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An unstated assumption in my post is that productivity growth does not continue apace. When interest rates are low, companies are incentivized to invest in low

An unstated assumption in my post is that productivity growth does not continue apace. When interest rates are low, companies are incentivized to invest in lower marginal productivity investments, because those investments still remain profitable when cost of capital is low. When rates suddenly go up, a number of these investments become unprofitable: the income streams from them don't exceed the new higher interest rates companies would have to pay to roll their bonds. Therefore the central bank is stuck unable to raise rates. Note that there is another potential ending for this: a deflationary trap like Japan is in, or like the U.S. was in from 2009-2020. I'm betting on hyperinflation, though. The reason is that nearly all past hyperinflationary events have come from large sector shifts in aggregate demand and aggregate supply, notably when coming down from a war or transitioning from a command economy to a market economy. COVID just provided exactly such a supply/demand shock: large quantities of production were shifted into medical devices and remote work, while demand shifted away from travel, experiences, and gasoline to home improvement & home office supplies. When demand shifts back, those industries will have significantly reduced capacity, and a lot of bargaining power to raise prices. The raised prices cascade through the economy, and that's what triggers inflation. It's like the economy is your heater, money-printing is turning up the gas because it's not getting hot enough, low productivity is not realizing that your igniter is broken, and COVID is lighting a match. Without COVID you'd just open your windows and air out the gas (although it still wouldn't fix your broken igniter). With it, we go boom.

thewarrior 6y ago
We have had low interest rates and massive QE even before this. We did not come close to hyper inflation. Why will this time be different ?
- AngrySkillzz 6y ago
  Because he has no idea what he's talking about. HN people are absolutely clueless on economics but insist on talking out of their ass at every opportunity.
  - thewarrior 6y ago
    QE is not quite the same as Zimbabwe. In Zimbabwe the government printed money and handed it out to people. This money directly makes its way into the economy. In QE the Fed buys assets such as mortgage securities from banks. The banks chose not to lend more aggressively and decided to hold on to the cash. As a result there was no hyper inflation. So how does QE affect stock / house prices ? When the FED comes into the market willing to lend to anyone and everyone interest rates fall. As a result returns on bonds and bank deposits also fall. Forcing people into stocks. The effect of QE on asset prices is therefore indirect. So the QE money itself is hoarded in a deflationary environment while savers get pushed into speculating on assets. As the economy slowly recovers over 5-10 years the QE money is slowly sucked back out and assets slowly deflate to a fairer value. In theory this can work without too many hiccups. The problem here lies in the inequality that this generates. Large banks, companies stay afloat thanks to buy backs. Asset owners get richer. Wages stagnate and people lose their jobs albeit less than if QE didn’t exist. This topic is much more complex than I had initially thought. Nobody should come to conclusions such as “A crash is inevitable” or “Hyperinflation”.
    - AngrySkillzz 6y ago
      Props to you for looking into it! Economics and finance are really complicated. Bank lending decisions are based on risk and profit opportunities, and not at all on reserves availability. QE mostly just substitutes central bank money for the balance sheet "bank money" in M2, increasing reserves and lowering longer term interest rates without flowing immediately into the real economy. Lower interest rates encourage lending and investment, but do not force it. It's a lot more subtle of a tool.
      - thewarrior 6y ago
        That makes sense. However my worry is that the economy seems to have become permanently dependent on low interest rates. Sure it won’t be zero but something like 1 % looks like a distant dream. It seems to suggest that we have run out of ways to increase real productivity. A good example is the shale industry which will basically go bust if interest rates are like 3 %. We seem to be in a new regime of lower economic growth, high asset prices and inequality. The real danger here is the political sustainability of this. Zero interest rates are an indirect pay cut via rents and mortgages. At some point asset owners will have to take a haircut.
