4 ms·

This is way off topic but hopefully it will get allowed because I think you have the expertise to help: It seems to me that the widely accepted practice of mar

by boppo1 5y ago

This is way off topic but hopefully it will get allowed because I think you have the expertise to help: It seems to me that the widely accepted practice of market stimulation by interest rate intervention has the cost of destroying price discovery. Also, that it is a primary cause of wealth inequality. These relationships seem to me actually obvious: push down DCF denominators and valuations go up, inefficient businesses stay in business and employ people digging holes. Sure, we get good jobs reports, but we also work harder to make less. Meanwhile those who hold wealth see its value increase disproportionate to 'actual' worth and common people who hold little or none can afford less and less of it. It seems like a pretty direct policy of 'rich get richer, poor get poorer'. Worse yet, as I look at the world around me, it all seems to support my hypothesis. Tesla, spacs, NFTs, housing, blackrock & vanguard & gates buying land, etc. I could go on and on with examples. But the thing is, I got shitty grades in my college econ courses. It's laughable to me that all the highly educated people at central banks somehow haven't thought of this but I have. I'm being serious, I'm kind of a lazy idiot. By any reasonable measure, I expect that I'm wrong. Could you point me in the direction of some primary sources that address the relationship between interest rate intervention and price discovery? I've been told to pick up an undergrad macro text, but those all just seem to say "low rates = easier to get loans = mo' jobz" without any rigor. Open market ops and other interventions are so common and accepted, the only other people I see complaining are precious metals schizos. Surely there's a theoretical foundation for the policy/practice.

