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The Fed’s Doomsday Prophet Has a Dire Warning About Where We’re Headed

57 points by hodgesrm 5y ago

HarryHirsch 5y ago
higher prices for gas, goods and automobiles being fueled by the Fed’s unprecedented money printing programs Really? These are not caused by low interest rates. But the current housing prices are caused by low interest rates, and that's not even discussed in the article. But the government is missing in action.
- Robotbeat 5y ago
  I think it’s kind of silly to blame gas prices on Fed action since 2008-2011. Even in nominal terms, gas prices are lower now than the peaks of that time, and for much of the time, gas prices were FAR lower. Inflation was low for over a decade. We hit a huge pandemic and inflation ticked up. Let’s not crown him vindicated about inflation like a clock that’s right one or twice a day. He has a decade of low inflation to answer for first, and countless examples of monetary austerity giving rise to recessions in other countries as counterfactual.
  - exceptione 5y ago
    The article makes a point that Hoenig did repeatedly not mentioned inflation. Instead his main point is about the inequality as well as asset bubbles QE would cause. I think he is right, also about the point that you cannot walk back without causing massive pain in the economy. I too think central banks have painted themselves in a corner, as when central banks drop even a slight hint of changing course, panic in the markets follows.
wonderwonder 5y ago
The paragraph that struck me the hardest in this was the following: "To execute quantitative easing, a trader at the New York Fed would call up one of the primary dealers, like JPMorgan Chase, and offer to buy $8 billion worth of Treasury bonds from the bank. JPMorgan would sell the Treasury bonds to the Fed trader. Then the Fed trader would hit a few keys and tell the Morgan banker to look inside their reserve account. Voila. The Fed had instantly created $8 billion out of thin air, in the reserve account, to complete the purchase. Morgan could, in turn, use this money to buy assets in the wider marketplace." I still need to research what this means but is it essentially saying that the fed is just giving these large banks money for free under the assumption they will buy assets to pump the market? It seems crazy that the fed is actively selecting winning institutions this way.
mwattsun 5y ago
This is a long read but worth it. I don't like to only complain but praise too, so good on the writer Christopher Leonard. The part about low interest rates causing a farm land bubble in Kansas was enlightening. I lived through the extreme interest rates of the late 70's and subsequent crash caused by the policies of Paul Volcker and it wasn't pretty, but then I was able to buy a house in the mid 80's at a decent interest rate. Edit: Volcker
- hodgesrm 5y ago
  Agree. It had an unusually clear explanation of how different types of bubbles are tied to Fed policies. Pointing out the effect of shifting of assets from poorer to richer segments of society was another interesting point in the article. Hoenig's arguments are quite different from the "deficits don't matter" spiel of Krugman and others. Krugman's argument that we don't see ill effects of current policies could be just as much a failure of imagination as lack of data.
  - uejfiweun 5y ago
    Krugman is nothing but an idiotic hack. He has been so consistently out of touch and wrong about everything that I almost consider him to be malicious. He just blatantly is a spinster for the democratic party, but hides behind his pedigree and pretends like his opinion is obviously correct. It's that classic snooty elitism, the grandstanding, the self-righteousness - the same things that alienate moderates from the democratic party.
    - JamesBarney 5y ago
      I get that Krugman can be shrill. But no one who wins a nobel prize in economics is an idiot.
      - hodgesrm 5y ago
        Agree. Krugman is really good on pure economic questions like trade theory. Unfortunately he is a lot less trustworthy on issues where economics and current politics intersect, e.g., NYT opinion pieces. I read those with a fair degree of skepticism though he has produced a few that were economic gems.
jdhn 5y ago
He mentions that asset prices (primarily stocks, but also housing) was rising during the earlier portion of the last decade, but I'm curious to know what is take would be on why we didn't see a lot of inflation outside of those assets until the supply chain issues due to covid popped up. Perhaps the supply chain issues were the match that lit the inflation fire?
