> Economists have been casting around for the answer, a theory to explain their inability to peer accurately in the months ahead, let alone the years. ...
No mention of "quantitative easing" anywhere.
QE ran in various forms from 2008-2013. Short term rates were held at zero in the US from 2008-2015. Several industrialized areas now have negative nominal rates. The Fed has started QE back up again to prop up the failing repo market, insisting that what's happening isn't another round of QE. None of these unusual activities were considered worth discussing by most economists prior to 2008. No wonder why their predictions are so off the mark.
Can ultra-loose monetary policy lead to marketplace distortions? Can it lead to malinvestments like we see in the tech sector? Can it lead companies into a false sense of security, delaying and scaling back layoffs, because the usual economic signals have been swept under the rug by government policies?
Of course. The only surprise here is that the WSJ chooses to completely ignore these completely obvious distortions.
There's no mention about QE because QE is only about lowering the cost for the private sector to borrow money. The main threat to QE is inflation, which is hovering around 2% and stubbornly low, so QE is in the clear. The repo purchases are operating as intended, with new liquidity requirements for banks from Basel 3 reforms.
Also you complain about negative nominal rates, which make banks less likely to lend; then you speculate on malinvestments and market distortions. So which way do you want it, is money too tight or too loose?
> The main threat to QE is inflation, which is hovering around 2%
If I lent money at 6% interest from 2007 to today, I would have performed about the same as the capital gains from owning an equivalent amount of everyone's Favourite Shiny Rock, gold. Not including the recent price jump from QE4.
Owning a rock should not be generating a real return. In reality, it probably isn't. Real inflation is likely different from consumer price inflation.
It isn't perfect evidence, but gold is basically as pure an asset as we can get and it lines up with what should be happening if the government is printing money with its ears pinned back. No practical uses, easy to store, rare enough to be valuable. Anyone who is interested in saving for their retirement would be unwise to treat CPI as inflation in their calculations.
Gold is fairly volatile and you are cherry picking dates. The spot price of gold fell 45% from 2010 to 2015, do you think consumer prices fell 45% over the same period?
No, I specifically said the gold price change suggested the consumer price inflation rate wasn't measuring real inflation; so obviously I don't think changes in the gold price are having an immediate reflection in consumer prices. And I think in the timeframe you indicate they stopped QE and people noticed the gold price had risen much faster than new money had been created so scaled back.
Picking 2010-2015 is cherry picking the date substantially more than 2007-early 2019 when we're talking about QE spurred inflation. If I were cherry picking I'd go 2000 to late 2019 and get 19%. I'm just going a little pre-QE and then the lowest rate of return post-QE so people can't accuse me of cherry picking in favour of my argument. If you pick practically any pre-financial crisis to basically any post-crisis date it looks like a real rate of return.
4-5% real inflation lines up pretty well with what we'd expect inflation to be if we assumed doubling the money supply halved the value for money. So if asset inflation is a little high and consumer price inflation is a little low the theory seems reasonable.
What exactly is your definition of “real inflation”? If you’re including the prices of financial assets then you are using a nonstandard definition of inflation.
Persistent decline in the purchasing power of money. I forget the technical definition of a 'good', but I count assets as part of 'goods and services' that people want to purchase.
Anyway, if the technical definition of inflation is only consumer goods, that shouldn't be the focus when talking about QE. If we are creating money we should focus on what that money is being used to purchase. If inflation is only going to be consumer goods then the main threat of QE obviously isn't inflation because it isn't being used to buy consumer goods. The risk is nobody being able to afford non-consumer goods like houses and other financial assets needed for retirement.
My motivation is knowing how much my salary is worth in assets, because I don't spend most of what I earn and I think the political situation would be a lot more stable if everyone got to retire into their own home without having to spend years paying for a banks endorsement that they are worthy to own a home.
I dunno, what do you want to call the steady erosion of purchasing power? We have to adjust asset prices by something to account for expected change caused by creation of new money. My understanding is people use CPI, which is not a good choice for reasons under discussion - the CPI isn't capturing the effects of QE.
The cost of housing is included in the inflation number via rent, not house prices. Rent is the true cost of housing; when you purchase a house you are not only purchasing shelter but also a speculative investment that you expect to appreciate. Only the former is relevant to cost of living.
> The risk is nobody being able to afford non-consumer goods like houses and other financial assets needed for retirement.
You need to buy financial assets for retirement only so they can be later exchanged for non-financial goods like good and gas. Only the latter prices are relevant to you. It makes a difference whether you pay $1 or $10 for gas, but there is zero difference between buying stock at $100 and selling it later at a X% return, and buying stock at $1000 and selling it later at an X% return.
The future rate of return might be relevant for your retirement, but that is both outside the scope of inflation and not proxied by the current asset price increases (which is what you are claiming inflation is supposed to also measure).
I don't know what a good yardstick would be, but CPI is definitely not it.
US CPI weights the entire Medical Products & Services category at 8.68% vs its actual weighting of 18.1% as a fraction of GDP.
The average price of a new vehicle hasn't materially changed in 22 years in the CPI due to hedonic adjustments, whereas the actual sticker price is 55% higher.
