9 ms·

"What we desperately need today is higher rates, not merely as a temporary measure or to restore a sense of near term credibility, but higher for longer, in ord

by rsync 4y ago

"What we desperately need today is higher rates, not merely as a temporary measure or to restore a sense of near term credibility, but higher for longer, in order to promote long-term economic vibrancy. In the near term, this will cause economic pain and wealth destruction." There is an apt analogy to be made with forest fires and recessions. You can keep forest fires from erupting for decades - and we have done that in much of the American West. But the fuels continue to build up and, eventually, a fire that cannot be managed will explode violently - and cause much more damage than the aggregate of all of the smaller fires along the way. Business firms fail. Employees of those firms lose their jobs and suppliers are left unpaid. Nobody likes this but it is the circle of life of the economy. Keeping these firms alive with cheap and easy rollover of debt is akin to letting the fuels build up in the forest: when the day finally arrives that these zombie firms cannot finance or rollover debt we will have an explosion of defaults and bankruptcies that consumes far more than the laggards we supported along the way. We need regular recessions the same way we need regular fires in the forest.

zozbot234 4y ago
I don't think anything policy does is going to cause a recession. We've got a whole lot of QE to wind down before anything like that happens. If a recession hits now, it's going to be due to supply factors: the aftermath of the pandemic and the global situation more recently. Of course, any move towards sustained inflation is also dangerous; it would be good to avoid that.
- whimsicalism 4y ago
  The issue is that we might need to contract quite a bit to pull inflation down.
TimPC 4y ago
The counterpoint is that we needed higher rates earlier to combat inflation before we had stagflation. My understanding is that with stagflation the better policy is to accept the inflation. Raising interest rates combats inflation but also contracts the economy. Contracting the economy during a recession is extremely dangerous. As in start talking about the D-word dangerous. I think raising interest rates so aggressively now is poorly thought out and is going to bite us in the ass.
- zozbot234 4y ago
  > My understanding is that with stagflation the better policy is to accept the inflation. Accepting sustained inflation is always dangerous; it's exactly what we did in the 1970s. Letting it run up even further now just means a bigger recession later.
  - TimPC 4y ago
    I still think it's the least bad option. I prefer two recessions to a depression.
    - whimsicalism 4y ago
      If you get sustained inflation, the ensuing contractionary policy will have to be much, much harsher than if you nip it in the bud. We are also not currently in recession, so I don't know what you mean about contracting while we are in a recession.
      - mpalczewski 4y ago
        First quarter gdp was negative, we could very well be in a recession and not know it.
        whimsicalism 4y ago
        The fed should be targeting nominal GDP, which is currently way too high. First quarter GDP was negative because inflation expectations are running amok.
      - TimPC 4y ago
        What was the extremely harsh correction to the high inflation of the 1970s and 1980s. I don’t recall more than a minor recession in the 1990s. Perhaps you’re from a different reality than me?
        4y ago
greeneggs 4y ago
I don't buy this analogy. Bankruptcy isn't the only market discipline. If a firm is underperforming, then it will be bought up and sold for parts. This happens all the time, and low interest rates only make it easier. Anyway, the article's main mistake is in thinking that the Fed controls interest rates. It can only control nominal interest rates, not real interest rates (adjusted for inflation). Like any other competitive market, real interest rates are set by supply and demand. If companies, entrepreneurs, and investors see few ways of investing cash to increase revenue or improve efficiency, then interest rates must be low. Better investment (real) returns can come from new technologies and innovations, or from demographic surges. Yes, we all want better investment opportunities, in real dollars. But the Fed can't control this.
- rsync 4y ago
  "I don't buy this analogy. Bankruptcy isn't the only market discipline. If a firm is underperforming, then it will be bought up and sold for parts. This happens all the time, and low interest rates only make it easier." The cheap financing allows these firms to disguise the fact that they are underperforming. So whatever form of "market discipline" might occur, these firms are shielded from it because they can just keep rolling over their debt obligations while continuing to pretend they are competitive in the marketplace.
  - imtringued 4y ago
    There is this customer who isn't buying anything for the next 10 years, ergo there must be a company that isn't producing anything over the next 10 years. The fact that they roll over their debt tells you nothing about the company, only about the customer.
- I_DRINK_KOOLAID 4y ago
  > Yes, we all want better investment opportunities, in real dollars. But the Fed can't control this. Better means an optimal risk-reward profile, meaning that you don't lose principal while looking to allocate that capital in search for yield. The Fed controls the rate of the safest investment there is: money held at the Fed AKA the Fed fund rate. Every interest rate is calculated using that fundamental rate as the point of reference because literally every entity in the world has a higher risk of default rate than the U.S. Federal Government. So yes they control the most important thing in global markets: the price of safe money backed by 5000+ nukes, largest air force, 2nd largest airforce, 3rd largest airforce, largest navy, largest economy...
greg7gkb 4y ago
You can still have less successful businesses failing (trees dying) without entering a recession (forest fire). Nice analogy but I don't think it proves that recessions are necessary.
lend000 4y ago
This is a topic I truly want to become more mainstream knowledge. Wealth inequality only decreases notably during market corrections, which the Fed is determined to prevent at all costs [0]. The more the Fed distorts normal market signals, like interest rates, the less efficiently capital is allocated, and so the wealth distribution morphs from one that roughly represents human skill at allocating capital to an extremely top-heavy skewed chart that rewards incumbents. [0] https://fred.stlouisfed.org/series/WFRBST01134 https://fred.stlouisfed.org/series/WFRBST01134
- HWR_14 4y ago
  > the wealth distribution morphs from one that roughly represents human skill at allocating capital When has the been the case? I thought the case for index funds went something like "there is no replicatable skill test for assigning capital, so just diversify"
  - whimsicalism 4y ago
    It's more like: if there was a replicable test for assigning capital, the pricing of that assignee/that capital would already reflect the results of that test.
- whimsicalism 4y ago
  I largely agree with many of the points you are making, but I feel like you are missing the obvious rejoinder anyone would make to your point: Why care about wealth inequality as a first-order concern? The periods you identify as decreasing wealth inequality also correspond to periods of decrease in real median income [0]. If my median income is going up, why should I root for periods that decrease it, even if it means that the wealthy are being hurt more than I am? Seems a bit like cutting off the nose to spite the face. [0] https://fred.stlouisfed.org/series/MEHOINUSA672N https://fred.stlouisfed.org/series/MEHOINUSA672N
  - avgcorrection 4y ago
    That is not an obvious rejoinder that “anyone would make”.
oversocialized 4y ago
macinjosh 4y ago
It is all just garbage collection.
donthellbanme 4y ago
I just heard a msnbc guest say, "Once inflation rears it's ugly head, in my experience (very old guy) only a severe recession brings down prices. (I hope that's not the case.) Then I heard Kathy Woods say she predicts deflation in about a year. I my world of the poor, and low middle class we didn't get much out of the low interest party. I guess there's more jobs? We can't afford to speculate on stocks, and those high interest rate cd's were nice 20 years ago. We can't afford a home, so we didn't get those low interest rate mortgages. We can't afford new cars, and used car loans always seem high. Did you guys know the Homeless got 0 government money through the pandemic. (Off topic, but it just bothered me.) I just heard a big wig business guru say that Jerome Powell should be looking for another job. I think he did an ok job for what he was handed. What I will never understand about Jerome Powell is why had government buy the mortgage backed securities, and treasury securities for so so so long, especially since realeste and the stock market flourished during the pandemic? (Yes--I'm no expert obviously.)
shockeychap 4y ago
I wholly agree with this analogy. But it doesn't help that the populist press, schools, and various other institutions always try to paint every instance of failure, job loss, and economic pain as a referendum on a broken system rather than a necessary part of the economic circle of life.