- HarryHirsch 5y ago
  I think the supply chain problems are a separate issue. The reason that the stocks-and-housing asset inflation hasn't spilled over into the monetary economy yet is that not much of it has been sold so far. God help us when the retirees will have to cash out.
  - JamesBarney 5y ago
    Inflation of assets and goods and services are two completely different phenomenon's with different causes. Inflation of assets are caused by lowered by interest rates, they don't spiral and they don't effect the cost of living. Just a straightforward result of net present value calculations. Inflation of goods is caused by a supply shock or too much demand (too much spending chasing two few resources).
    - HarryHirsch 5y ago
      Everyone needs a roof over the head, and the proportion of household income that went into housing has been steadily going up since the 1980's. So it's not correct that asset inflation does not affect everyday cost of living.
      - JamesBarney 5y ago
        We need to disentangle housing the good the thing you pay rent for, from a house an asset that produces housing. Why would low interest rates cause rent to increase? Intuitively I would think that low interest rates would make it cheaper to fund the creation of new housing lowering rents. I imagine the increase in rents is because we've made it more difficult to build things because of zoning, permitting etc..., and we're building better houses that are more insulated, fire proof, more outlets, etc... We also haven't made builders that much more productive over the last 40 years.
throwawaymanbot 5y ago
JamesBarney 5y ago
The Fed's mandate "so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates" It does not mention asset price bubbles, or inequality. > stoke dangerous asset bubbles Maybe low interest rates increase the risk of asset bubbles, but there were plenty of asset bubbles when interest rates were higher than today. But are we willing to accept less than full employment for the risk of maybe causing an asset bubble that will lead to less than full employment? It's trading something bad today for a risk of something bad tomorrow. Seems like a poor trade to me. > enrich the biggest banks over everyone else Investopedia doesn't think so, but who cares if banks get rich if it means we have full employment. > that would deepen income inequality There is plenty of evidence that full employment helps reduce income inequality. Anecdotally the recent shortage of employees means I'm seeing gas stations advertising $15/hr instead of the $8 they used to pay. Meanwhile everyone I know who was making $100k didn't see a 100% raise. Research backs up that full employment reduces inequality [1]. [0] https://www.investopedia.com/ask/answers/041015/how-do-interest-rate-changes-affect-profitability-banking-sector.asp https://www.investopedia.com/ask/answers/041015/how-do-inter... [1] https://equitablegrowth.org/wages-full-employment-reducing-inequality/ https://equitablegrowth.org/wages-full-employment-reducing-i...
- nopenopenopeno 5y ago
  Full employment is objectively impossible under capitalism. If nothing else, that is what the interest rate is for regulating. It’s to ensure full employment never happens so that capital will always have a surplus labor market to barter with.
- landemva 5y ago
  That quote about maximum employment, stable prices, and moderate interest rates caught my eye. For years people have spoken about the Fed's 'dual mandate'. That third part about moderate interest rates seems to be fictionalized. The Fed branches still call it a dual mandate. https://www.chicagofed.org/research/dual-mandate/dual-mandate https://www.chicagofed.org/research/dual-mandate/dual-mandat... '... to foster economic conditions that achieve both stable prices and maximum sustainable employment.'
oversocialized 5y ago
Threeve303 5y ago
The main problem with the 70s comparison and the reason the inflation subsided eventually, other than the Volcker Rule, is because the U.S. still had a strong reserve currency after. That will probably change this time and unless the U.S. can find a new China to bring into the financial system... The inflation will likely be getting worse.
- mgh2 5y ago
  Is India next? https://www.youtube.com/watch?v=aKNPP8nwD_E https://www.youtube.com/watch?v=aKNPP8nwD_E
  - mgh2 5y ago
    Or just plain local real state: https://news.ycombinator.com/item?id=29774075 https://news.ycombinator.com/item?id=29774075
grogers 5y ago
The big question is that after the fed raises rates and markets crash some point later, will the fed go right back to easy money or keep rates high? Everybody seems to be assuming the former...