imtringued 5y ago
>It seems to me that the widely accepted practice of market stimulation by interest rate intervention has the cost of destroying price discovery. The idea that low interest rates stimulate anything is a myth. If you believe in the idea that the financial markets should obey the real world, rather than the opposite (which is assumed by practically all economics), then interest rates must go down all the way to 0% as the market reaches saturation. > Also, that it is a primary cause of wealth inequality. The idea that one should raise interest rates in a stagnant economy will cause nothing but a redistribution from the working class to the owning class. Who do you think is working for those interest payments? The rich? Do they even pay enough taxes to service government debt? Do they pay the interest payments for the financing that companies need to operate? Do they pay the interest on consumer loans of the poor? >These relationships seem to me actually obvious: push down DCF denominators and valuations go up, inefficient businesses stay in business and employ people digging holes. >Meanwhile those who hold wealth see its value increase disproportionate to 'actual' worth and common people who hold little or none can afford less and less of it. It's exactly backwards. Getting paid interest in a saturated market creates excess liquidity which floods the market and drives yields down everywhere. People start speculating because they have nothing better to do. >It seems like a pretty direct policy of 'rich get richer, poor get poorer'. Well, that's what interest does. If you have too much money you get more. http://userpage.fu-berlin.de/~roehrigw/kennedy/english/chap1.htm http://userpage.fu-berlin.de/~roehrigw/kennedy/english/chap1... >Worse yet, as I look at the world around me, it all seems to support my hypothesis. Tesla, spacs, NFTs, housing, blackrock & vanguard & gates buying land, etc. I could go on and on with examples. Land speculation is an extremely old problem that has always existed. https://bibliotek1.dk/english/history/centuries-of-experience-with-land-taxation-in-denmark https://bibliotek1.dk/english/history/centuries-of-experienc... >But the thing is, I got shitty grades in my college econ courses. It's laughable to me that all the highly educated people at central banks somehow haven't thought of this but I have. I'm being serious, I'm kind of a lazy idiot. By any reasonable measure, I expect that I'm wrong. You're wrong and the central bankers are wrong as well but they have no other option which is why they do what they do. When you take money out of the economy by saving it, the money in circulation goes down. The savers think they should be paid interest to circulate the money. The thing is, savers can just sit on their money which means they can charge an interest rate that is not set by supply and demand. Central bankers think the missing money has to be replenished. The thing about interest is that the amount of missing money in the economy grows exponentially. The obvious answer is to just tax the people who are sitting on cash. If they are lucky enough to find a borrower that wants to pay them 0% interest, then they get to keep their money. That is a real free market. Saving in cash is akin to blocking a road and demanding interest is like charging a toll for anyone who dares to take that road. The central bankers build a new road next to yours and then you block it too, leading to endless road construction. Fine the person blocking the road and you won't need to do much else. >Could you point me in the direction of some primary sources that address the relationship between interest rate intervention and price discovery? I've been told to pick up an undergrad macro text, but those all just seem to say "low rates = easier to get loans = mo' jobz" without any rigor. I would urge to watch this video series instead: https://www.youtube.com/watch?v=UI2Zs3QfzEI&list=PL65E9E086794AB4A7 https://www.youtube.com/watch?v=UI2Zs3QfzEI&list=PL65E9E0867... >Open market ops and other interventions are so common and accepted, the only other people I see complaining are precious metals schizos. Surely there's a theoretical foundation for the policy/practice. Have fun treating the symptoms and then noticing, that your solution either delayed the inevitable or made things worse to the point that people start a violent revolution and then reintroduce the same system so your grandchildren can experience a revolution as well. Here are other excerpts from that book: http://userpage.fu-berlin.de/~roehrigw/kennedy/english/ http://userpage.fu-berlin.de/~roehrigw/kennedy/english/
- boppo1 5y ago
  Oh man I'm really glad so many people jumped on my post, I'm looking forward to reading all of it and catching up and hopefully improving my grasp. At a glance though, this stuck out: >...you take money out of the economy by saving it, the money in circulation goes down. How do you take money out of the economy by saving it (unless it's under the mattress)? Banks make loans out of my savings, no? I thought a pretty common/basic macro identity was that savings = investment (or at least they are about equal and the same thing).
whatever1 5y ago
We tried austerity in the European Union. It worked (but only for Germany). The rest never recovered from the 2009 collapse.
- Icko 5y ago
  We did, don't be dramatic. https://data.worldbank.org/indicator/NY.GDP.MKTP.KD?locations=ES-FR-IT-NO-DE https://data.worldbank.org/indicator/NY.GDP.MKTP.KD?location...
- imtringued 5y ago
  Austerity does not work with the current money system because any deflationary effect of paying debts back leads to currency speculation. Every dollar is like a capillary in your body. Taking money out of circulating is equivalent to blocking the capillary. When you do austerity it's like getting multiple simultaneous heart attacks. The Austrian economists say just deal with the pain but I have a fairer proposal. Tax cash at 6%, then you can pay off debts. Anyone who wants to save can go to a bank and lend out their money at 0% or above.