- XorNot 6y ago
  The staple of Hacker News armchair economics is that whatever the situation currently is, it'll lead to hyperinflation.
- ahepp 6y ago
  I don't necessarily agree, but doesn't the parent comment clearly say: >I'm betting on hyperinflation, though. The reason is that nearly all past hyperinflationary events have come from large sector shifts in aggregate demand and aggregate supply The user is arguing that large scale shifts in aggregate demand and supply are what is different this time.
- pashamur 6y ago
  There is a good article by Lyn Alden on this, but basically, the difference is how the QE is targeted. In 2008, the QE was done in order to get rid of toxic assets and recapitalize the banks - most of that money stayed locked up in the financial system and never made it out (banks had reserve requirements changed and tightened credit, which shrank the money supply - the QE was done to counteract that). This time around, the banks are well capitalized and the QE is targeted at monetizing the federal deficit (federal government issuing treasuries in order to finance relief packages and the like and FED buying them), so the money is actually going to make it into the broad money supply, which might lead to inflation (though hyper-inflation is probably an overstatement at this point). Basically Lyn compares what happened in 2008-2009 to 1929 - which was a banking crisis; whereas what happened in 2020 is closer to 1940-1945 / late 1960's in terms of the FED monetizing the debt. We had inflation in the late 1940's and in the 1970s, so it's possible we'll see something similar. https://www.lynalden.com/quantitative-easing-mmt-inflation/ https://www.lynalden.com/quantitative-easing-mmt-inflation/
  - ericmay 6y ago
    Consider a couple of things: 1) 1929 bears no resemblance to 2020. They are completely different economies, and economic factors. It’s a non-starter to compare the two time frames. 2) Inflation != hyperinflation. We can handle inflation just fine, it’s a 5% change, a 10% change, etc. Hyperinflation leads to a collapse (Venezuela, or Zimbabwe or similar). If the United States collapses, you better have stocked up on lots of beans and ammo. 3) We should really only look at historical financial crises as unique events with unique circumstances, not as comparisons. It’s like people looking at home prices now and saying “it’s all going to crash, it’s 2008 all over again!” which is a surface-level analysis that doesn’t take into account how 2007-2008 happened. 1929 - Dust Bowl. 1970s - oil embargo. Etc. I enjoy reading Lyn’s commentary as well, but the comparisons are non-starters. There isn’t, or so far hasn’t been any predictable events that have taken place. You can’t look at history and say “this thing is the same thing as this other thing”. They just manifest differently.
daed 6y ago
I don’t know about your reduced capacity argument. The reason Buffett sold his airline shares so low is he foresees supply outstripping demand for quite some time in the industry. Presumably that would apply to other travel/experience stuff as well. And for gasoline I think the Saudis et al can ramp up preeetttyyy quickly.
- tomatocracy 6y ago
  I think the airline industry is sort of uniquely vulnerable vs other travel/experience related industries: in the short term, supply may outstrip demand for some time against a relatively fixed cost base; and in the medium term, there may be limited ability to scale back up rapidly if airlines are unable to re-recruit pilots and crews they had to let go to deal with the short term.
rsp1984 6y ago
When demand shifts back, those industries will have significantly reduced capacity, and a lot of bargaining power to raise prices. The raised prices cascade through the economy, and that's what triggers inflation. Not sure I buy that. Yes, there will be temporary upwards pressure on prices in some segments of the economy but also, following your argument, temporary downwards pressure on prices in other segments. So a) it's going to balance out and b) it'll be temporary. Not enough to trigger sustained inflation, not nearly enough to trigger hyperinflation. Are we going to see higher inflation in this decade vs. the last? Absolutely. But hyperinflation is a different beast altogether and I'm quite skeptical we have the environment for it to come alive.

