9 ms·

That period in the 70s also corresponds with the moment that US dollars lost any ties to gold. There is a natural rate of interest in an economy. When the cent

That period in the 70s also corresponds with the moment that US dollars lost any ties to gold. There is a natural rate of interest in an economy. When the central bank artificially lowers interest rates you get malinvestments. This is only possible with fiat currencies because you can't print gold. None of this would be possible if interest rates were at (say) 5% which is about the historic average, or at early 90s (double digit) levels. This ends dramatically. I'm guessing with a less dramatic version of Zimbabwe or the Weimar republic.

friendly_chap 6y ago
I'm not sure why you are being downvoted. All we see is bubbles, inflation, inequality, record low interest rates and stagnant wages, but apparently printing trillions and and not having a gold standard has nothing to do with it. Sure.
- newhotelowner 6y ago
  > apparently printing trillions and and not having a gold standard has nothing to do with it Printed trillions because of Covid-19. It would have been grim situation without the stimulus. 12-14% unemployement, no stimulus would have closed thousands of business, and would have increase unemployement. People who has money (Silicon valley engineers) is not going to invest in rural Ohio. Wages are stagnated because of policies and misinformation. Federal minimum wages should be raised at least $12 and tied to inflation with universal health care. Inflation is record low. Not sure what you talking about. Its time to be robin hood. Tax high income, tax stock buy backs, higher capital gain taxes etc. Its pathetic that people making $500k/year pays less than $75k in Federal income tax (14%).
  - deleted 6y ago
    [deleted]
  - votepaunchy 6y ago
    > Its pathetic that people making $500k/year pays less than $75k in Federal income tax (14%). The 32% bracket begins at $160k and at $500k AGI you’re paying $150k in taxes (30%).
    - take_a_breath 6y ago
      If taxes were that easy, we wouldn’t need so many accountants in the US. In reality, there are a bunch of ways a person makes $500k and pays less than $150k in taxes. - For example, if it’s paid as carried interest, they only pay a 20% tax rate. - They could itemize deductions. - A farmer could buy a brand new truck and call it a business investment. - If you’re a pass-through entity you only pay a 20% rate
      - newhotelowner 6y ago
        > A farmer could buy a brand new truck and call it a business investment. That is a business expense. 500k is after all the business (Non-personal) expenses, depreciation and deductions .
        take_a_breath 6y ago
        $500k is the income. The entire point is that business and personal expenses overlap considerably for farmers so they have wide range for tax purposes. It’s an inefficiency in the tax code which allows a person to have income of $500k and pay less than 31% in taxes.
      - WalterBright 6y ago
        > They could itemize deductions. The AMT (Alternative Minimum Tax) phases out itemized deductions for higher incomes.
    - newhotelowner 6y ago
      That is if your income is mostly salary.
  - scarface74 6y ago
    Minimum wage doesn’t need to be raised. Any time that you place an artificial price floor or ceiling on supply in a competitive market you distort it. Private industry should not be in the job of providing a social safety net. That’s government’s job. We should have universal healthcare, expand the earned income tax credit and make it easier to distribute throughout the year and increase taxes to fund it. But I noticed that you called out people making $500K instead of $200K. Why? Maybe because $200K is not considered “rich” by most people on HN? Why not raise taxes on everyone that has a household income of $130K since that puts you above 80 percentile of households income or $184K since that puts you in the 90 percentile? “Tax the rich” often translates to “tax people who make more than I do.
    - JoeAltmaier 6y ago
      No minimum wage? In this world of accelerating automation and dropping real wages? That argument is right up there with 'let them starve'. Are Socialists correct, than our society depends upon a slave class to function? Because so often a suggestion that people earn a humane wage, is met with blanket resistance and dire predictions that the economy will be ruined.
      - scarface74 6y ago
        What do you think is going to happen if you increase minimum wage to the point where it makes automation a more affordable alternative? Also, you did see the part about expanding the earned income tax credit and providing universal healthcare didn’t you? I’m not saying let anyone starve. I’m saying that’s society’s responsibility through taxation and redistribution.
        newhotelowner 6y ago