> The main threat to QE is inflation, which is hovering around 2% and stubbornly low, so QE is in the clear.
Obligatory comment that the measure of inflation used by the Fed - core inflation - intentionally under presents inflation. It literally takes a basket of all goods, sorts by least volatile, and picks the least volatile items possible.
Discarding the most volatile categories is not the same as throwing out the ones that increase the most. Energy prices fluctuate both up and down, so throwing out energy will frequently increase, not decrease the measure of core inflation.
One huge issue I've seen as a result of near-zero interest rates is how this has hit tax collection from corporations and the very wealthy.
Currently, if a company earns profits overseas and doesn't repatriate those funds then the IRS doesn't tax them. This all came about due to ridiculous IP licensing that tech companies engaged in (eg sell their IP to an Irish subsidiary and then license it as a form of transfer pricing, essentially).
So companies are faced with a choice of repatriating "foreign" profits at 21%+ or just borrowing money locally at 1-2% to cover local cash needs. This is a big reason why corporate debt has ballooned: it's essentially just deferring tax obligations for years, hopefully long enough so they can buy another Congress to pass a "one-time" tax holiday. Then rinse and repeat.
What the US needs to do is to treat all borrowings as the repatriation of that same amount of money of foreign profits.
Why is QE a market distortion? Is all monetary policy a market distortion? If we used a gold standard is that not a market distortion? If the price of gold changes drastically due to gold mines closing/opening changing interest rates is that a market distortion?
Technically getting $50 in a Christmas card is a market distortion. What matters is the scale of it. With technology and economic optimization (eg offshoring), we expect the cost of production to continually drop. Yet the Fed has seen fit to declare that the exact opposite should generally occur to consumer prices.
How this plays out is obvious if you draw a diagram of the feedback loop that is the CPI. Prices of manufactured goods do go slowly down. To keep the overall average rising other components have to go up, and the natural ones are where consumers have access to newly-created money (debt). Easy credit then prices straightforward cash out of the market, pushing us all to sign up for more overfinancialized monthly payments instead of simply saving for a rainy day.
It's fascinating to me that even august publications like the Wall Street Journal continue to use 'unemployment rate' as any kind of reliable metric, and says stuff like 'the unemployment rate is at a 50 year low now'. Unemployment just measures those who are actively looking for full-time employment but are unable to find it (and yes there is a separate underemployment metric, which seems a little more accurate).
The reason we have 'slack' in the labor market is because the adult prime-age participation rate in the economy was quite low for a long time after 2008, and even now is only getting back to early 2000s numbers. This just seems like a much better metric to understand the health of the labor market & perceived slack. Disability has exploded over the last 20-30 years, and someone collecting a disability check- especially if they are simply milking the system- doesn't show up as 'unemployed' because they're not actively looking for work. It's actually pretty concerning for the US how low the adult participation rate has fallen. There's pretty good evidence that this decade of low interest rates has started to slowly bring in people off the sidelines who weren't looking for work, had given up, were in the informal sector and weren't counted, etc. That's a massively good thing for society.
I don't think you can understand labor market slack or the point at which wages will start to rise until you ditch the somewhat gimmicky 'unemployment rate' and start looking at adult participation in the economy period
What they never measure is the big rise in BS near-substinence hand-to-mouth jobs over higher quality gigs - which is the case in many (most?) countries...
You're right, that information is captured by the median weekly inflation-adjusted earnings for wage and salary workers, which is actually at historic highs.
>You're right, that information is captured by the median weekly inflation-adjusted earnings for wage and salary workers, which is actually at historic highs.
Like probabilities in research, with the right adjustments everything can be painted to be at historic highs.
First the graph starts at 310 and focuses on 310 to 360 on the y-axis, so that the meagre 330 (1979) to 355 (today) change (despite productivity/GDP etc soaring in between years) to seem huge.
Second, the inflation-adjustment heuristics are such a creative field for governments that can be used to paint pictures of wage triumph in the Weimar Republic even. Sometimes you don't even have to mess with the heuristic, just leave criteria the same when totally different costs of living have emerged.
> First the graph starts at 310 and focuses on 310 to 360 on the y-axis, so that the meagre 330 (1979) to 355 (today) change (despite productivity/GDP etc soaring in between years) to seem huge.
Okay sure, we're now arguing something completely different: whether or not the inflation-adjusted increase in median income is "meagre". Keeping in mind that, in real-terms, we saw a 12% increase in the real wage since 1981 (6% increase since 1979, following a plunge between 1979-1981), check out [1] and scroll down to Table A-7 (it's an Excel file). It's the real earnings data (in 2018 dollars), by gender, from 1960 to 2018 (though it's kind of spotty before 1967). What sticks out:
* For men (looking at Total Workers), real earnings are currently around 10% higher than they were in the 70s (moving from low-$40K's to recently just past mid-$40K's, with some peaks and valleys along the way). Doesn't sound like much, but...