57 points by hodgesrm 5y ago

higher prices for gas, goods and automobiles being fueled by the Fed’s unprecedented money printing programs Really? These are not caused by low interest rates. But the current housing prices are caused by low interest rates, and that's not even discussed in the article. But the government is missing in action.

Robotbeat 5y ago
I think it’s kind of silly to blame gas prices on Fed action since 2008-2011. Even in nominal terms, gas prices are lower now than the peaks of that time, and for much of the time, gas prices were FAR lower. Inflation was low for over a decade. We hit a huge pandemic and inflation ticked up. Let’s not crown him vindicated about inflation like a clock that’s right one or twice a day. He has a decade of low inflation to answer for first, and countless examples of monetary austerity giving rise to recessions in other countries as counterfactual.
- exceptione 5y ago
  The article makes a point that Hoenig did repeatedly not mentioned inflation. Instead his main point is about the inequality as well as asset bubbles QE would cause. I think he is right, also about the point that you cannot walk back without causing massive pain in the economy. I too think central banks have painted themselves in a corner, as when central banks drop even a slight hint of changing course, panic in the markets follows.

wonderwonder 5y ago

The paragraph that struck me the hardest in this was the following: "To execute quantitative easing, a trader at the New York Fed would call up one of the primary dealers, like JPMorgan Chase, and offer to buy $8 billion worth of Treasury bonds from the bank. JPMorgan would sell the Treasury bonds to the Fed trader. Then the Fed trader would hit a few keys and tell the Morgan banker to look inside their reserve account. Voila. The Fed had instantly created $8 billion out of thin air, in the reserve account, to complete the purchase. Morgan could, in turn, use this money to buy assets in the wider marketplace." I still need to research what this means but is it essentially saying that the fed is just giving these large banks money for free under the assumption they will buy assets to pump the market? It seems crazy that the fed is actively selecting winning institutions this way.

mwattsun 5y ago

This is a long read but worth it. I don't like to only complain but praise too, so good on the writer Christopher Leonard. The part about low interest rates causing a farm land bubble in Kansas was enlightening. I lived through the extreme interest rates of the late 70's and subsequent crash caused by the policies of Paul Volcker and it wasn't pretty, but then I was able to buy a house in the mid 80's at a decent interest rate. Edit: Volcker

hodgesrm 5y ago
Agree. It had an unusually clear explanation of how different types of bubbles are tied to Fed policies. Pointing out the effect of shifting of assets from poorer to richer segments of society was another interesting point in the article. Hoenig's arguments are quite different from the "deficits don't matter" spiel of Krugman and others. Krugman's argument that we don't see ill effects of current policies could be just as much a failure of imagination as lack of data.
- uejfiweun 5y ago
  Krugman is nothing but an idiotic hack. He has been so consistently out of touch and wrong about everything that I almost consider him to be malicious. He just blatantly is a spinster for the democratic party, but hides behind his pedigree and pretends like his opinion is obviously correct. It's that classic snooty elitism, the grandstanding, the self-righteousness - the same things that alienate moderates from the democratic party.
  - JamesBarney 5y ago
    I get that Krugman can be shrill. But no one who wins a nobel prize in economics is an idiot.
    - hodgesrm 5y ago
      Agree. Krugman is really good on pure economic questions like trade theory. Unfortunately he is a lot less trustworthy on issues where economics and current politics intersect, e.g., NYT opinion pieces. I read those with a fair degree of skepticism though he has produced a few that were economic gems.

jdhn 5y ago

He mentions that asset prices (primarily stocks, but also housing) was rising during the earlier portion of the last decade, but I'm curious to know what is take would be on why we didn't see a lot of inflation outside of those assets until the supply chain issues due to covid popped up. Perhaps the supply chain issues were the match that lit the inflation fire?