xapata 5y ago
> It seems to me that the widely accepted practice of market stimulation by interest rate intervention has the cost of destroying price discovery. Also, that it is a primary cause of wealth inequality. Those claims deserve an explanation and empirical evidence. Measuring price discovery itself is a bit awkward. You could say that poor quality price discovery would result in more price volatility, and that increased costs of price discovery would result in lower liquidity. Unfortunately, both of those things have many other causal factors. How would you untangle the causes to isolate the effects of interest rate intervention? Making the leap to saying it's the primary cause of wealth inequality is absurd. So long as society uses a market economy, or allows any form of individual wealth aggregation, wealth is likely to follow a log-normal distribution.
- smallnamespace 5y ago
  The proper operation of monetary policy (which you can verify by cracking open any macroeconomics 101 textbook) calls for the central bank to control interest rates via the creation and destruction of money, such that the interest rate in the market for money (via fixed income instruments) always remains at an equilibrium rate. The Fed failed to effectively create money in ‘08 and afterwards, and instead settled for more or less directly controlling the price of fixed income instruments. This is bypassing the textbook cause and effect mechanism and is indeed the equivalent to a price control in the fixed income market. You can see negative effects by realizing that price controls always widen the gap between the marginal borrower vs. non-borrower — in a ‘true low rates’ scenario, loans would’ve been freely available at the low rate, but in post-Recession US, loan rates were low, but only strong borrowers could get liquidity. That directly widens the gap between the haves and have-nots, and was a direct result of Fed policy.
  - xapata 5y ago
    Asset inflation is exacerbating inequality, but to say it's the "primary cause" isn't supported.
smallnamespace 5y ago
You’re not crazy, if you want to find lots of discussion about this topic head to https://alhambrapartners.com/tag/eurodollar-university/ https://alhambrapartners.com/tag/eurodollar-university/ But to be fair to the Fed (not to excuse plenty of incompetence), the banks in 08 became close to insolvency. The ‘proper’ way to inject money into the economy would’ve required Congress to authorize a recapitalization of banks - which would’ve been political suicide.
nevereasonfroma 5y ago
Scott Sumner likes Mishkin's Economics of Money, Banking, and Financial Markets. If you're in USA, looks like you can get the 7th edition for around $10. * https://www.themoneyillusion.com/the-league-of-monetary-cranks/ https://www.themoneyillusion.com/the-league-of-monetary-cran... * https://www.themoneyillusion.com/mishkins-revealing-omissions/ https://www.themoneyillusion.com/mishkins-revealing-omission... His blog is great. Mainstream, orthodox macroeconomics. Well written, useful, and entertaining. Read the whole thing, in chronological order: * https://www.themoneyillusion.com/page/932/ https://www.themoneyillusion.com/page/932/ I graduated with a B average in economics, so I can't address this head on, but here's my understanding of the mainstream perspective: 1. Never reason from a price change: Prices go up, therefore people buy less? To the contrary, this begs the question of, why did prices go up? The causation is backwards: demand goes up, and then prices respond. 2. For example: "Low interest rates are generally a sign that money has been tight, as in Japan; high interest rates, that money has been easy." -Milton Friedman. The demand for money goes up (for whatever reason), the fed responds by increasing the supply of money, then interest rates fall. 3. Interest rates and inflation are nominal, thus don't impact relative prices (ie price discovery). Deflation/hyperinflation do have real effects though. 4. High/low, easy/tight is relative to market expectations. Successfully targeting the interest rate (or NGDP/aggregate demand) isn't market "stimulation" but keeping things on track, in a do no harm manner. And deviating does harm (ie business cycles). 5. Mainstream macro says money is neutral in the long run, non neutral in the short run. This might be what you're looking for: the effect of short term non neutrality of money on relative prices across the overall economy. So, if the downward pressure on DCF denominators is an economy wide phenomenon (ie inflation), then it's still the same say top 10% of businesses that survive. The missing link for me is: what's pushing up the value of inefficient businesses more than efficient businesses (or apples)? What distorts prices specifically and systematically in favor of inefficient businesses, vs. against or randomly/unpredictably? Now, let me go off the rails a bit re: wealth inequality. I think it's mostly just technology. There's just more and more stuff every year, and that sort of accretion, mix and stir with meritocracy, kleptocracy, plain old statistical randomness, network effects, what-have-you, lead to not just more wealth inequality, but inequality in general, and really just more overall diversity. The space of possibilities is just expanding at an incredible rate, together with the population, so there's a lot more room. And, I think it's natural for the distribution of people to be diffuse across the space. And, more people across a wider space, it's harder to consolidate, especially upward (eg Mao moved us in the wrong direction). Markets + technology do bring up the floor (hunger, shelter, etc), but we're still a ways off from the floor or the ceiling hitting our biological limits, ie post scarcity a la Iain M Banks' The Culture.
deleted 5y ago
[deleted]