* For women, earnings have roughly doubled in that timespan
* The number of men in the workforce has increased by almost 50%
* The number of women in the workforce has increased by almost 100%
From a certain perspective, it's kind of amazing that real earnings haven't gone down significantly. The share of people eating from the economic pie has dramatically increased, and that too, equitably across the genders.
And none of this takes into account that while the real median income has increased a modest amount, the composition of the distribution is constantly in flux. That is to say, a given individual does not remain in the median for their lifetime, on average (THAT would be meagre). Looking at IRS tax filing since 1968, ~70% of Americans spent at least 1 year in the top 20 percent of the income distribution [2][3]. So while the shape of the distribution looks similar over time, the composition of it changes dramatically.
Genuine question: looking at that graph, it's saying that median weekly earnings reached a peak in 2009 then dipped 2010 through 2013. I find it rather counter-intuitive that a peak in median earnings would occur during the recession. What would be the explanation behind that peak?
I would have to combine it with changes in CoL in areas of economic opportunity versus those without. Parts of the country offer far more security in future income than others.
From 1998 to 2018 participation dropped just 2 points for those age 25-54. That is projected to stay stable through 2028. It went up for those 55+. The only place it dropped significantly was 16-24. I.e. our society is richer and we can afford to have more young adults spend their early 20s binge drinking instead of working.
As to disability—it’s hard to tell whether increasing numbers of people on disability is good or bad. If the government has simply gotten more generous and allowing more people with real problems to draw disability, that’s not a bad thing.
This is a great example of why you should dig into the numbers behind a statistic.
Everyone claims labor participation is still low and throws around their pet theories as to why, yet if you simple dig into the numbers like rayiner did, you’d realize most of those pet theories are wrong.
FRED seems to have some different results https://fred.stlouisfed.org/series/CIVPART. These are huge numbers in a country the size of the US. Anyways, 'projected' is meaningless.
It's pretty widely acknowledged that disability is abused, it seems to be a mix of people with real problems and those without. The very high disability rates in a few counties I think shows that it's not always legitimate usage
The FRED data is identical and probably the same source. It shows labor force participation rate dropping from 67% in 1998 to 63%, same as the BLS data I posted. But the chart you linked to doesn’t break things down by age group. When you do, you can see that the drop is almost entirely due to the 16-24 age group. Participation for people 25+ is stable since 1998.
>drop is almost entirely due to the 16-24 age group. Participation for people 25+ is stable since 1998
This is simply not true at all. FRED specifically tracks prime-age labor participation rate. Gallons of ink/pixels have been written by academics about how the prime-age rate is lower since the early 2000s, it's a well-understood phenomena:
We saw that in the UK with some areas in the North having huge levels of disability. The government cracked down on it in the normal ham fisted way they do. There was a recent story about a man with no arms or legs being deemed fit for work.
What you'll never hear is how the bottoming of unemployment has preceded the last 9 or so market crashes. So it's quite the opposite in terms of being an indication of the market's good health.
The US non-farm payrolls report does include average hourly earnings and average hours worked per week but for some reason it's not as widely reported. IMO the multiple of those 2 values and participation rate are much more meaningful than the total number of jobs added or removed.
Underemployment is an entirely subjective concept though. Having skills that that you can’t sell due to insufficient demand doesn’t necessarily say anything about the market at all.
One person not being able to sell their skills is a personal problem, a significant number of people who can't find work with their skillset and a significant number of employers unable to find people with skills is a market failure. We're at a market failure and there is economic loss as a result.
Yeah not really. It depends on a lot more context than just number of skilled people unable to find employment. If I became the best person in the world at playing Pac-Man, but couldn’t find a job as a professional Pac-Man player, it would be ridiculous to say I was underemployed.
The only situation I would find it reasonable to describe underemployment as a problem is when people who’s skills were marketable at the time they acquired them, are no longer marketable. But even then, it takes more context to describe that as a market failure. If I decided to never learn another skill at work, then my skills would eventually become obsolete. In that situation, the market hasn’t failed me, I have failed me.
Then you have people who’s skills were known to be completely unmarketable at the time they acquired them. This isn’t a market failure in any way. The most common context where this occurs could be described as a governance failure though. The fact that you can get huge amounts of credit to pursue an education that doesn’t have any market value at all isn’t a market failure. It’s a failure of government for financially guaranteeing something that doesn’t have any value. When people who made bad decisions fail, that is a market success.
> If I became the best person in the world at playing Pac-Man, but couldn’t find a job as a professional Pac-Man player, it would be ridiculous to say I was underemployed.
It would be ridiculous, because we're not talking about one person with a fringe occupation as a strawman, we're talking about large groups of normal people facing systemic problems.
Putting aside the fact that this assessment is really just your opinion, what was your reasons for claiming this is a market failure? I believe you never got around to mentioning that.
Well that sounds quite rational. But I don’t think that’s what comments here are referring to. Those discussions tend to be focused on people employed below their level of skill. Like a college graduate working in a job that doesn’t require a degree.
Someone please correct my impression here, but why aren't both macro- and micro-econ viewed as a largely academic ideal that completely ignores many realities of human civiliation?
