4 ms·

> economic activity has some dependence on the derivative of interest rates If interest rates go down, it's easy to roll over old promises and make new ones be

> economic activity has some dependence on the derivative of interest rates If interest rates go down, it's easy to roll over old promises and make new ones besides. If interest rates go up, promises must be kept or the business will fold. At the end of every business cycle, interest rates are low and there are lots of unprofitable "zombie companies" that operate by simply rolling over their promises. In order for the economy to grow, interest rates must be hiked to do a controlled burn and remove this underbrush. Zombie companies have to actually die. This is painful at the best of times. Political will formation will be doubly hard this time around because A. there is more national debt (so we probably need to soft-default on it and inflate it down, first) and B. last time around Carter did the burn and Reagan got the growth and the credit, so the question is who wants to be Carter this time around.

reflexco 5y ago
It seems that Putin is the scapegoat for inflation and will be the scapegoat for recession as well.
- jjoonathan 5y ago
  This isn't a rate-hike recession, it's stimulus withdrawal. Rates are at 0.25%. Last time it took 20.00% to stop inflation. We haven't even started. We haven't soft-defaulted on the national debt, so we can't even think about starting. The Ukraine conflict will be dusty history by the time actual rate hikes and an actual rate hike recession come around.
  - voisin 5y ago
    > Rates are at 0.25%. Last time it took 20.00% to stop inflation. This is good context. Is anything different this time that would make one believe we won’t need much, much higher rates to tame inflation?
    - tmn 5y ago
      The system will seize up and collapse with anything close 20% interest rates. Look at what happened in September 2019. The rates shot back to 0 because there was a liquidity problem in the repo market. The system is rife with zombie companies servicing their debt with nearly free debt. This will not go like the 70s. When rates stop increasing and go back to zero within the next two years remember this comment
      - jjoonathan 5y ago
        The 1979-1982 interest rate spike was preceded by 15 years of faffing around, playing at raising interest rates, and then chickening out, with a backdrop of rising persistent inflation. I think it's likely to play out exactly as you describe, but that's exactly how it played out in the 70s. I'm much less certain that it will end the same way, but there are big problems with all the alternatives too (yuan, euro, crypto, gold) so who knows.
      - voisin 5y ago
        If rates stop increasing and inflation continues with barely a pause, then what happens? We have massive social instability? Retirees are screwed? Lenders will have to increase rates just to earn a real return.
  - cjsplat 5y ago
    The MMT point is that it isn't clear that the interest rate is what killed inflation. A major cause of inflation in the 70s was the 6x increase in the price of oil. From 1980 to 1986 there was nearly a div by 5 drop.
    - nostrademons 5y ago
      Except it wasn't. Inflation was already high and going up by the time the first oil crisis hit. CPI was 5.5% in 1969, 5.8% in 1970, went down to 3.3% by 1972, and was 6.2% in 1973: https://www.minneapolisfed.org/about-us/monetary-policy/inflation-calculator/consumer-price-index-1913- https://www.minneapolisfed.org/about-us/monetary-policy/infl... The first oil crisis didn't hit until October 1973. Look at the month-by-month numbers for 1973: https://www.inflation.eu/en/inflation-rates/united-states/historic-inflation/cpi-inflation-united-states-1973.aspx https://www.inflation.eu/en/inflation-rates/united-states/hi... The biggest jump was 1.81% in August, 2 months before the oil shock. (Note that this is roughly double the monthly numbers we see now.) There was consistent monthly inflation 0.68%+ from January -> June. The real reason for the 1970s inflation was Nixon monetizing the debt incurred by our Vietnam hangover, but in true Nixonian fashion, he found an external event to blame it on.
  - xxpor 5y ago
    There's still a lot of debate if raising interest rates is what actually caused inflation to fall. Another theory is that it was actually Regulation Q. https://pages.stern.nyu.edu/~asavov/alexisavov/Alexi_Savov_files/DSS_Inflation_Feb_2020.pdf https://pages.stern.nyu.edu/~asavov/alexisavov/Alexi_Savov_f... I also personally think that high inflation is treated as bad axiomatically. This needs some justification if the only proposed solution is to intentionally cause a recession.
alexb_ 5y ago
> unprofitable "zombie companies" that operate by simply rolling over their promises Many modern tech companies come to mind....
phkahler 5y ago
>> last time around Carter did the burn and Reagan got the growth and the credit, so the question is who wants to be Carter this time around. You are only the second person to tell me this story. I'm not doubting it, the first guy said it to me over 15 years ago right before the bust as he was buying 6 percent treasuries. Probably the right time to do it would have been around 2000, the last time the government ran a surplus (last years of Clinton, first year of Bush jr.) but instead we heard: There's a surplus, we don't know why, but we don't think it will go away, so here have some money, and lets spend like crazy and have a war.