        > What do you think is going to happen if you increase minimum wage to the point where it makes automation a more affordable alternative? This is going to happen anyway. Walmart is planning to go cashierless. Taco bell has kiosk for ordering. New PlayStation manufacturing plant is fully automated. Universal Basic Income is the solution. I don't even think 20% of the population is doing even a simple task.
chii 6y ago
> This is only possible with fiat currencies because you can't print gold. on the other hand, if the world was still on a gold standard, then the gov't couldn't have printed stimulus packages, and it would lead to more poverty and misery in the short to medium term (even if that would've been better in the long term, which is a debatable outcome). Fiat is only as good as the gov't handling it. It can indeed be abused more than gold can. But it's also more powerful than gold. A tool, in the hands of the capable, can do wonders. So the debate around monetary policy should be how to achieve the best results.
- roenxi 6y ago
  > if the world was still on a gold standard, then the gov't couldn't have printed stimulus packages Sure they could, borrowing is still allowed. And the government can just declare "property rights are lovely but we're suspending them in this emergency, here are some IOU for after we raise taxes to cover this". Which would have a largely equivalent effect in real terms to money printing but much easier to understand. > Fiat is only as good as the gov't handling it. The government is consistently made up of financial incompetents. Most governments struggle to deliver a balanced budget when they try. All the people who know how to make good financial decisions are in private industry making them.
  - AshamedCaptain 6y ago
    > And the government can just declare "property rights are lovely but we're suspending them in this emergency, here are some IOU for after we raise taxes to cover this". Which would have a largely equivalent effect in real terms to money In no way this has the same effect. The uber wealthy have an even easier time of hiding their property in this case, and the mid wealthy react much worse (violently) to private property forfeits than to the usage of printing press (which as you say most of us don't even understand). > Most governments struggle to deliver a balanced budget when they try. All the people who know how to make good financial decisions are in private industry making them. This is very old bullshit, and thinking like this leads to parties trying to be cool by hiring people from industry with the consequent terrible results ( this trope is so old its even parodied on yes minister).
_qulr 6y ago
If we're "wise" enough to constrain our currency to gold, then we're also wise enough not to manipulate our currency in self-defeating ways. But if we're not wise enough, nothing can save us. Some lumps of gold won't save us from ourselves.
alexmingoia 6y ago
A gold standard doesn't prevent manipulation of interest rates. The Federal Reserve manipulated interest rates while on a gold standard. One of the reasons they would increase or decrease interest rates was to manage the desired gold stock. The reason the US abandoned the gold standard was the (inevitable) failure of centralized fractional-reserve banking. By 1971 the U.S. was effectively insolvent in its ability to cover foreign holdings, and feared a run on the dollar. U.S. gold reserves couldn't keep pace with the expanding money supply and increasing demands by foreign holders for redemption of their dollars.
mtgp1000 6y ago
A growing number of netizens are starting to believe that we are already living in an American Weimar Republic. And it's hard not to see the many social and political parallels - I'm not familiar with the economic side of Weimar Germany.
082349872349872 6y ago
Two things mentioned in the article (a) US tax advantaging of a debt-laden structure and (b) LBOs actively punishing firms for not carrying an "efficient" level of debt are probably more important. Note that LBOs were invented in a period of double digit interest rates. (there is an argument that USD interest rates are "too low" due to market reasons, because USD is the global reserve currency. I suspect leveraging global reserve status to apply strategic sanctions is, at least over the short term, far worth more the US than any resulting malinvestment. If not, we'd all be using Bancor for exchange.)
pjc50 6y ago
I don't understand how people can look at the near-zero price and wage inflation and then claim America is suddenly going to become Zimbabwe without going through an intermediate phase of "slightly higher inflation", like 5 or 10%. Besides, the use of gold has no bearing on "M2", which is quite important in the modern economy. And all the classic hyperinflation cases were forex-driven: either the country's exports fell below their ability to import necessities like food and oil, or (in the case of Weimar) they were forced at gunpoint to hand over gold. So long as the US continues to produce enough food and oil domestically, it's very well insulated against hyperinflation.