I'm thinking specifically of malice and manipulation, at all levels of all systems: if there is a way to enrich (ie steal), motivation is towards it happening and towards weakening rules and oversight. For example, who wants to quibble over peanuts like $1T federal deficits or $10T NASDAQ total caps when there are $370T tied to the LIBOR, which has a big fat steering wheel on it? Your econ textbook doesn't have a nice chart for that.
> why aren't both macro- and micro-econ viewed as a largely academic idea
Because it's easier to get funding when you claim to be a science.
The fact that the discipline has exactly zero predictive power is rarely brought up by practitioners (of course), nor particularly noticed from the people who consume the by-product of said discipline.
Economists are the Wizards/Shamans of today, both pretend to have special insight and knowledge of how future outcomes will unfold only difference is instead of cutting off the head of a chicken and seeing where it lands, they have "models".
But that there are economic expansion without inflation depends on globalization. We are importing goods from low wage countries. In other words we are importing low inflation until trade barriers stop that.
Ie central banks try to operate like they control wage inflation. But wage inflation is a global market nowadays.
I'm not a subscriber so I can't read the article but I have a personal hypothesis about this. Developed economies have begun to enter a post scarcity state. Daily goods like food and household items are not responding to inflation because they are no longer scarce. The combination of economies of scale, automation and cheap foreign labor have brought many goods to this point.
Meanwhile, things which are still governed by scarcity, medicine, property, education are skyrocketing in price. In part because those are more opaque markets with some bad incentives but also in some part ecause people can devote much greater percentage of their income to these things.
What it really looks like to me is these economies are straddling a the line between acarcity and non-scaecity. I'm no economist though.
Whether intentionally, you are describing the Baumol effect - where productivity gains in some sectors actually cause other sectors to become more expensive in comparison.
The first sentence is incorrect, inflation is about too many dollars for the amount of goods available for purchase. You're thinking of deflation, which is the relatively small amount dollars for real goods in the economy.
As an economist, strongly allergic to this kind of title. The theory of endogenous money (as opposed to non monetary and/or fractional reserve banking theories) accounts for what is described in the title fairly effectively: money needs to be viewed as a medium of exchange, and it needs to be plentiful so that information never gets bottlenecked: this will surprise no software developer if they compare it to, for example, storage space and/or network bandwidth. Economic theories that either ignore money as irrelevant or ascribe inherent value to it (as does neoclassical economics, and as do crypto-currency enthusiasts who effectively seek to recreate artificial sources of scarcity just as the gold or more accurately bimetallic standard did) fail to account for the economic expansion that accompanied the expansion of monetary supply; endogenous money models, though less widespread, do not make such disproven predictions, and thus should be allowed to stand whereas the others should be held to be manifestly disproven.
Now, could we please sit down and figure out not what the next currency shall be, but what an ‘antibank’ is going to be?
There's something I don't get about endogenous money vs. fractional reserve. Namely, the factual claims.
So fractional reserve says that money is created by loans between banks as restricted by the money multiplier and endogenous money says that banks can create unlimited money. [1]
My question is not which of these is true but rather how can this be under dispute? Aren't the workings of banks established by laws and regulations? Can't one just ask the relevant people what are they actually doing?
Indeed the Bank of England famously proclaimed that it adheres to the Endogenous Theory of Money in an unexpected set of articles its economists published to dispense with the nonsense.
How so if money is created by commercial banks today with a fictional multiplier for bonds (did I get that right?)? I believe money to be an intermediary, but it works because we all believe that it does have an inherent value. At least as long as it is relatively stable for the time frame between earning and spending.
If I cannot use it for any form of saving, we had a primitive market of natural produce for any form of security. It don't think that financial assets are a widespread reality for most market participants.
If there is at least the factor to theoretically restrict the creation of money, what mechanism would replace it? Trust in banks or the currency itself?
Wouldn't that be practically the same? Or asked otherwise: What are the greatest problems with the current banking system?
Commercial banks don't create money, they create loans. And when loans are zeroed out they no longer exist. There's interest that is earned as revenue and eventual profit, but only the Treasury creates money.
Money doesn't work on faith. Money is debt. The currency issuer takes on debt(the US government.) The debt is coined/minted/printed to fulfill some government budget. These dollars go to people to build/work/service the programs. The government coerces people into working by raising a tax. If the government runs a deficit, then the private sector has a net positive gain. If the government runs a surplus, then the private sector has a net loss(e.g., austerity.)
You don't want to restrict the creation of money if the economy is expanding. You want the money supply to grow or else you will have deflation.
If you can find me economists that have predicted economic activities/results with any level of accuracy (e.g., greater than 50% even), then I will find you ~10 times as many prominent economists who have predicted the opposite. Economists probably predict things accurately at a rate lower than throwing a 20 sided die into the air and guessing which number will be facing up when it lands.
Does that matter? Well, if they can’t predict things with any degree of accuracy based on the data given, this must mean that they don’t understand the ends that are achieved by the means that generated the data, doesn’t it?
If economists don’t understand the outcomes that result from the inputs, then they shouldn’t be trusted to advise on the inputs?