reflexco 5y ago

It seems that Putin is the scapegoat for inflation and will be the scapegoat for recession as well.

jjoonathan 5y ago
This isn't a rate-hike recession, it's stimulus withdrawal. Rates are at 0.25%. Last time it took 20.00% to stop inflation. We haven't even started. We haven't soft-defaulted on the national debt, so we can't even think about starting. The Ukraine conflict will be dusty history by the time actual rate hikes and an actual rate hike recession come around.
- voisin 5y ago
  > Rates are at 0.25%. Last time it took 20.00% to stop inflation. This is good context. Is anything different this time that would make one believe we won’t need much, much higher rates to tame inflation?
  - tmn 5y ago
    The system will seize up and collapse with anything close 20% interest rates. Look at what happened in September 2019. The rates shot back to 0 because there was a liquidity problem in the repo market. The system is rife with zombie companies servicing their debt with nearly free debt. This will not go like the 70s. When rates stop increasing and go back to zero within the next two years remember this comment
    - jjoonathan 5y ago
      The 1979-1982 interest rate spike was preceded by 15 years of faffing around, playing at raising interest rates, and then chickening out, with a backdrop of rising persistent inflation. I think it's likely to play out exactly as you describe, but that's exactly how it played out in the 70s. I'm much less certain that it will end the same way, but there are big problems with all the alternatives too (yuan, euro, crypto, gold) so who knows.
    - voisin 5y ago
      If rates stop increasing and inflation continues with barely a pause, then what happens? We have massive social instability? Retirees are screwed? Lenders will have to increase rates just to earn a real return.
- cjsplat 5y ago
  The MMT point is that it isn't clear that the interest rate is what killed inflation. A major cause of inflation in the 70s was the 6x increase in the price of oil. From 1980 to 1986 there was nearly a div by 5 drop.
  - nostrademons 5y ago
    Except it wasn't. Inflation was already high and going up by the time the first oil crisis hit. CPI was 5.5% in 1969, 5.8% in 1970, went down to 3.3% by 1972, and was 6.2% in 1973: https://www.minneapolisfed.org/about-us/monetary-policy/inflation-calculator/consumer-price-index-1913- https://www.minneapolisfed.org/about-us/monetary-policy/infl... The first oil crisis didn't hit until October 1973. Look at the month-by-month numbers for 1973: https://www.inflation.eu/en/inflation-rates/united-states/historic-inflation/cpi-inflation-united-states-1973.aspx https://www.inflation.eu/en/inflation-rates/united-states/hi... The biggest jump was 1.81% in August, 2 months before the oil shock. (Note that this is roughly double the monthly numbers we see now.) There was consistent monthly inflation 0.68%+ from January -> June. The real reason for the 1970s inflation was Nixon monetizing the debt incurred by our Vietnam hangover, but in true Nixonian fashion, he found an external event to blame it on.
- xxpor 5y ago
  There's still a lot of debate if raising interest rates is what actually caused inflation to fall. Another theory is that it was actually Regulation Q. https://pages.stern.nyu.edu/~asavov/alexisavov/Alexi_Savov_files/DSS_Inflation_Feb_2020.pdf https://pages.stern.nyu.edu/~asavov/alexisavov/Alexi_Savov_f... I also personally think that high inflation is treated as bad axiomatically. This needs some justification if the only proposed solution is to intentionally cause a recession.

alexb_ 5y ago

> unprofitable "zombie companies" that operate by simply rolling over their promises Many modern tech companies come to mind....

phkahler 5y ago

>> last time around Carter did the burn and Reagan got the growth and the credit, so the question is who wants to be Carter this time around. You are only the second person to tell me this story. I'm not doubting it, the first guy said it to me over 15 years ago right before the bust as he was buying 6 percent treasuries. Probably the right time to do it would have been around 2000, the last time the government ran a surplus (last years of Clinton, first year of Bush jr.) but instead we heard: There's a surplus, we don't know why, but we don't think it will go away, so here have some money, and lets spend like crazy and have a war.