by boppo1 5y ago

imtringued 5y ago

>It seems to me that the widely accepted practice of market stimulation by interest rate intervention has the cost of destroying price discovery. The idea that low interest rates stimulate anything is a myth. If you believe in the idea that the financial markets should obey the real world, rather than the opposite (which is assumed by practically all economics), then interest rates must go down all the way to 0% as the market reaches saturation. > Also, that it is a primary cause of wealth inequality. The idea that one should raise interest rates in a stagnant economy will cause nothing but a redistribution from the working class to the owning class. Who do you think is working for those interest payments? The rich? Do they even pay enough taxes to service government debt? Do they pay the interest payments for the financing that companies need to operate? Do they pay the interest on consumer loans of the poor? >These relationships seem to me actually obvious: push down DCF denominators and valuations go up, inefficient businesses stay in business and employ people digging holes. >Meanwhile those who hold wealth see its value increase disproportionate to 'actual' worth and common people who hold little or none can afford less and less of it. It's exactly backwards. Getting paid interest in a saturated market creates excess liquidity which floods the market and drives yields down everywhere. People start speculating because they have nothing better to do. >It seems like a pretty direct policy of 'rich get richer, poor get poorer'. Well, that's what interest does. If you have too much money you get more. http://userpage.fu-berlin.de/~roehrigw/kennedy/english/chap1.htm http://userpage.fu-berlin.de/~roehrigw/kennedy/english/chap1... >Worse yet, as I look at the world around me, it all seems to support my hypothesis. Tesla, spacs, NFTs, housing, blackrock & vanguard & gates buying land, etc. I could go on and on with examples. Land speculation is an extremely old problem that has always existed. https://bibliotek1.dk/english/history/centuries-of-experience-with-land-taxation-in-denmark https://bibliotek1.dk/english/history/centuries-of-experienc... >But the thing is, I got shitty grades in my college econ courses. It's laughable to me that all the highly educated people at central banks somehow haven't thought of this but I have. I'm being serious, I'm kind of a lazy idiot. By any reasonable measure, I expect that I'm wrong. You're wrong and the central bankers are wrong as well but they have no other option which is why they do what they do. When you take money out of the economy by saving it, the money in circulation goes down. The savers think they should be paid interest to circulate the money. The thing is, savers can just sit on their money which means they can charge an interest rate that is not set by supply and demand. Central bankers think the missing money has to be replenished. The thing about interest is that the amount of missing money in the economy grows exponentially. The obvious answer is to just tax the people who are sitting on cash. If they are lucky enough to find a borrower that wants to pay them 0% interest, then they get to keep their money. That is a real free market. Saving in cash is akin to blocking a road and demanding interest is like charging a toll for anyone who dares to take that road. The central bankers build a new road next to yours and then you block it too, leading to endless road construction. Fine the person blocking the road and you won't need to do much else. >Could you point me in the direction of some primary sources that address the relationship between interest rate intervention and price discovery? I've been told to pick up an undergrad macro text, but those all just seem to say "low rates = easier to get loans = mo' jobz" without any rigor. I would urge to watch this video series instead: https://www.youtube.com/watch?v=UI2Zs3QfzEI&list=PL65E9E086794AB4A7 https://www.youtube.com/watch?v=UI2Zs3QfzEI&list=PL65E9E0867... >Open market ops and other interventions are so common and accepted, the only other people I see complaining are precious metals schizos. Surely there's a theoretical foundation for the policy/practice. Have fun treating the symptoms and then noticing, that your solution either delayed the inevitable or made things worse to the point that people start a violent revolution and then reintroduce the same system so your grandchildren can experience a revolution as well. Here are other excerpts from that book: http://userpage.fu-berlin.de/~roehrigw/kennedy/english/ http://userpage.fu-berlin.de/~roehrigw/kennedy/english/

boppo1 5y ago
Oh man I'm really glad so many people jumped on my post, I'm looking forward to reading all of it and catching up and hopefully improving my grasp. At a glance though, this stuck out: >...you take money out of the economy by saving it, the money in circulation goes down. How do you take money out of the economy by saving it (unless it's under the mattress)? Banks make loans out of my savings, no? I thought a pretty common/basic macro identity was that savings = investment (or at least they are about equal and the same thing).

whatever1 5y ago

We tried austerity in the European Union. It worked (but only for Germany). The rest never recovered from the 2009 collapse.

Icko 5y ago
We did, don't be dramatic. https://data.worldbank.org/indicator/NY.GDP.MKTP.KD?locations=ES-FR-IT-NO-DE https://data.worldbank.org/indicator/NY.GDP.MKTP.KD?location...
imtringued 5y ago
Austerity does not work with the current money system because any deflationary effect of paying debts back leads to currency speculation. Every dollar is like a capillary in your body. Taking money out of circulating is equivalent to blocking the capillary. When you do austerity it's like getting multiple simultaneous heart attacks. The Austrian economists say just deal with the pain but I have a fairer proposal. Tax cash at 6%, then you can pay off debts. Anyone who wants to save can go to a bank and lend out their money at 0% or above.

xapata 5y ago

> It seems to me that the widely accepted practice of market stimulation by interest rate intervention has the cost of destroying price discovery. Also, that it is a primary cause of wealth inequality. Those claims deserve an explanation and empirical evidence. Measuring price discovery itself is a bit awkward. You could say that poor quality price discovery would result in more price volatility, and that increased costs of price discovery would result in lower liquidity. Unfortunately, both of those things have many other causal factors. How would you untangle the causes to isolate the effects of interest rate intervention? Making the leap to saying it's the primary cause of wealth inequality is absurd. So long as society uses a market economy, or allows any form of individual wealth aggregation, wealth is likely to follow a log-normal distribution.