TBH, why do we even care what “economists” think at all, given the above? Economists are no better, from an objective value perspective, then tarot readers. Economics, as a study / practice, has been corrupted by the followers of Keynes, and by the worship of monetarism, and, as a result, fails to provide any value to the economy, let alone to society as a whole.
Business leaders. Business leaders provide value to the economy by staking their own success on being able providing enough value to turn a profit. Business leaders make predictions, and when they fail they don’t make money (they probably lose a lot of money). If their predictions come true, they become rich. Economists just sit on the sidelines, watching and squawking like railbirds, and postcasting things to boost their ego, staking nothing but the time it takes to type out 280 characters of their precious wisdom.
> TBH, why do we even care what “economists” think at all, given the above? Economists are no better, from an objective value perspective, then tarot readers
Because the people with data to prove this are themselves economists. Yes, economics has had a lot of failures (I often find myself informing people of these) but anything you replace it with is ultimately going to be another form of economics.
For every successful business leader you could probably find 100 who failed: taking your guidance from business leaders just leads to survivorship bias.
I think it’s pretty core to my thesis that economics is a practice/study that provides little to no value to anyone, so why would it need to be replaced?
Because someone is going to make policy decisions. On what basis would you have them do so? Economics, which (as you say) fails many times in making predictions? A good guess? Gut feel? Wishful thinking?
For all its flaws, economics is actually better than the alternatives.
Just because it is not perfect does not mean it is useless. Just look at the countries trying to endlessly print money to see what happens when you ignore it.
Businesses only become profitable in a almost completely artificial human made financial landscape. There is really no reason to believe much more than a successful businessman is someone who was smart, sure, but also lucky at some very particular niche. And as bad as economists are, they're the few which are studying how that landscape's construction affects how businesses and people grow within them. That isn't to say we should blindly follow their advice, but to throw out all economists in favor or successful businessmen is looking to implement cargo cult surviorship biases.
You’re right; we shouldn’t throw out what they have created.
Economists have been working tirelessly for decades to generate models that can demonstrate how economies don’t work.
If we destroy the earth in nuclear war or some other calamity, these models could help to ensure that future civilizations fail before they ever reach the point that we did.
Satoshi got it right; "Chancellor on Brink of Second Bailout for Banks" — 10 years and running strong. Seems the Austrians are winning back a century of lost ground!
Satoshi got it extremely wrong, to the point that if he had any economic background at all I’d suspect the first wave of crypto currencies to be a sick joke: artificial scarcity (and more generally, inflexible money supply) of the kind engendered by bitcoin and its ilk are the exact embodiment of what money must not be if one is to not artificially crimp the economy’s growth. There’s a very good reason why we came off the so-called Gold Standard (bimetallic standard, actually), and why coming off it heralded the greatest period of economic growth in Western history.
Don't delude yourself to thinking that the volatility of Bitcoin is due to it's constrained supply. It's because it's used for speculation almost exclusively, and not for it's intended purpose: buying stuff.
The volatility of bitcoin has nothing to do with its eventual theoretical maximum (and therefore extremely long-term contraction, as the theoretical maximum will be subject to corruption, loss, and so forth).
The volatility of bitcoin and other cryptocurrencies (or more accurately, crypto-assets) is due to their extremely shallow markets and unpredictable volumes.
>Satoshi got it extremely wrong, to the point that if he had any economic background at all I’d suspect the first wave of crypto currencies to be a sick joke
...
>coming off [the Gold Standard] heralded the greatest period of economic growth in Western history.
You got this extremely wrong, to the point that if you had any economic background at all I'd suspect your comment to be a sick joke. The US saw average growth rates of over 4% in the 19th century as it industrialised. By the time the Gold Standard was abandoned, most of the west was already thoroughly "developed", and could not grow as fast as before due to there being fewer lower-hanging fruit. This is the same reason places like China and India see growth rates of 6-8% in recent years (compared to 2-3% in the west): there are many more low-hanging fruit in a developing economy (e.g. moving the 50%+ of the population engaged in subsistence farming into more productive factory or service work).
As an aside, such language is unbecoming of anyone who wishes economics to be considered a real science. Even in physics, where it's possible to craft exact, repeatable experiments that can prove a statement true with 99.999% accuracy, practitioners still try to avoid bombast and smuggery because of how easy it is to make mistakes. Yet in economics, a field where it's difficult to even repeat the same experiment twice, and no model can predict the future anywhere near as accurately as a simple model such as Newton's laws can in physics, many practitioners seem quite comfortable making grandiose, bombastic and mocking statements with complete confidence in their own correctness. To me this smells like a consequence of economists never having been exposed to the humbling experience of having to validate their models' predictions against the real world, and not being held accountable for bad predictions.
>There’s a very good reason why we came off the so-called Gold Standard (bimetallic standard, actually), and why coming off it heralded the greatest period of economic growth in Western history.
How sure are we that this was a good idea in the long run? Politicians and their appointees aren't always the most responsible people. If it's possible for them to obfuscate some of their spending without upsetting people then we could end up with quite a surprise later. The US already has a big debt problem. I get where you're coming from, but I'm just not sure whether we know the long-term consequences of this.
