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Comment by EGreg | Hacker News Reader

Guys, here is my analysis (which, after reading this article, may shed more light on the matters).

We have had an asset bubble due to low interest rates. Because people don't want to keep money in banks. So we have had a bubble in crypto and stocks etc.

As interest rates rise - and they will, because the government will need to reload for the next QA or whatever - asset markets will keep taking hits.

The question is - why does the central bank really need to raise interest rates? Why not just keep things as they are and not load up on QA ammo?

That depends - are you an Austrian economist? :)

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Because of low interest rates and QE, which is the elephant hidden behind the rates. And they haven't really started unwinding QE (the reduction so far is homeopathic):

https://www.federalreserve.gov/monetarypolicy/bst_recenttren...

And the problem is: either they aggressively retire QE and the combination of withdrawal of liquidity and rising interest rate is going to create an enormous pressure on stocks, either they keep the balance sheet as it is and we enter into the next recession with the monetary tools already at 11, with very little room for the Fed to react without resulting in massive inflation.

I think the current asset bubble has to burst, it's going to be painful for investors but this is the only responsible thing to do.

I think you answered your question in the sentence above. If the fed keeps interest rates low, and we still hit another recession, they won't have the ability to react by lowering rates again.

But if reacting and lowering them will ease the recession, why not just keep them low in the first place? That way the recession doesn't materialize. Maybe raising interest rates is what causes the recession in the first place!

Because they tried that and it ended up in inflation and slow growth. The Phillips curve broke.

Raising interest rates is what causes a recession. But if you don't lower two bad things eventually happen: large inflation and associated of purchasing power, and debt keeps on ballooning. Regarding the second point, you always have to deleverage sooner or later. The current view is that sooner and smoothly is better than later and abruptly.

Ah, is there anything about Austrian economists I'm missing?

It's more of a religion than a useful tool: https://en.wikipedia.org/wiki/Praxeology

>Austrian economics relies heavily on praxeology in the development of its economic theories. Austrian School economists continue to use praxeology and deduction, rather than empirical studies, to determine economic principles.

https://www.investopedia.com/articles/economics/09/austrian-...

>"The Austrian school believes any increase in money supply not supported by an increase in the production of goods and services leads to an increase in prices, but the prices of all goods do not increase simultaneously." //

because inflation will start and we need to fight it with high interest rates

Why do we need to fight inflation? Prices rise because people can afford to buy things at higher prices. So what's the problem?

Inflation is a very regressive economic phenomenon, so to speak. When it rises it tends to affect poorer people the hardest because they don’t have the negociating power towards their employers to keep their salaries’ increases above the inflation rate and second, and equally important, a larger portion of their incomes goes towards base purchases (food, gas for their cars or public transport passes etc), so if the prices of those items increase more than said poor people can afford that means that those people would have to give up on some of those said base products (only drive if strictly necessary, give up on some food altogether etc). That is bad.

The alternative argument is that inflation is a progressive economic phenomenon, because it reduces the real value of debts (which are mostly owed by the poorer to the richer) and of accumulated wealth, whereas salaries end up adjusting even if with a bit of delay.

What's the reality? Beats me!

Poor people have small debts on high interest rates and short terms (pay day loans). Rich people have large debts on low interest rates on long terms (mortgages). Who do you think benefits more from inflation?

So then simply raise the minimum wage. Or better yet, institute unconditional basic income because more and more jobs are being automated.

If the salary/pricing spiral goes out of control, the currency quickly becomes worthless.

If your $10 today is the value of $1 yesterday, it's very hard to store wealth in such a currency. So people move their assets to a less volatile currency.

Why are currencies needed to store wealth? As we see there are plenty of assets that people are parking their money in. Why not simply use money as a medium of exchange?

Unless conversion is instantaneous, they all need to store wealth. From the time it takes for you to get your salary until you spend it for example.

Inflation guarantees that your salary is worth less when you spend it than when it was paid to you.

If inflation is high enough for you to worry about it, the solution would indeed be to convert it as quickly as possibly to something that is better at storing value.

At some point, people might start trading the thing that stores value really well and just retire that constantly depreciating currency.

That's not what happened in Zimbabwe.

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