- zzleeper 6y ago
  You make some really interesting points. Allow me to reply with a bit of speculation: 1) Peruvian, Bolivian, Argentinan hyperinflation were purely printing-press inflations, without forex being the culprit. 2) Inflation is strongly affected by expectations. If everyone think prices will go up 5%, then we all increase salaries/prices by that and we self fulfill the prophecy. 3) 5-10% inflation is actually quite high for modern standards. We are not in the 70s anymore. 4) Lastly, the main point: onxe you get there, there is a high chance that the dollar will lose its place as the world's currency. Then, inflation accelerates and you enter a spiral.
  - jcranmer 6y ago
    The good counterpoint here is Japan, which has insanely high public debt (about 200% of GDP), invented quantitative easing, and has struggled to hit 2% inflation for several decades now. If Japan hasn't been able to hit a hyperinflationary spiral based on its debt-fueled trajectory, then the US (which is far less along that path) isn't going to be hitting it anytime soon.
    - Nasrudith 6y ago
      As nuts as it sounds I suspect high levels of debt may be a hint that there isn't enough money printed into the economy and the debt is a symptom. That more supply doesn't drop the demand significantly seems like a hint. I would love to hear counterarguments because this seems odd even to me.
neilwilson 6y ago
"There is a natural rate of interest in an economy." Yes, and the base rate is zero. Since reserves are costless to produce and banks can't get rid of them in aggregate the base rate should always be zero. It is rates above zero that are unnatural since by definition they are a market intervention that reduces the price of all other assets and drives up yields artificially. The state shouldn't be paying a Basic Income to banks in the form of interest on reserves. Banks should earn their crust by lending productively. Beyond that the rate of interest is the one estimated by the lender to be sufficient to cover the risk of discounting your collateral into the state's liquidity. Banks are really just pawnbrokers with shinier suits and better PR.
- 6510 6y ago
  How would banks lend productively? (just curious)
  - voisin 6y ago
    Borrow from depositors at one rate, lend to borrowers at a higher rate with losses to bad loans amounting to less than the spread.
- AbrahamParangi 6y ago
  The base rate is non-zero because capital has non-zero cost. Interest is just the limit of the cost of capital. If you don’t have a fed, or if the fed does nothing then interest rates will converge on their own to a positive value.
  - neilwilson 6y ago
    Banks have a capital cost. The central bank does not. I was talking about base rates. Banks mark up on base rate to cover the risk to their capital
- alexmingoia 6y ago
  The natural interest rate refers to the interest rate in a free market of banking. In a free market interest rates would not be zero otherwise the bank can’t make any money...
nknealk 6y ago
Actually, the last time we had high inflation, the fed kicked interest rates up[1]. So I don’t know if we end up like Zimbabwe. The fed would likely step in well before something bad happened. https://www.stlouisfed.org/publications/regional-economist/january-2005/volckers-handling-of-the-great-inflation-taught-us-much https://www.stlouisfed.org/publications/regional-economist/j...
Nasrudith 6y ago
That isn't true for gold - historically it has destabilized economies several times by having both too little and too much gold relative to the true size. The gold standard has caused many wars and travesties as conquest was started for the sake of raising their economic cap above deflation, let alone debasement of currency. A "natural rate" of interest doesn't seem like a meaningful concept to me, to be pedantic. There is nothing natural about it, it is all tautological based upon what "works". Closest concept to it I see is the currency vs productivity mapping for what causes real inflation. Given that universal value is a mere mentally convenient myth everything is fuzzy anyway.
jariel 6y ago
Limiting the money supply on the basis of quantity of some arbitrary metal is in no way creating a 'natural' interest rate in the economy. Gold acts as an 'independent, non-political' arbiter, but it's nowhere near 'natural'. How does the discovery of a lot of Gold, somewhere on the planet, related to the 'natural' productivity and growth of a nation? There's no such thing a 'natural' interest rates - we have to decide how much currency we want in circulation, and we try to use 'objective rules' to do that, and try to keep that system as far away from the Political System as possible. But since 2008, we are definitely playing with fire in terms of the funny business and 'breaking of our own rules' we are doing at the Fed, i.e. by accepting crap mortgages as collateral etc..

