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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.
      - AngrySkillzz 6y ago
        It's possible. You are right that productivity growth is the big driver behind everything. There are some people that make the argument that massive growth is behind us, that the internet revolution is not the same kind of game-changer like trains, planes, etc. Not clear how much more "Smithian" growth via trade liberalization is possible, either. If you look at the long histories, there have been plenty of times in the past 2000 years when interest rates and economic growth were very low for an extended period of time. Inequality tends to grow to it's maximum sustainable level in between catastrophes, though that level is likely lower now, because there is a certain amount of disperse affluence necessary to sustain the modern knowledge economy that creates that wealth in the first place. But at this point, we're talking technology and society instead of economics. Will innovation continue, and are those innovations a big enough deal that they will continue to make our world more productive, wealthier, more successful? I lean towards yes, but it is not at all obvious. It is certainly possible that productivity growth stagnates, most countries catch up to a generally-developed level of output, and asset prices stagnate as temporary demographic bumps are smoothed out.
        thewarrior 6y ago
        My personal belief and this is where a lot of people might disagree with me is that we will not see the kind of growth we saw again. Growth is fundamentally tied to the availability of cheap energy. If you look at oil prices in gold you’ll see how it’s almost twice as expensive today. We are also facing constraints on energy extraction due to climate change. Every time oil prices spike shale oil comes online but the economy chokes on the price oil crashes and the shale producers go further into debt. This may also be why a lot of growth is in the digital sphere which is far less energy constrained. Maybe future growth will be Virtual reality GDP :P The only way I can be wrong is if someone invents a cheap fusion reactor or a cheap magical battery that stores endless amounts of solar energy. This is highly unlikely to happen. Disclaimer: Very speculative thesis but I believe in it.
  - AngrySkillzz 6y ago
    Though I will say, asset prices are not determined directly by central bank actions, there is a third component that pushes both asset prices and central bank policy - the global supply/demand of savings vs investment opportunities. Which is driven mostly by demographics, looking at China in particular. I've commented about this before. There is an interesting hypothesis that the global deflationary and asset price-increasing forces will wane as China's economy becomes more consumer focused and as working age people in China age out of the labor force, thus moving from the net-saving part of the lifecycle to the net-spending part. It's very plausible, unless that population bulge bracket is replaced again by another massive, increasingly-affluent population, say in a fast developing India or Africa. On the inequality side, it is a bit unfortunate to be in the workforce at this time competing with the massive influx of other savers, bidding up productive assets to save for retirement, enriching the people who were "lucky" enough to be in the generation before that population/affluence boom. But there's not really anything that can be done about it, not without tightening financial conditions enough that it has severe negative effects for the labor market.
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.

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.
    - AngrySkillzz 6y ago
      It's possible. You are right that productivity growth is the big driver behind everything. There are some people that make the argument that massive growth is behind us, that the internet revolution is not the same kind of game-changer like trains, planes, etc. Not clear how much more "Smithian" growth via trade liberalization is possible, either. If you look at the long histories, there have been plenty of times in the past 2000 years when interest rates and economic growth were very low for an extended period of time. Inequality tends to grow to it's maximum sustainable level in between catastrophes, though that level is likely lower now, because there is a certain amount of disperse affluence necessary to sustain the modern knowledge economy that creates that wealth in the first place. But at this point, we're talking technology and society instead of economics. Will innovation continue, and are those innovations a big enough deal that they will continue to make our world more productive, wealthier, more successful? I lean towards yes, but it is not at all obvious. It is certainly possible that productivity growth stagnates, most countries catch up to a generally-developed level of output, and asset prices stagnate as temporary demographic bumps are smoothed out.
      - thewarrior 6y ago
        My personal belief and this is where a lot of people might disagree with me is that we will not see the kind of growth we saw again. Growth is fundamentally tied to the availability of cheap energy. If you look at oil prices in gold you’ll see how it’s almost twice as expensive today. We are also facing constraints on energy extraction due to climate change. Every time oil prices spike shale oil comes online but the economy chokes on the price oil crashes and the shale producers go further into debt. This may also be why a lot of growth is in the digital sphere which is far less energy constrained. Maybe future growth will be Virtual reality GDP :P The only way I can be wrong is if someone invents a cheap fusion reactor or a cheap magical battery that stores endless amounts of solar energy. This is highly unlikely to happen. Disclaimer: Very speculative thesis but I believe in it.
- AngrySkillzz 6y ago
  Though I will say, asset prices are not determined directly by central bank actions, there is a third component that pushes both asset prices and central bank policy - the global supply/demand of savings vs investment opportunities. Which is driven mostly by demographics, looking at China in particular. I've commented about this before. There is an interesting hypothesis that the global deflationary and asset price-increasing forces will wane as China's economy becomes more consumer focused and as working age people in China age out of the labor force, thus moving from the net-saving part of the lifecycle to the net-spending part. It's very plausible, unless that population bulge bracket is replaced again by another massive, increasingly-affluent population, say in a fast developing India or Africa. On the inequality side, it is a bit unfortunate to be in the workforce at this time competing with the massive influx of other savers, bidding up productive assets to save for retirement, enriching the people who were "lucky" enough to be in the generation before that population/affluence boom. But there's not really anything that can be done about it, not without tightening financial conditions enough that it has severe negative effects for the labor market.

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.