The Case for Higher Rates
thelastbearstanding.substack.com
thelastbearstanding.substack.com
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.
I think raising interest rates so aggressively now is poorly thought out and is going to bite us in the ass.
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.
We are also not currently in recession, so I don't know what you mean about contracting while we are in a recession.
Volcker is well known for his harsh correction, I don't really know what to tell you. We have lived through very unusual recessions recently, but that doesn't make the one in the 80s (where unemployment went over 10%) not bad.
https://en.m.wikipedia.org/wiki/Early_1980s_recession_in_the...
In other words, we have an economy running too hot, and raising interest rates will slow that (by how much is another question...)
The way I understand the current situation, one one hand there was a lot of covid money and on the other hand a lot of people were fired by their companies during covid. This in turn made them unwilling to go back and work the same job, on the same salary as before, for a company which preferred to cater to their profits than to their employees.
But high employment seems a little different to me than just low unemployment, just because my read is that there's fewer people working in general than before the pandemic (IIRC). [1][2]
[1] https://www.uschamber.com/workforce/understanding-americas-l... [2] https://www.fitchratings.com/research/sovereigns/fittch-rati...
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.
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.
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...
Another angle is that all of the military defense backing the USD is coming from dilution of the USD (monetary inflation), or at least that is true as long as we continue to run a deficit.
The Fed mandate says "stable prices AND maximum employment". It says nothing about setting the fed fund rate in a way that enables investors to earn money from lending to an entity which has a zero default risk.
They set the rate and investors use that as a reference point to calculate the rate of everything else, starting from the security which mostly resembles the overnight Fed fund rate : the US. Treasury with the shortest duration which if I recall correctly is the 4 weeks US Note.
When investors are very scared it happens that they get very defensive and pay the Fed govt. for the privilege of parking their money in US Treasuries. It makes sense even, you only have to get rich once and if you are born in America you are essentially already rich the moment you are born (on a global basis), the desire for capital and wealth preservation has steadily increased over time and the Federal Govt. like any borrower is taking advantage of this thirst for safety from investors at home and abroad, this phenomenon actually reduces the Federal Debt which was a huge topic of concern circa 2011-2014.
I was not saying that the Fed mandate says that the fed must do this. I was challenging YOU who said that investors should consider treasuries capital preserving and default risk free. Neither is true-- inflation rate is meant to characterize the buying power of dollars. Whenever inflation rate exceeds the overnight interest rate, then the purchasing power of anyone holding cash or short term treasuries is by definition losing principal in a guaranteed way. Defaulting on a pure fiat system is also basically pointless, dollar denominated debts can always be met with money printing, so inflation is really the only way a default happens. And we did actually default in 1971 when Nixon ended convertibility of dollar to gold.
> When investors are very scared it happens that they get very defensive and pay the Fed govt. for the privilege of parking their money in US Treasuries.
I think you have something inverted here in your understanding (unless you are talking about negative interest rates?). You pay to borrow, you get to collect interest if you park capital. If you want to park money in US treasuries, that's a long treasury position and the government is paying you for the privilege of being able to use your dollars for a while. How it would work is you start with your asset (say a stock) sell that for dollars, then sell the dollars for a treasury, which pays a coupon upon maturation (gives you back more dollars than it started). So investors with a parked cash position are not paying the government, the government is paying them. When there is a panic, I agree the demand for treasuries goes up, and that is why you see the long term rates go down-- as demand for treasuries goes up, they start to be auctioned at a lower premium. The only people paying the government interest on the treasuries are those who are borrowing money, for example banks.
I am up for the challenge, but promise to read the whole thing because it took a while to write :)
It is risk free and also think that it's capital preserving in the long run. Every 3-4 years there is a big crisis (health/military/economic) and when fecal matter hits the proverbial fan everything that is not USD gets torn to pieces, like it happened in March 2020. And if you are into any investment that is not USD and need the money (for any reason) or just panic sell...then you take a gigantic loss.
Again, risk/reward. You'll never find an entity with a lower default risk than the U.S. Govt so, by definition that is (for all practical purposes) zero-risk and every other investment entails a non-zero risk of default
As I said, you only have to get rich once, and if you are an American you are already in the top 1% of the world when you are born, so losing 5% or 6% to inflation... that fits the definition of capital preservation much like subbing all the starters and letting the other team score when you are up 72-0 in the 4th quarter of a football game fits the definition of football roster management.