by rsync 4y ago

zozbot234 4y ago

I don't think anything policy does is going to cause a recession. We've got a whole lot of QE to wind down before anything like that happens. If a recession hits now, it's going to be due to supply factors: the aftermath of the pandemic and the global situation more recently. Of course, any move towards sustained inflation is also dangerous; it would be good to avoid that.

whimsicalism 4y ago
The issue is that we might need to contract quite a bit to pull inflation down.

TimPC 4y ago

The counterpoint is that we needed higher rates earlier to combat inflation before we had stagflation. My understanding is that with stagflation the better policy is to accept the inflation. Raising interest rates combats inflation but also contracts the economy. Contracting the economy during a recession is extremely dangerous. As in start talking about the D-word dangerous. I think raising interest rates so aggressively now is poorly thought out and is going to bite us in the ass.

zozbot234 4y ago
> My understanding is that with stagflation the better policy is to accept the inflation. Accepting sustained inflation is always dangerous; it's exactly what we did in the 1970s. Letting it run up even further now just means a bigger recession later.
- TimPC 4y ago
  I still think it's the least bad option. I prefer two recessions to a depression.
  - whimsicalism 4y ago
    If you get sustained inflation, the ensuing contractionary policy will have to be much, much harsher than if you nip it in the bud. We are also not currently in recession, so I don't know what you mean about contracting while we are in a recession.
    - mpalczewski 4y ago
      First quarter gdp was negative, we could very well be in a recession and not know it.
      - whimsicalism 4y ago
        The fed should be targeting nominal GDP, which is currently way too high. First quarter GDP was negative because inflation expectations are running amok.
    - TimPC 4y ago
      What was the extremely harsh correction to the high inflation of the 1970s and 1980s. I don’t recall more than a minor recession in the 1990s. Perhaps you’re from a different reality than me?
      - 4y ago

greeneggs 4y ago

I don't buy this analogy. Bankruptcy isn't the only market discipline. If a firm is underperforming, then it will be bought up and sold for parts. This happens all the time, and low interest rates only make it easier. Anyway, the article's main mistake is in thinking that the Fed controls interest rates. It can only control nominal interest rates, not real interest rates (adjusted for inflation). Like any other competitive market, real interest rates are set by supply and demand. If companies, entrepreneurs, and investors see few ways of investing cash to increase revenue or improve efficiency, then interest rates must be low. Better investment (real) returns can come from new technologies and innovations, or from demographic surges. Yes, we all want better investment opportunities, in real dollars. But the Fed can't control this.