friendly_chap 6y ago

I'm not sure why you are being downvoted. All we see is bubbles, inflation, inequality, record low interest rates and stagnant wages, but apparently printing trillions and and not having a gold standard has nothing to do with it. Sure.

newhotelowner 6y ago
> apparently printing trillions and and not having a gold standard has nothing to do with it Printed trillions because of Covid-19. It would have been grim situation without the stimulus. 12-14% unemployement, no stimulus would have closed thousands of business, and would have increase unemployement. People who has money (Silicon valley engineers) is not going to invest in rural Ohio. Wages are stagnated because of policies and misinformation. Federal minimum wages should be raised at least $12 and tied to inflation with universal health care. Inflation is record low. Not sure what you talking about. Its time to be robin hood. Tax high income, tax stock buy backs, higher capital gain taxes etc. Its pathetic that people making $500k/year pays less than $75k in Federal income tax (14%).
- deleted 6y ago
  [deleted]
- votepaunchy 6y ago
  > Its pathetic that people making $500k/year pays less than $75k in Federal income tax (14%). The 32% bracket begins at $160k and at $500k AGI you’re paying $150k in taxes (30%).
  - take_a_breath 6y ago
    If taxes were that easy, we wouldn’t need so many accountants in the US. In reality, there are a bunch of ways a person makes $500k and pays less than $150k in taxes. - For example, if it’s paid as carried interest, they only pay a 20% tax rate. - They could itemize deductions. - A farmer could buy a brand new truck and call it a business investment. - If you’re a pass-through entity you only pay a 20% rate
    - newhotelowner 6y ago
      > A farmer could buy a brand new truck and call it a business investment. That is a business expense. 500k is after all the business (Non-personal) expenses, depreciation and deductions .
      - take_a_breath 6y ago
        $500k is the income. The entire point is that business and personal expenses overlap considerably for farmers so they have wide range for tax purposes. It’s an inefficiency in the tax code which allows a person to have income of $500k and pay less than 31% in taxes.
    - WalterBright 6y ago
      > They could itemize deductions. The AMT (Alternative Minimum Tax) phases out itemized deductions for higher incomes.
  - newhotelowner 6y ago
    That is if your income is mostly salary.
- scarface74 6y ago
  Minimum wage doesn’t need to be raised. Any time that you place an artificial price floor or ceiling on supply in a competitive market you distort it. Private industry should not be in the job of providing a social safety net. That’s government’s job. We should have universal healthcare, expand the earned income tax credit and make it easier to distribute throughout the year and increase taxes to fund it. But I noticed that you called out people making $500K instead of $200K. Why? Maybe because $200K is not considered “rich” by most people on HN? Why not raise taxes on everyone that has a household income of $130K since that puts you above 80 percentile of households income or $184K since that puts you in the 90 percentile? “Tax the rich” often translates to “tax people who make more than I do.
  - JoeAltmaier 6y ago
    No minimum wage? In this world of accelerating automation and dropping real wages? That argument is right up there with 'let them starve'. Are Socialists correct, than our society depends upon a slave class to function? Because so often a suggestion that people earn a humane wage, is met with blanket resistance and dire predictions that the economy will be ruined.
    - scarface74 6y ago
      What do you think is going to happen if you increase minimum wage to the point where it makes automation a more affordable alternative? Also, you did see the part about expanding the earned income tax credit and providing universal healthcare didn’t you? I’m not saying let anyone starve. I’m saying that’s society’s responsibility through taxation and redistribution.
      - newhotelowner 6y ago
        > What do you think is going to happen if you increase minimum wage to the point where it makes automation a more affordable alternative? This is going to happen anyway. Walmart is planning to go cashierless. Taco bell has kiosk for ordering. New PlayStation manufacturing plant is fully automated. Universal Basic Income is the solution. I don't even think 20% of the population is doing even a simple task.