I’m going to stop you right there. You see a large public debt and you presume, because you view debt as all household agents do (i.e., as something that needs to be repaid and that limits future discretionary spending). It’s not necessarily that way for a nation-state that (as the article seems to recount) can literally print money to make good on the debts it is running up.
The US has a big debt. A debt is, for households/firms/private individuals usually a “problem”, so a big debt would qualify as a big problem. But that doesn’t apply here.
Who would be most alarmed by a true “debt problem”? The bond-holders, one presumes. And yet there’s apparently no limit to the willingness of market participants to lend money to the US and, judging by the yields on those bonds, no suspicion of default.
There is no debt problem. There is just a big debt, because lots of money needs to be in circulation to support the massive amount of economic activity going on.
The percentage paid as interest of the budget seems to be increasing. Current forecasts put it at over 12% by 2023. That's double what it was in 2016. At that point it'll rival US military spending in size. When would you say it becomes a problem? Does it have to become the highest cost item on the budget? The government is borrowing money that future taxpayers have to bear the burden of. Does the return on that extra spending outpace the servicing cost?
>Who would be most alarmed by a true “debt problem”? The bond-holders, one presumes.
That's only the case if the problem was that the US wasn't going to pay back its debt. The problem is that future generations are responsible for paying back the debt, not the current generations. This means that the people potentially most affected by this aren't even born yet.
Really it comes down to the present net value of future opportunity cost: of economic growth outgrows the compounded future cash flows to service the debt (particularly if debt principal and at least part of the interest due) can always be rolled over for the foreseeable future within the temporal horizon, it makes sense to accrue debt.
We’re arguably lumbering future generations with just as much when we do not invest in basic science and technology development because of debt concerns; when we do not service our infrastructure; and most definitely when we act myopically towards the environment.
I get what you're saying, but how sure are we that this spending actually ends up improving lives more than the cost it will have in the future? Politicians aren't always the most honest and with a complex system it's possible to obfuscate people enriching themselves at the expense of the taxpayer. How sure are we that this won't be abused at any point?
If you’re concerned about future politicians’ probity, surely you should be partially worried that they may choose to default and keep all of those gains for their constituents and stiff the bondholders?
See? Thinking about the future is pernicious in that policy makers have both more and less latitude than one tends to assume.
Satoshi used his/her economic theories to create a 100 billion market cap asset from literally zero... what would they have to do to convince you folks that they were on to something with their ideas? Also cure cancer?
Madoff was a product of the artificially low interest rates established by the US Fed, causing people to participate in all sorts of risky schemes to see some investment returns. So yes, one could argue that the Fed "succeeded" at creating lots of bubbles and fueling lots of scams in recent history, though the details of the situation are of course a lot more complicated.
Yeah... but... nah... it being the biggest fad in history does not mean it’s not a fad.
If even 5% of bitcoin held were placed on the market simultaneously the whole thing would implode like a coke can filled with a vacuum. It’s totally illiquid and any attempt to cash out by a significant proportion of holders would herald instant disaster. That’s why it’s so volatile. Research shows the 2017 peak and crash were due transactions by a single ‘whale’.
"we" came off of the gold standard because Nixon was having trouble paying for the Vietnam war. Printing money doesn't create wealth, it redistributes it to the printer: this is seigniorage and it is a tax https://en.wikipedia.org/wiki/Seigniorage
No, the Gold Standard effectively died when convertibility of paper currency into gold was suspended, starting with the Gold Reserve Act of 30 January 1934 and subsequently elsewhere.
The post-WWII Bretton Woods regimen of “gold standard without domestic convertibility” definitely falls short of meeting the gold standard for gold standards: absent any audit of extant gold reserves, the price of gold (dictated by a purely hypothetical estimation of availability) served as a fixed exchange-rate (and thus implicitly fixed relative real rate of risk-free interest) and not as a true gold standard.
To say that Nixon dictated the end of the Gold Standard is as myopic as to suggest that the surgeon who removes the organs from a brain-dead patient is guilty of murder.
Whatever the case, it’s bit of odd bedfellows when extreme conservatives and some people on the left see the bi-metallic standard as something to go back to.
It takes power away from the government. Printing money is a wealth transfer from currency holders to the printer (hence why counterfeiting is illegal), and the government has unlimited ability to do this, which in the case of a bad government can result in hyperinflation and mass impoverishment, like happened recently in Zimbabwe and Venezuela. It's harder for the government to do this with gold.
That I can believe, but it seems a bit double-speaky to call it a savings glut, right? My untutored intuition tells me that its a glut of savings in a small number of people's hands.
People who don't have a glut of savings, or even significant debt, which is a lot of people, can probably think of a lot of good uses for that money.
Assuming this sketch is accurate, the problem is too much money in the hands of too few. Not a savings glut. To call it such seems like a nakedly political way of avoiding the real issue.
The thing that's glutted is the savings themselves - the number of dollar bills that have been scanned in and put in spreadsheets. That the spreadsheets are in the name of a small fraction of the population doesn't change the fact that there is a glut of the dollars.