thewarrior 6y ago

We have had low interest rates and massive QE even before this. We did not come close to hyper inflation. Why will this time be different ?

AngrySkillzz 6y ago
Because he has no idea what he's talking about. HN people are absolutely clueless on economics but insist on talking out of their ass at every opportunity.
- thewarrior 6y ago
  QE is not quite the same as Zimbabwe. In Zimbabwe the government printed money and handed it out to people. This money directly makes its way into the economy. In QE the Fed buys assets such as mortgage securities from banks. The banks chose not to lend more aggressively and decided to hold on to the cash. As a result there was no hyper inflation. So how does QE affect stock / house prices ? When the FED comes into the market willing to lend to anyone and everyone interest rates fall. As a result returns on bonds and bank deposits also fall. Forcing people into stocks. The effect of QE on asset prices is therefore indirect. So the QE money itself is hoarded in a deflationary environment while savers get pushed into speculating on assets. As the economy slowly recovers over 5-10 years the QE money is slowly sucked back out and assets slowly deflate to a fairer value. In theory this can work without too many hiccups. The problem here lies in the inequality that this generates. Large banks, companies stay afloat thanks to buy backs. Asset owners get richer. Wages stagnate and people lose their jobs albeit less than if QE didn’t exist. This topic is much more complex than I had initially thought. Nobody should come to conclusions such as “A crash is inevitable” or “Hyperinflation”.
  - AngrySkillzz 6y ago
    Props to you for looking into it! Economics and finance are really complicated. Bank lending decisions are based on risk and profit opportunities, and not at all on reserves availability. QE mostly just substitutes central bank money for the balance sheet "bank money" in M2, increasing reserves and lowering longer term interest rates without flowing immediately into the real economy. Lower interest rates encourage lending and investment, but do not force it. It's a lot more subtle of a tool.
    - thewarrior 6y ago
      That makes sense. However my worry is that the economy seems to have become permanently dependent on low interest rates. Sure it won’t be zero but something like 1 % looks like a distant dream. It seems to suggest that we have run out of ways to increase real productivity. A good example is the shale industry which will basically go bust if interest rates are like 3 %. We seem to be in a new regime of lower economic growth, high asset prices and inequality. The real danger here is the political sustainability of this. Zero interest rates are an indirect pay cut via rents and mortgages. At some point asset owners will have to take a haircut.
XorNot 6y ago
The staple of Hacker News armchair economics is that whatever the situation currently is, it'll lead to hyperinflation.
ahepp 6y ago
I don't necessarily agree, but doesn't the parent comment clearly say: >I'm betting on hyperinflation, though. The reason is that nearly all past hyperinflationary events have come from large sector shifts in aggregate demand and aggregate supply The user is arguing that large scale shifts in aggregate demand and supply are what is different this time.
pashamur 6y ago
There is a good article by Lyn Alden on this, but basically, the difference is how the QE is targeted. In 2008, the QE was done in order to get rid of toxic assets and recapitalize the banks - most of that money stayed locked up in the financial system and never made it out (banks had reserve requirements changed and tightened credit, which shrank the money supply - the QE was done to counteract that). This time around, the banks are well capitalized and the QE is targeted at monetizing the federal deficit (federal government issuing treasuries in order to finance relief packages and the like and FED buying them), so the money is actually going to make it into the broad money supply, which might lead to inflation (though hyper-inflation is probably an overstatement at this point). Basically Lyn compares what happened in 2008-2009 to 1929 - which was a banking crisis; whereas what happened in 2020 is closer to 1940-1945 / late 1960's in terms of the FED monetizing the debt. We had inflation in the late 1940's and in the 1970s, so it's possible we'll see something similar. https://www.lynalden.com/quantitative-easing-mmt-inflation/ https://www.lynalden.com/quantitative-easing-mmt-inflation/
- ericmay 6y ago
  Consider a couple of things: 1) 1929 bears no resemblance to 2020. They are completely different economies, and economic factors. It’s a non-starter to compare the two time frames. 2) Inflation != hyperinflation. We can handle inflation just fine, it’s a 5% change, a 10% change, etc. Hyperinflation leads to a collapse (Venezuela, or Zimbabwe or similar). If the United States collapses, you better have stocked up on lots of beans and ammo. 3) We should really only look at historical financial crises as unique events with unique circumstances, not as comparisons. It’s like people looking at home prices now and saying “it’s all going to crash, it’s 2008 all over again!” which is a surface-level analysis that doesn’t take into account how 2007-2008 happened. 1929 - Dust Bowl. 1970s - oil embargo. Etc. I enjoy reading Lyn’s commentary as well, but the comparisons are non-starters. There isn’t, or so far hasn’t been any predictable events that have taken place. You can’t look at history and say “this thing is the same thing as this other thing”. They just manifest differently.

daed 6y ago

I don’t know about your reduced capacity argument. The reason Buffett sold his airline shares so low is he foresees supply outstripping demand for quite some time in the industry. Presumably that would apply to other travel/experience stuff as well. And for gasoline I think the Saudis et al can ramp up preeetttyyy quickly.

tomatocracy 6y ago
I think the airline industry is sort of uniquely vulnerable vs other travel/experience related industries: in the short term, supply may outstrip demand for some time against a relatively fixed cost base; and in the medium term, there may be limited ability to scale back up rapidly if airlines are unable to re-recruit pilots and crews they had to let go to deal with the short term.

rsp1984 6y ago

When demand shifts back, those industries will have significantly reduced capacity, and a lot of bargaining power to raise prices. The raised prices cascade through the economy, and that's what triggers inflation. Not sure I buy that. Yes, there will be temporary upwards pressure on prices in some segments of the economy but also, following your argument, temporary downwards pressure on prices in other segments. So a) it's going to balance out and b) it'll be temporary. Not enough to trigger sustained inflation, not nearly enough to trigger hyperinflation. Are we going to see higher inflation in this decade vs. the last? Absolutely. But hyperinflation is a different beast altogether and I'm quite skeptical we have the environment for it to come alive.