HarryHirsch 5y ago
I think the supply chain problems are a separate issue. The reason that the stocks-and-housing asset inflation hasn't spilled over into the monetary economy yet is that not much of it has been sold so far. God help us when the retirees will have to cash out.
- JamesBarney 5y ago
  Inflation of assets and goods and services are two completely different phenomenon's with different causes. Inflation of assets are caused by lowered by interest rates, they don't spiral and they don't effect the cost of living. Just a straightforward result of net present value calculations. Inflation of goods is caused by a supply shock or too much demand (too much spending chasing two few resources).
  - HarryHirsch 5y ago
    Everyone needs a roof over the head, and the proportion of household income that went into housing has been steadily going up since the 1980's. So it's not correct that asset inflation does not affect everyday cost of living.
    - JamesBarney 5y ago
      We need to disentangle housing the good the thing you pay rent for, from a house an asset that produces housing. Why would low interest rates cause rent to increase? Intuitively I would think that low interest rates would make it cheaper to fund the creation of new housing lowering rents. I imagine the increase in rents is because we've made it more difficult to build things because of zoning, permitting etc..., and we're building better houses that are more insulated, fire proof, more outlets, etc... We also haven't made builders that much more productive over the last 40 years.

throwawaymanbot 5y ago

JamesBarney 5y ago

The Fed's mandate "so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates" It does not mention asset price bubbles, or inequality. > stoke dangerous asset bubbles Maybe low interest rates increase the risk of asset bubbles, but there were plenty of asset bubbles when interest rates were higher than today. But are we willing to accept less than full employment for the risk of maybe causing an asset bubble that will lead to less than full employment? It's trading something bad today for a risk of something bad tomorrow. Seems like a poor trade to me. > enrich the biggest banks over everyone else Investopedia doesn't think so, but who cares if banks get rich if it means we have full employment. > that would deepen income inequality There is plenty of evidence that full employment helps reduce income inequality. Anecdotally the recent shortage of employees means I'm seeing gas stations advertising $15/hr instead of the $8 they used to pay. Meanwhile everyone I know who was making $100k didn't see a 100% raise. Research backs up that full employment reduces inequality [1]. [0] https://www.investopedia.com/ask/answers/041015/how-do-interest-rate-changes-affect-profitability-banking-sector.asp https://www.investopedia.com/ask/answers/041015/how-do-inter... [1] https://equitablegrowth.org/wages-full-employment-reducing-inequality/ https://equitablegrowth.org/wages-full-employment-reducing-i...

nopenopenopeno 5y ago
Full employment is objectively impossible under capitalism. If nothing else, that is what the interest rate is for regulating. It’s to ensure full employment never happens so that capital will always have a surplus labor market to barter with.
landemva 5y ago
That quote about maximum employment, stable prices, and moderate interest rates caught my eye. For years people have spoken about the Fed's 'dual mandate'. That third part about moderate interest rates seems to be fictionalized. The Fed branches still call it a dual mandate. https://www.chicagofed.org/research/dual-mandate/dual-mandate https://www.chicagofed.org/research/dual-mandate/dual-mandat... '... to foster economic conditions that achieve both stable prices and maximum sustainable employment.'

oversocialized 5y ago

Threeve303 5y ago

The main problem with the 70s comparison and the reason the inflation subsided eventually, other than the Volcker Rule, is because the U.S. still had a strong reserve currency after. That will probably change this time and unless the U.S. can find a new China to bring into the financial system... The inflation will likely be getting worse.

mgh2 5y ago
Is India next? https://www.youtube.com/watch?v=aKNPP8nwD_E https://www.youtube.com/watch?v=aKNPP8nwD_E
- mgh2 5y ago
  Or just plain local real state: https://news.ycombinator.com/item?id=29774075 https://news.ycombinator.com/item?id=29774075

grogers 5y ago

The big question is that after the fed raises rates and markets crash some point later, will the fed go right back to easy money or keep rates high? Everybody seems to be assuming the former...