Pretty sure it does - if you split that "glut" up evenly across the population of, say, earth, I'm pretty sure they would find more than "marginal returns" on its expenditure - perhaps not in the form of literal investments in monetary instruments, though. When its concentrated in the hands of a few, its marginal value is very small. The very wealthy aren't looking to spend that money on like actually useful things like health care or paying off their student debts or housing or education. They want to get returns.
The world would be a better place if that money was in the hands of more people.
If you ask non-wealthy humans, there is plenty of stuff to spend money on. It only looks like a glut if you're a rich person.
A lot of the things you are talking about are spending. I think the savings glut theory is specifically about the demand for saving and loaning money for investments vs spending and borrowing money to invest, and there being a relatively high demand in dollars for the former. If you’re proposing decreasing saving via tax policy (on people with a high propensity to save) and increasing spending via fiscal policy, I think that fits right in.
Aside from wealth inequality increasing net saving (since wealthy people save a higher percent of their income), the trade deficit may also be a factor, since it means overall foreign countries are saving dollars (if they were spending the dollars we pay them on US goods there would be no trade deficit).
Low interest rates are a traditional way to discourage saving and encourage borrowing but interest rates are already quite low (real negative rates are a possibility with some inflation, but it’s questionable if investments that only make sense under negative rates are actually good investments).
Can they though? What do you have in mind when you say they can think of good uses for the money?
The savings we are talking about here are really "funds looking for yield", in fact must be because Western monetary policy punishes cash saving through inflation. And finding great investments at scale is definitely hard. I doubt you know lots of people who can do it.
Bear in mind by this definition houses and corporate balances count as "savings".
You're kind of illustrating my point, though - the very language we are using to describe the problem hides the fact that there are a lot of people with a lot of demand for goods and services who can't access them because they don't have savings, and, in fact, have a lot of debt.
The framing of the problem as a "savings glut" reflects this fundamentally wealth and investment oriented way of thinking about economics.
Politically I will always be against policies that attempt to reduce unemployment. It's counter productive. Jobs is not a good metric.
There are way too many subsidies to sustain wage slavery. I'm not against capitalism, but fighting unemployment has not reduced inequality. The UBI, even at a low amount, would enable a much more virtuous labor economy.
It doesn't include enough of the big 3 costs in people's lives : housing, education and healthcare.
It includes whacky stuff like "oh your cellphone is faster now than 5 years ago, we're going to say that you're getting 10x the phone for roughly the same price and use that to disprove inflation".
It ignores asset inflation (stocks, real estate, venture capital, everything else) driven by QE. The average person never saw the QE because it went straight to banks and inflated asset prices. Rich people with assets made 4x their money. Wage slaves saw none of it. None of this is counted in inflation measures.
I'm no CPI expert, but I don't think this statement is really accurate.
Rent is including in CPI; home prices are not. See https://economics.stackexchange.com/a/4779. The sidebar should provide links to multiple other questions asking why that is the case.
Most inflation measures include housing, education, and healthcare. The perception that the national inflation measure isn’t accurate is rooted in the fact that a small but very vocal segment of the population (yuppies in coastal metro areas) are facing very high housing and educational costs. But that’s not true of most people. Housing prices aren’t skyrocketing in the Kansas City suburbs. Most people aren’t in college and don’t have any college debt.
They’re actually beginning to blow up in smaller markets as well, causing a housing and affordability crisis for people without higher education (and because wages are lower on average in these regions):
I don’t know if or when it will reach the Kansas City suburbs, but here in Michigan, my brother, a construction worker, is priced out of the market. He could move way out to the country, but his kid would have to change schools and have a long commute, and it’s actually a lot more dangerous to do so in the winter here.
Rent is the biggest item in the entire report. The healthcare number seems about right. And remember that education is averaged over an entire lifetime.
It's objectively true that people are choosing to spend more on better/faster phones. That doesn't necessarily mean inflation; it means that phones have become more useful and capable and therefore worth a larger relative expense to people. If people started buying $100k self-driving cars, you can't claim that inflation did that.
The BLS is completely nuts with computing CPI. What the previous poster is referring to is called "hedonic adjustment" [1]. For example, the CPI contains a TV, and adjusts its price [2]. As an example, say that you put a 19" CRT TV in there in the 1980's, and it cost $400 at the time. Over time, as televisions got better, and it became impossible to buy that specific TV, the BLS started adjusting the price of the original tv down, because it's clearly inferior to anything available today. At the end of those adjustments, you end up with a situation where the TV may "cost" $100 post-adjustment, but it's impossible to buy any $100 TV today because that would be the price of something which doesn't exist. This type of adjustment happens in many categories, and it biases the CPI downwards. It's a giant sham.
However the actual calculation would be more like:
19" color TV in 1980 $600. "Equivalent today" price $9.21 which is a bit absurd, though the 22" TV has roughly 6x the pixels, so it's not entirely divorced from reality.
Two of the richest investors I can think of off the top of my head (Warren Buffett and Steven Cohen) have an education in economics. In fact, lots of fund managers do. Also, economists as a group are quite varied, and dare I say the more successful ones are making millions trading and working for banks, not making public predictions.
