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Yes, the Fed is supposed to manage long-term inflation. I was reacting the rather extraordinary claim that it does so to help finance the government deficit. Th

Yes, the Fed is supposed to manage long-term inflation. I was reacting the rather extraordinary claim that it does so to help finance the government deficit. This claim would only make sense if a long-term (and therefore known and expected by everybody) stable inflation could have an effect on the real interest rate. Evidence for that seems not to be forthcoming, so I stand by my statement.

dredmorbius 13y ago
Growing the money supply -- inflating it -- does help finance the deficit, by allowing federal debt to be repaid with deflated currency. The US has grown its way out of past debts. Because real wealth and economic activity was also growing, the inflation, while significant, was still reasonably limited. Attempting to continue growing the money supply while the real economy is stagnant or contracting won't have that effect. Unless the Fed directly injects money into the Federal treasury, where it's paid out. In which case, unless the money is then lost through nonproductive economic activity, it will inflate the currency. In any event, the ability to continue immense levels of Federal borrowing will end. I'm not inclined to swallow the Republican line, but I'm coming to see long-term Federal deficits as a looming and increasing problem. Keep an eye on those Federal Reserve interest rates.
- nhaehnle 13y ago
  Maybe I am extraordinarily dense, but I still don't see an argument that the real interest rate is decreased by long-term stable inflation. If real GDP growth stops or even becomes negative, then the real interest rate will have to end up being zero or less as well, regardless of what the government supposedly does to create inflation or not. Ultimately, even if government acts like every gold bug wants it to act, the private sector will create inflation through its action if the real interest rate remains too high. [1] So I don't know what we should make of all this? Perhaps you want the government to stop borrowing when the Limits of Growth have been reached? But (a) we are not at this point yet, so it is irrelevant for current decisions, and (b) how would you recognize when we've reached this point? Perhaps you recognize it when there is zero unemployment and real GDP is still shrinking? In any case, this is very unclear territory. [1] Since I don't want to repeat myself too much, this is the comment where I've tried to explain my understanding of the mechanisms behind this: https://news.ycombinator.com/item?id=6291096 https://news.ycombinator.com/item?id=6291096
  - dredmorbius 13y ago
    If real GDP growth stops or even becomes negative Given that return on invested capital has been decreasing 1965-2009, and I've seen similar charts for GDP, we're on track for that. How our banking/finance system resolves that situation will be ... interesting http://www.deloitte.com/view/en_US/us/Insights/Browse-by-Content-Type/podcasts/130fc6c110262310VgnVCM2000001b56f00aRCRD.htm http://www.deloitte.com/view/en_US/us/Insights/Browse-by-Con... http://www.forbes.com/sites/stevedenning/2012/01/25/shift-index-2011-the-most-important-business-study-ever/ http://www.forbes.com/sites/stevedenning/2012/01/25/shift-in... I still don't see an argument that the real interest rate is decreased by long-term stable inflation. I need to think this over a bit more. I'm not sure there is a stable long-term relationship here -- the financial system is part of the internal control and feedback system of the economy, growth is ultimately dependent on exogenous factors (notably resources). So it's fair to say that the real interest rate is determined by the nominal rate and the inflation rate. And the nominal interest rate is strongly influenced by the real rate of return on investment. See Shift Index above. Though I'm trying to reconcile that with the low interest rates of the late 1960s / early 1970s and high interest of 1979-1982 or so.
  - dredmorbius 13y ago
    If real GDP growth stops or even becomes negative Given that return on invested capital has been decreasing 1965-2009, and I've seen similar charts for GDP, we're on track for that. How our banking/finance system resolves that situation will be ... interesting http://www.deloitte.com/view/en_US/us/Insights/Browse-by-Content-Type/podcasts/130fc6c110262310VgnVCM2000001b56f00aRCRD.htm http://www.deloitte.com/view/en_US/us/Insights/Browse-by-Con... http://www.forbes.com/sites/stevedenning/2012/01/25/shift-index-2011-the-most-important-business-study-ever/ http://www.forbes.com/sites/stevedenning/2012/01/25/shift-in... I still don't see an argument that the real interest rate is decreased by long-term stable inflation. I need to think this over a bit more. I'm not sure there is a stable long-term relationship here -- the financial system is part of the internal control and feedback system of the economy, growth is ultimately dependent on exogenous factors (notably resources). So it's fair to say that the real interest rate is determined by the nominal rate and the inflation rate. And the nominal interest rate is strongly influenced by the real rate of return on investment. See Shift Index above. Though I'm trying to reconcile that with the low interest rates of the late 1960s / early 1970s and high interest of 1979-1982 or so. Perhaps you want the government to stop borrowing when the Limits of Growth have been reached? Not so much "want" as "it will have to, as the costs of borrowing will start increasing uncontrollably". But (a) we are not at this point yet You and I disagree on that point. (b) how would you recognize when we've reached this point? Real, depreciation-adjusted (e.g., declining stocks of energy reserves), EROEI-adjusted, quality-of-life adjusted aggregate and per-capita growth falling. GDP itself is a poor metric, it's mostly just easy to obtain (sum up everyone's incomes). There are other alternatives which have been proposed: FISH, GPI, UNHDI, among them. A long, sustained, global recession or depression from which neither fiscal nor monetary stimulus seems sufficient to restore growth might lend another clue. zero unemployment and real GDP is still shrinking? I'd expect unemployment to be rather nonzero. Better: workforce participation rates to be low despite considerable pressures for individuals to seek out work.