It's also important to stress that you are not really losing 5-6% either, you as an American are a shareholder of the Federal Govt. and as a shareholder you also benefit form the fact that the organization that you "own" can borrow money at a rate lower than inflation.
> You pay to borrow, you get to collect interest if you park capital
If the interest rate of a loan or a bond is lower than inflation you as a lender are essentially paying the borrower for the privilege of parking money with them because by the time they pay you back, inflation ate up your profit and diluted their debt, so they are the ones who come out ahead from the transaction, not you. Big entities with low default risk (zero in the case of the Federal Govt.) and very low for blue chip companies have the advantage of getting loans/issuing bonds at a lower rate compared to inflation expectations.
Leaving aside inflation expectations, if we just look at the past and see what was the rate of inflation in Q1_2022 there are various entities which had the advantage of having borrowed money at a rate lower than inflation, and thus they were de-fato being payed by the lender for the privilege of parking money with them, that's because again...you only have to get rich once. Powell said that inflation wasn't transitory but people decided to lend to those solid entities at below inflation rates anyways in the name of capital preservation because as I repeat again, you only have to get rich once.
I don't see a path for the dollar to regain the credibility that it had before. It might take a long time to transition because much of the market is forced buyers (either the fed itself, or funds that are mandated to hold a percentage of bonds, for example) but the trajectory is clear. As monetary inflation looks more and more unavoidable, fiat as a safe asset will look less enticing. Instead, assets like commodities, real estate, gold, or even bitcoin will look more desirable. Everyone now knows that in the next crisis, the fed will go hard into money printing and monetary inflation will follow. The market will front run that by buying the assets and driving up the price ahead of inflation, which takes a while to slosh around the entire economy.
> you as an American are a shareholder of the Federal Govt. and as a shareholder you also benefit
I'm not sure how I'm a "shareholder". I'm a citizen yes, but there is no equity. There is however an incredible amount of debt relative to GDP (about 130%). If we were a public company, the equity would be worthless and we would be insolvent, as such a high amount of debt relative to a slowly growing revenue (GDP) is impossible to overcome. But as a fiat based country, we can avoid bankruptcy with money printing and monetary inflation.
> Powell said that inflation wasn't transitory but people decided to lend to those solid entities
It isn't PEOPLE who are doing the lending, for the most part these days. The Fed itself was buying $120 billion a month on the open market of treasuries and mortgage bonds plus 4 trillion or so to kick things off. This action is to create new credit and liquidity for the people. The general trend is the the percentage of debt held by the central bank goes higher as the currency gets weaker and debt becomes more of a problem. In the past, when rates were more attractive and debt was lower, then yes, people made up a larger portion of government debt holders.
On the contrary, March 2020 demonstrated that USD is the only game in town, everything collapsed except that. Then the USD "decided" to collapse via tons money printing and zero interest rate. Both policies enacted by the Fed in order to support recovery and its double mandate of stable prices and maximum employment. But there is a huuuge difference between collapsing due to market conditions and actively deciding to debase in order to support market functioning, prices and employment. This seems a subtle difference but it is not, it's the same difference that exists between genuinely losing a boxe match or going down on purpose for the good of the boxing business.
> I'm a citizen yes, but there is no equity
There is equity and also dividends, you just don't see it your portfolio because it's impossible to split the ownership of a bridge or an airport or a port.
> the equity would be worthless and we would be insolvent
A debt of 130% income is actually not even that serious, and besides the US can make that go to 10% or even 5% if it uses all its military might to anness and acquire land and GDP from other countries. The possibility of selling federal land is also priced in.
> It isn't PEOPLE who are doing the lending, for the most part these days
If you read balance sheets you actually see it's not just the Fed, also surveys say that the 60-40 equity-bonds portfolio is still the most popular for family offices, pension funds and even retail investors The 40% is mostly treasuries, so again it's not just the Fed
I'm talking about credibility going forward. I said I agree with you for past events, and you again cite past events. The consequences of that intentional choice going forward are what matters.
> There is equity and also dividends, you just don't see it your portfolio because it's impossible to split the ownership of a bridge or an airport or a port.
