Comment by thewarrior | Hacker News Reader

Comment by thewarrior | Hacker News Reader

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QE is not quite the same as Zimbabwe.

In Zimbabwe the government printed money and handed it out to people. This money directly makes its way into the economy.

In QE the Fed buys assets such as mortgage securities from banks. The banks chose not to lend more aggressively and decided to hold on to the cash. As a result there was no hyper inflation.

So how does QE affect stock / house prices ?

When the FED comes into the market willing to lend to anyone and everyone interest rates fall. As a result returns on bonds and bank deposits also fall. Forcing people into stocks. The effect of QE on asset prices is therefore indirect.

So the QE money itself is hoarded in a deflationary environment while savers get pushed into speculating on assets.

As the economy slowly recovers over 5-10 years the QE money is slowly sucked back out and assets slowly deflate to a fairer value. In theory this can work without too many hiccups.

The problem here lies in the inequality that this generates. Large banks, companies stay afloat thanks to buy backs. Asset owners get richer. Wages stagnate and people lose their jobs albeit less than if QE didn’t exist.

This topic is much more complex than I had initially thought. Nobody should come to conclusions such as “A crash is inevitable” or “Hyperinflation”.

Though I will say, asset prices are not determined directly by central bank actions, there is a third component that pushes both asset prices and central bank policy - the global supply/demand of savings vs investment opportunities. Which is driven mostly by demographics, looking at China in particular. I've commented about this before. There is an interesting hypothesis that the global deflationary and asset price-increasing forces will wane as China's economy becomes more consumer focused and as working age people in China age out of the labor force, thus moving from the net-saving part of the lifecycle to the net-spending part. It's very plausible, unless that population bulge bracket is replaced again by another massive, increasingly-affluent population, say in a fast developing India or Africa.

On the inequality side, it is a bit unfortunate to be in the workforce at this time competing with the massive influx of other savers, bidding up productive assets to save for retirement, enriching the people who were "lucky" enough to be in the generation before that population/affluence boom. But there's not really anything that can be done about it, not without tightening financial conditions enough that it has severe negative effects for the labor market.

Props to you for looking into it! Economics and finance are really complicated. Bank lending decisions are based on risk and profit opportunities, and not at all on reserves availability. QE mostly just substitutes central bank money for the balance sheet "bank money" in M2, increasing reserves and lowering longer term interest rates without flowing immediately into the real economy. Lower interest rates encourage lending and investment, but do not force it. It's a lot more subtle of a tool.

That makes sense.

However my worry is that the economy seems to have become permanently dependent on low interest rates. Sure it won’t be zero but something like 1 % looks like a distant dream.

It seems to suggest that we have run out of ways to increase real productivity. A good example is the shale industry which will basically go bust if interest rates are like 3 %.

We seem to be in a new regime of lower economic growth, high asset prices and inequality. The real danger here is the political sustainability of this. Zero interest rates are an indirect pay cut via rents and mortgages. At some point asset owners will have to take a haircut.

It's possible. You are right that productivity growth is the big driver behind everything. There are some people that make the argument that massive growth is behind us, that the internet revolution is not the same kind of game-changer like trains, planes, etc. Not clear how much more "Smithian" growth via trade liberalization is possible, either. If you look at the long histories, there have been plenty of times in the past 2000 years when interest rates and economic growth were very low for an extended period of time. Inequality tends to grow to it's maximum sustainable level in between catastrophes, though that level is likely lower now, because there is a certain amount of disperse affluence necessary to sustain the modern knowledge economy that creates that wealth in the first place.

But at this point, we're talking technology and society instead of economics. Will innovation continue, and are those innovations a big enough deal that they will continue to make our world more productive, wealthier, more successful? I lean towards yes, but it is not at all obvious. It is certainly possible that productivity growth stagnates, most countries catch up to a generally-developed level of output, and asset prices stagnate as temporary demographic bumps are smoothed out.

My personal belief and this is where a lot of people might disagree with me is that we will not see the kind of growth we saw again.

Growth is fundamentally tied to the availability of cheap energy. If you look at oil prices in gold you’ll see how it’s almost twice as expensive today.

We are also facing constraints on energy extraction due to climate change.

Every time oil prices spike shale oil comes online but the economy chokes on the price oil crashes and the shale producers go further into debt.

This may also be why a lot of growth is in the digital sphere which is far less energy constrained. Maybe future growth will be Virtual reality GDP :P

The only way I can be wrong is if someone invents a cheap fusion reactor or a cheap magical battery that stores endless amounts of solar energy. This is highly unlikely to happen.

Disclaimer: Very speculative thesis but I believe in it.

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