dredmorbius 13y ago

Growing the money supply -- inflating it -- does help finance the deficit, by allowing federal debt to be repaid with deflated currency. The US has grown its way out of past debts. Because real wealth and economic activity was also growing, the inflation, while significant, was still reasonably limited. Attempting to continue growing the money supply while the real economy is stagnant or contracting won't have that effect. Unless the Fed directly injects money into the Federal treasury, where it's paid out. In which case, unless the money is then lost through nonproductive economic activity, it will inflate the currency. In any event, the ability to continue immense levels of Federal borrowing will end. I'm not inclined to swallow the Republican line, but I'm coming to see long-term Federal deficits as a looming and increasing problem. Keep an eye on those Federal Reserve interest rates.

nhaehnle 13y ago
Maybe I am extraordinarily dense, but I still don't see an argument that the real interest rate is decreased by long-term stable inflation. If real GDP growth stops or even becomes negative, then the real interest rate will have to end up being zero or less as well, regardless of what the government supposedly does to create inflation or not. Ultimately, even if government acts like every gold bug wants it to act, the private sector will create inflation through its action if the real interest rate remains too high. [1] So I don't know what we should make of all this? Perhaps you want the government to stop borrowing when the Limits of Growth have been reached? But (a) we are not at this point yet, so it is irrelevant for current decisions, and (b) how would you recognize when we've reached this point? Perhaps you recognize it when there is zero unemployment and real GDP is still shrinking? In any case, this is very unclear territory. [1] Since I don't want to repeat myself too much, this is the comment where I've tried to explain my understanding of the mechanisms behind this: https://news.ycombinator.com/item?id=6291096 https://news.ycombinator.com/item?id=6291096
- dredmorbius 13y ago
  If real GDP growth stops or even becomes negative Given that return on invested capital has been decreasing 1965-2009, and I've seen similar charts for GDP, we're on track for that. How our banking/finance system resolves that situation will be ... interesting http://www.deloitte.com/view/en_US/us/Insights/Browse-by-Content-Type/podcasts/130fc6c110262310VgnVCM2000001b56f00aRCRD.htm http://www.deloitte.com/view/en_US/us/Insights/Browse-by-Con... http://www.forbes.com/sites/stevedenning/2012/01/25/shift-index-2011-the-most-important-business-study-ever/ http://www.forbes.com/sites/stevedenning/2012/01/25/shift-in... I still don't see an argument that the real interest rate is decreased by long-term stable inflation. I need to think this over a bit more. I'm not sure there is a stable long-term relationship here -- the financial system is part of the internal control and feedback system of the economy, growth is ultimately dependent on exogenous factors (notably resources). So it's fair to say that the real interest rate is determined by the nominal rate and the inflation rate. And the nominal interest rate is strongly influenced by the real rate of return on investment. See Shift Index above. Though I'm trying to reconcile that with the low interest rates of the late 1960s / early 1970s and high interest of 1979-1982 or so.
- dredmorbius 13y ago
  If real GDP growth stops or even becomes negative Given that return on invested capital has been decreasing 1965-2009, and I've seen similar charts for GDP, we're on track for that. How our banking/finance system resolves that situation will be ... interesting http://www.deloitte.com/view/en_US/us/Insights/Browse-by-Content-Type/podcasts/130fc6c110262310VgnVCM2000001b56f00aRCRD.htm http://www.deloitte.com/view/en_US/us/Insights/Browse-by-Con... http://www.forbes.com/sites/stevedenning/2012/01/25/shift-index-2011-the-most-important-business-study-ever/ http://www.forbes.com/sites/stevedenning/2012/01/25/shift-in... I still don't see an argument that the real interest rate is decreased by long-term stable inflation. I need to think this over a bit more. I'm not sure there is a stable long-term relationship here -- the financial system is part of the internal control and feedback system of the economy, growth is ultimately dependent on exogenous factors (notably resources). So it's fair to say that the real interest rate is determined by the nominal rate and the inflation rate. And the nominal interest rate is strongly influenced by the real rate of return on investment. See Shift Index above. Though I'm trying to reconcile that with the low interest rates of the late 1960s / early 1970s and high interest of 1979-1982 or so. Perhaps you want the government to stop borrowing when the Limits of Growth have been reached? Not so much "want" as "it will have to, as the costs of borrowing will start increasing uncontrollably". But (a) we are not at this point yet You and I disagree on that point. (b) how would you recognize when we've reached this point? Real, depreciation-adjusted (e.g., declining stocks of energy reserves), EROEI-adjusted, quality-of-life adjusted aggregate and per-capita growth falling. GDP itself is a poor metric, it's mostly just easy to obtain (sum up everyone's incomes). There are other alternatives which have been proposed: FISH, GPI, UNHDI, among them. A long, sustained, global recession or depression from which neither fiscal nor monetary stimulus seems sufficient to restore growth might lend another clue. zero unemployment and real GDP is still shrinking? I'd expect unemployment to be rather nonzero. Better: workforce participation rates to be low despite considerable pressures for individuals to seek out work.