chii 6y ago

> This is only possible with fiat currencies because you can't print gold. on the other hand, if the world was still on a gold standard, then the gov't couldn't have printed stimulus packages, and it would lead to more poverty and misery in the short to medium term (even if that would've been better in the long term, which is a debatable outcome). Fiat is only as good as the gov't handling it. It can indeed be abused more than gold can. But it's also more powerful than gold. A tool, in the hands of the capable, can do wonders. So the debate around monetary policy should be how to achieve the best results.

roenxi 6y ago
> if the world was still on a gold standard, then the gov't couldn't have printed stimulus packages Sure they could, borrowing is still allowed. And the government can just declare "property rights are lovely but we're suspending them in this emergency, here are some IOU for after we raise taxes to cover this". Which would have a largely equivalent effect in real terms to money printing but much easier to understand. > Fiat is only as good as the gov't handling it. The government is consistently made up of financial incompetents. Most governments struggle to deliver a balanced budget when they try. All the people who know how to make good financial decisions are in private industry making them.
- AshamedCaptain 6y ago
  > And the government can just declare "property rights are lovely but we're suspending them in this emergency, here are some IOU for after we raise taxes to cover this". Which would have a largely equivalent effect in real terms to money In no way this has the same effect. The uber wealthy have an even easier time of hiding their property in this case, and the mid wealthy react much worse (violently) to private property forfeits than to the usage of printing press (which as you say most of us don't even understand). > Most governments struggle to deliver a balanced budget when they try. All the people who know how to make good financial decisions are in private industry making them. This is very old bullshit, and thinking like this leads to parties trying to be cool by hiring people from industry with the consequent terrible results ( this trope is so old its even parodied on yes minister).

_qulr 6y ago

If we're "wise" enough to constrain our currency to gold, then we're also wise enough not to manipulate our currency in self-defeating ways. But if we're not wise enough, nothing can save us. Some lumps of gold won't save us from ourselves.

alexmingoia 6y ago

A gold standard doesn't prevent manipulation of interest rates. The Federal Reserve manipulated interest rates while on a gold standard. One of the reasons they would increase or decrease interest rates was to manage the desired gold stock. The reason the US abandoned the gold standard was the (inevitable) failure of centralized fractional-reserve banking. By 1971 the U.S. was effectively insolvent in its ability to cover foreign holdings, and feared a run on the dollar. U.S. gold reserves couldn't keep pace with the expanding money supply and increasing demands by foreign holders for redemption of their dollars.

mtgp1000 6y ago

A growing number of netizens are starting to believe that we are already living in an American Weimar Republic. And it's hard not to see the many social and political parallels - I'm not familiar with the economic side of Weimar Germany.

082349872349872 6y ago

Two things mentioned in the article (a) US tax advantaging of a debt-laden structure and (b) LBOs actively punishing firms for not carrying an "efficient" level of debt are probably more important. Note that LBOs were invented in a period of double digit interest rates. (there is an argument that USD interest rates are "too low" due to market reasons, because USD is the global reserve currency. I suspect leveraging global reserve status to apply strategic sanctions is, at least over the short term, far worth more the US than any resulting malinvestment. If not, we'd all be using Bancor for exchange.)

pjc50 6y ago

I don't understand how people can look at the near-zero price and wage inflation and then claim America is suddenly going to become Zimbabwe without going through an intermediate phase of "slightly higher inflation", like 5 or 10%. Besides, the use of gold has no bearing on "M2", which is quite important in the modern economy. And all the classic hyperinflation cases were forex-driven: either the country's exports fell below their ability to import necessities like food and oil, or (in the case of Weimar) they were forced at gunpoint to hand over gold. So long as the US continues to produce enough food and oil domestically, it's very well insulated against hyperinflation.