I love MMT in theory but it is terrifying to consider actually making policy decisions with MMT as the justification. The downside risk of MMT being wrong and the resulting runaway hyper inflation would destroy the dominant economic standing that the US has spent the entire post war era cultivating.
That risk exists independent of MMT. We could deficit spend an airdrop of a million bucks to every American with a bill today under modern economics, and still destroy the economy with hyperinflation. We could borrow trillions in a foreign currency and face hyperinflation risk today.
As I understand it, MMTs actionable insights range from issuing less/no debt for the same government spending, offering jobs to the unemployed and underemployed through a federal jobs program, and tinkering with government spending /taxation as a tool for controlling inflation (as opposed to interest rates as a tool for controlling inflation).
Note that regardless of your economic beliefs, these are all still subject to the same political system we live in today. Most of the worst case scenarios people imagine with MMT look like "we gave someone the power to print money and they printed too much money". But in the real world that's a problem with autocracy, incentives, and feedback loops. If we keep autocracy out and still monitor/alter incentives and feedback loops as needed, it's hard to imagine MMT having a massive downside risk any moreso than existing economic orthodoxy.
I think the reliance on being able to adjust tax rates--especially upwards--makes MMT a non-starter politically. You'd basically have to remove the power of taxation from legislative bodies to unaccountable agencies, similar to how the Fed controls interest rates. And good luck convincing any legislative body to give up that power.
The problem with MMT is this: It might work if you spend the money on infrastructure. But who's going to be making the spending decisions? Congress is. Do you trust Congress to spend the way MMT says they should? I don't, not by a long shot. Congress will say "Free money? Great! Ponies for everybody!" or something equally wasteful.
MMT might work (though I doubt it). MMT being run by Congress terrifies me.
Their theory may work but I understand it's predicated on having control of a global reserve currency and being able to dynamically change income tax rates (and all tax rates?) on a daily basis. This is not possible so the theory can't be tested.
Modern Monetary Theory is the idea that the government can go ahead and just pay all its debts with IOUs, which is all cash really is anyway. You don't need taxes to pull in cash and dole it out, which just complicates things. You might do it anyway, to control inflation, but even orthodox Keynesian theory says that a little inflation is a good thing (since it encourages people to invest rather than put their money under a mattress).
The idea is to pump enough cash into the economy that employers (or worst case, the government itself) will find jobs for everybody who wants to work.
It's kind of the flip side of the inflation-averse Chicago/Austrian school of economics, with mainstream Keynesian economics in between. The Chicago school is strongly associated with the right wing, and MMT is receiving a lot of attention right now from the left, who want to use it to fund a lot of progressive spending policies.
Do you know does MMT says about printing money for the express purpose of infrastructure development? I’d be interested to see what their take would be on doing so for doing things like high speed internet expansion, decentralized green grids, etc. In housing, the fed doing this has obviously led to real estate asset bubbles, but what would happen in the case of public assets?
There's no reason to assume that there's real estate asset bubbles, we don't have overlending/unqualified lending. You could argue that there's scarcity in real estate, driven by local governments restricting the supply of housing through historic regulations and single family housing. And that as a result, the only time of private investment that can earn a return is luxury housing which fails to be affordable for a large segment of the population.
MMT doesn't say anything about what you use the funds for, but, if you're a Keynesian then you need to keep your eye on productivity and growing GDP, and you need to worry about inflation. Depending on your politics then you could spend on public assets like infrastructure, green energy, etc. But most MMTers suggest a federal jobs guarantee that would create a buffer for people that the private market will not employ. The job guarantee would employ people to do all sorts of public projects to anyone willing and able to work. You just have to be careful about inflation. If you spend money on steel and concrete and you put people to work in construction, you're going to suck up resources that the housing industry needs, and if you don't have the resources you're going to get inflation. Ideally you'd spend money in areas where the private sector doesn't want to or cannot deliver low costs(e.g., education, environmental cleanup, healthcare.)
Is this what China is doing? I often wonder about whether there are real downsides to just printing money as long as the rest of the world buys into your currency. Seems like printing money fails only when there is lost in confidence. But as long as the confidence is there, maybe it can just continue working.
The United States flies nuclear bombs around the world and parks them off coasts of other countries. I’d like to see an economist explain the impact of this in the stability of US currency as well.
No mention of "quantitative easing" anywhere.
QE ran in various forms from 2008-2013. Short term rates were held at zero in the US from 2008-2015. Several industrialized areas now have negative nominal rates. The Fed has started QE back up again to prop up the failing repo market, insisting that what's happening isn't another round of QE. None of these unusual activities were considered worth discussing by most economists prior to 2008. No wonder why their predictions are so off the mark.
Can ultra-loose monetary policy lead to marketplace distortions? Can it lead to malinvestments like we see in the tech sector? Can it lead companies into a false sense of security, delaying and scaling back layoffs, because the usual economic signals have been swept under the rug by government policies?
Of course. The only surprise here is that the WSJ chooses to completely ignore these completely obvious distortions.