smallnamespace 5y ago
The proper operation of monetary policy (which you can verify by cracking open any macroeconomics 101 textbook) calls for the central bank to control interest rates via the creation and destruction of money, such that the interest rate in the market for money (via fixed income instruments) always remains at an equilibrium rate. The Fed failed to effectively create money in ‘08 and afterwards, and instead settled for more or less directly controlling the price of fixed income instruments. This is bypassing the textbook cause and effect mechanism and is indeed the equivalent to a price control in the fixed income market. You can see negative effects by realizing that price controls always widen the gap between the marginal borrower vs. non-borrower — in a ‘true low rates’ scenario, loans would’ve been freely available at the low rate, but in post-Recession US, loan rates were low, but only strong borrowers could get liquidity. That directly widens the gap between the haves and have-nots, and was a direct result of Fed policy.
- xapata 5y ago
  Asset inflation is exacerbating inequality, but to say it's the "primary cause" isn't supported.

smallnamespace 5y ago

You’re not crazy, if you want to find lots of discussion about this topic head to https://alhambrapartners.com/tag/eurodollar-university/ https://alhambrapartners.com/tag/eurodollar-university/ But to be fair to the Fed (not to excuse plenty of incompetence), the banks in 08 became close to insolvency. The ‘proper’ way to inject money into the economy would’ve required Congress to authorize a recapitalization of banks - which would’ve been political suicide.

nevereasonfroma 5y ago

Scott Sumner likes Mishkin's Economics of Money, Banking, and Financial Markets. If you're in USA, looks like you can get the 7th edition for around $10. * https://www.themoneyillusion.com/the-league-of-monetary-cranks/ https://www.themoneyillusion.com/the-league-of-monetary-cran... * https://www.themoneyillusion.com/mishkins-revealing-omissions/ https://www.themoneyillusion.com/mishkins-revealing-omission... His blog is great. Mainstream, orthodox macroeconomics. Well written, useful, and entertaining. Read the whole thing, in chronological order: * https://www.themoneyillusion.com/page/932/ https://www.themoneyillusion.com/page/932/ I graduated with a B average in economics, so I can't address this head on, but here's my understanding of the mainstream perspective: 1. Never reason from a price change: Prices go up, therefore people buy less? To the contrary, this begs the question of, why did prices go up? The causation is backwards: demand goes up, and then prices respond. 2. For example: "Low interest rates are generally a sign that money has been tight, as in Japan; high interest rates, that money has been easy." -Milton Friedman. The demand for money goes up (for whatever reason), the fed responds by increasing the supply of money, then interest rates fall. 3. Interest rates and inflation are nominal, thus don't impact relative prices (ie price discovery). Deflation/hyperinflation do have real effects though. 4. High/low, easy/tight is relative to market expectations. Successfully targeting the interest rate (or NGDP/aggregate demand) isn't market "stimulation" but keeping things on track, in a do no harm manner. And deviating does harm (ie business cycles). 5. Mainstream macro says money is neutral in the long run, non neutral in the short run. This might be what you're looking for: the effect of short term non neutrality of money on relative prices across the overall economy. So, if the downward pressure on DCF denominators is an economy wide phenomenon (ie inflation), then it's still the same say top 10% of businesses that survive. The missing link for me is: what's pushing up the value of inefficient businesses more than efficient businesses (or apples)? What distorts prices specifically and systematically in favor of inefficient businesses, vs. against or randomly/unpredictably? Now, let me go off the rails a bit re: wealth inequality. I think it's mostly just technology. There's just more and more stuff every year, and that sort of accretion, mix and stir with meritocracy, kleptocracy, plain old statistical randomness, network effects, what-have-you, lead to not just more wealth inequality, but inequality in general, and really just more overall diversity. The space of possibilities is just expanding at an incredible rate, together with the population, so there's a lot more room. And, I think it's natural for the distribution of people to be diffuse across the space. And, more people across a wider space, it's harder to consolidate, especially upward (eg Mao moved us in the wrong direction). Markets + technology do bring up the floor (hunger, shelter, etc), but we're still a ways off from the floor or the ceiling hitting our biological limits, ie post scarcity a la Iain M Banks' The Culture.

deleted 5y ago

[deleted]