zzleeper 6y ago
You make some really interesting points. Allow me to reply with a bit of speculation: 1) Peruvian, Bolivian, Argentinan hyperinflation were purely printing-press inflations, without forex being the culprit. 2) Inflation is strongly affected by expectations. If everyone think prices will go up 5%, then we all increase salaries/prices by that and we self fulfill the prophecy. 3) 5-10% inflation is actually quite high for modern standards. We are not in the 70s anymore. 4) Lastly, the main point: onxe you get there, there is a high chance that the dollar will lose its place as the world's currency. Then, inflation accelerates and you enter a spiral.
- jcranmer 6y ago
  The good counterpoint here is Japan, which has insanely high public debt (about 200% of GDP), invented quantitative easing, and has struggled to hit 2% inflation for several decades now. If Japan hasn't been able to hit a hyperinflationary spiral based on its debt-fueled trajectory, then the US (which is far less along that path) isn't going to be hitting it anytime soon.
  - Nasrudith 6y ago
    As nuts as it sounds I suspect high levels of debt may be a hint that there isn't enough money printed into the economy and the debt is a symptom. That more supply doesn't drop the demand significantly seems like a hint. I would love to hear counterarguments because this seems odd even to me.

neilwilson 6y ago

"There is a natural rate of interest in an economy." Yes, and the base rate is zero. Since reserves are costless to produce and banks can't get rid of them in aggregate the base rate should always be zero. It is rates above zero that are unnatural since by definition they are a market intervention that reduces the price of all other assets and drives up yields artificially. The state shouldn't be paying a Basic Income to banks in the form of interest on reserves. Banks should earn their crust by lending productively. Beyond that the rate of interest is the one estimated by the lender to be sufficient to cover the risk of discounting your collateral into the state's liquidity. Banks are really just pawnbrokers with shinier suits and better PR.

6510 6y ago
How would banks lend productively? (just curious)
- voisin 6y ago
  Borrow from depositors at one rate, lend to borrowers at a higher rate with losses to bad loans amounting to less than the spread.
AbrahamParangi 6y ago
The base rate is non-zero because capital has non-zero cost. Interest is just the limit of the cost of capital. If you don’t have a fed, or if the fed does nothing then interest rates will converge on their own to a positive value.
- neilwilson 6y ago
  Banks have a capital cost. The central bank does not. I was talking about base rates. Banks mark up on base rate to cover the risk to their capital
alexmingoia 6y ago
The natural interest rate refers to the interest rate in a free market of banking. In a free market interest rates would not be zero otherwise the bank can’t make any money...

nknealk 6y ago

Actually, the last time we had high inflation, the fed kicked interest rates up[1]. So I don’t know if we end up like Zimbabwe. The fed would likely step in well before something bad happened. https://www.stlouisfed.org/publications/regional-economist/january-2005/volckers-handling-of-the-great-inflation-taught-us-much https://www.stlouisfed.org/publications/regional-economist/j...

Nasrudith 6y ago

That isn't true for gold - historically it has destabilized economies several times by having both too little and too much gold relative to the true size. The gold standard has caused many wars and travesties as conquest was started for the sake of raising their economic cap above deflation, let alone debasement of currency. A "natural rate" of interest doesn't seem like a meaningful concept to me, to be pedantic. There is nothing natural about it, it is all tautological based upon what "works". Closest concept to it I see is the currency vs productivity mapping for what causes real inflation. Given that universal value is a mere mentally convenient myth everything is fuzzy anyway.

jariel 6y ago

Limiting the money supply on the basis of quantity of some arbitrary metal is in no way creating a 'natural' interest rate in the economy. Gold acts as an 'independent, non-political' arbiter, but it's nowhere near 'natural'. How does the discovery of a lot of Gold, somewhere on the planet, related to the 'natural' productivity and growth of a nation? There's no such thing a 'natural' interest rates - we have to decide how much currency we want in circulation, and we try to use 'objective rules' to do that, and try to keep that system as far away from the Political System as possible. But since 2008, we are definitely playing with fire in terms of the funny business and 'breaking of our own rules' we are doing at the Fed, i.e. by accepting crap mortgages as collateral etc..