rsync 4y ago
"I don't buy this analogy. Bankruptcy isn't the only market discipline. If a firm is underperforming, then it will be bought up and sold for parts. This happens all the time, and low interest rates only make it easier." The cheap financing allows these firms to disguise the fact that they are underperforming. So whatever form of "market discipline" might occur, these firms are shielded from it because they can just keep rolling over their debt obligations while continuing to pretend they are competitive in the marketplace.
- imtringued 4y ago
  There is this customer who isn't buying anything for the next 10 years, ergo there must be a company that isn't producing anything over the next 10 years. The fact that they roll over their debt tells you nothing about the company, only about the customer.
I_DRINK_KOOLAID 4y ago
> Yes, we all want better investment opportunities, in real dollars. But the Fed can't control this. Better means an optimal risk-reward profile, meaning that you don't lose principal while looking to allocate that capital in search for yield. The Fed controls the rate of the safest investment there is: money held at the Fed AKA the Fed fund rate. Every interest rate is calculated using that fundamental rate as the point of reference because literally every entity in the world has a higher risk of default rate than the U.S. Federal Government. So yes they control the most important thing in global markets: the price of safe money backed by 5000+ nukes, largest air force, 2nd largest airforce, 3rd largest airforce, largest navy, largest economy...

greg7gkb 4y ago

You can still have less successful businesses failing (trees dying) without entering a recession (forest fire). Nice analogy but I don't think it proves that recessions are necessary.

lend000 4y ago

This is a topic I truly want to become more mainstream knowledge. Wealth inequality only decreases notably during market corrections, which the Fed is determined to prevent at all costs [0]. The more the Fed distorts normal market signals, like interest rates, the less efficiently capital is allocated, and so the wealth distribution morphs from one that roughly represents human skill at allocating capital to an extremely top-heavy skewed chart that rewards incumbents. [0] https://fred.stlouisfed.org/series/WFRBST01134 https://fred.stlouisfed.org/series/WFRBST01134

HWR_14 4y ago
> the wealth distribution morphs from one that roughly represents human skill at allocating capital When has the been the case? I thought the case for index funds went something like "there is no replicatable skill test for assigning capital, so just diversify"
- whimsicalism 4y ago
  It's more like: if there was a replicable test for assigning capital, the pricing of that assignee/that capital would already reflect the results of that test.
whimsicalism 4y ago
I largely agree with many of the points you are making, but I feel like you are missing the obvious rejoinder anyone would make to your point: Why care about wealth inequality as a first-order concern? The periods you identify as decreasing wealth inequality also correspond to periods of decrease in real median income [0]. If my median income is going up, why should I root for periods that decrease it, even if it means that the wealthy are being hurt more than I am? Seems a bit like cutting off the nose to spite the face. [0] https://fred.stlouisfed.org/series/MEHOINUSA672N https://fred.stlouisfed.org/series/MEHOINUSA672N
- avgcorrection 4y ago
  That is not an obvious rejoinder that “anyone would make”.

oversocialized 4y ago

macinjosh 4y ago

It is all just garbage collection.

donthellbanme 4y ago

I just heard a msnbc guest say, "Once inflation rears it's ugly head, in my experience (very old guy) only a severe recession brings down prices. (I hope that's not the case.) Then I heard Kathy Woods say she predicts deflation in about a year. I my world of the poor, and low middle class we didn't get much out of the low interest party. I guess there's more jobs? We can't afford to speculate on stocks, and those high interest rate cd's were nice 20 years ago. We can't afford a home, so we didn't get those low interest rate mortgages. We can't afford new cars, and used car loans always seem high. Did you guys know the Homeless got 0 government money through the pandemic. (Off topic, but it just bothered me.) I just heard a big wig business guru say that Jerome Powell should be looking for another job. I think he did an ok job for what he was handed. What I will never understand about Jerome Powell is why had government buy the mortgage backed securities, and treasury securities for so so so long, especially since realeste and the stock market flourished during the pandemic? (Yes--I'm no expert obviously.)

shockeychap 4y ago

I wholly agree with this analogy. But it doesn't help that the populist press, schools, and various other institutions always try to paint every instance of failure, job loss, and economic pain as a referendum on a broken system rather than a necessary part of the economic circle of life.