Splitting the ownership of things like that to share in profits is literally how equity financing works. I'm not entitled to any profits that the government earns, should it ever actually have profits. Sure, I get to use the publicly owned land and airports, but to call that a dividend or equity is ridiculous. Your analogy would be like saying that since I am a google user, I therefore am a google shareholder. Similarly, a foreign citizen can also use our airports, it doesn't make them a shareholder of the nation.
> so again it's not just the Fed
You are reading past what I'm saying. I never said it was just the fed, what I meant is that the fed at that time was probably the largest market participant and the force that kept rates low, manipulating the entire market despite there being other participants. That's the point of QE-- to entice people to take debt in an environment when the free market can't provide sufficient lending. Note also as I said, many of the 60-40 portfolios are forced-- managers contractually must keep a 40% allocation of bonds.
An entity which is invulnerable to market deterioration and solely decides to handicap itself on its own will for the the greater good so the speak...will always attract the majority of investors. Much like everybody wants to be the manager of the best boxer who is also a showman and decides to go down for the good of the boxing business. People who know, do understand that he is the fundamental part of the equation, not the various prop opponents which are matched against him and that manage to win a fixed match from time to time.
> Sure, I get to use the publicly owned land and airports, but to call that a dividend or equity is ridiculous
Quality of life is obviously a dividend, at the end of the day money is meant to be spent to get quality of life. Only serial accumulators get excited about accumulating zeros and ones in the bank account.
> manipulating
Would you say the US engaged in manipulation after 9/11 when 2 wars were started in 3 years?
A country will always do what is necessary to protect its citizens AKA its shareholders. Especially the most vulnerable ones . They will lower interest rates and engage in QE and do money printing etc. It's their job, and besides in a world and a country which is exceptionally partisan , the Fed approval rating is very high [0]. Actually much higher than every POTUS , except Bush in the aftermath of 9/11.
If we look at data I don't see the erosion of trust in the Federal Reserve that you are seeing
[0]https://www.pewresearch.org/politics/2020/04/09/public-holds...
The fact that your source for this is April 2020 makes me conclude you are trolling
Fed has been doing QE ever since 2008 if you haven't noticed, and interest rates trailed inflation ever since
... and an increasingly fringe electorate.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.
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"
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.
Do you understand now?
Because, markets behave in a zero sum manner when limiting constraints are reached (ie room for growth has run out), and many economies aren't really growing all that much right now.
As a simple example, there is only so much land in Manhattan (all of which is already owned; some of which might be for sale). That means if you ever wish to own land in Manhattan and currently do not, you must take it from someone else who already owns land in Manhattan (making it their loss). This makes owning land in Manhattan a zero sum market. Granted you wouldn't take it in a literal sense, but trade for it. The point here is that you can't just magically make yourself some land in Manhattan. Rather you must trade for it, and beat competing offers from other market participants.
Which brings me to my next point...
>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?
In short, focusing solely on your own income is too short-sighted. As the price of everything is dictated by the collective market (ie other market participants who also have disposable income). If you don't acknowledge this, then there's potential for you to be priced out of markets even if your income is growing, but growing slower relative to everyone else. Hence, if your income falls, but at a slower pace than everyone else, you will be better off in markets, because effectively, your earnings will trade relatively for more despite your income having decreased.
Also, during a supply-driven recession, then both your income falls and the price of goods increases.
It actually doesn't account for what I'm talking about. It dismisses it without much substance and avoids the topic that we're talking about which is:
>Why care about wealth inequality as a first-order concern?
If you equalize income inequality, it's impossible for real median income to fall when it's below the real average income. If you can't see why, keep reading.
>Also, during a supply-driven recession, then both your income falls and the price of goods increases.
This is a straw man which I'm not going to address, but let's relate it back to the topic. If we're running out of supply, you're running out of something (and are closer to a zero sum scenario). If you are to ever acquire something in a zero sum game, you must take it from someone else (the wealthy owners of said supply). That's why you should be concerned about wealth inequality in such a scenario. If we take from the wealthy who have that supply and equalized it, real median wealth wouldn't actually fall.
To further demonstrate why, let's take my Manhattan scenario. Median ownership of Manhattan land is 0 Manhattan land. If we take all that Manhattan land from people who own Manhattan land, and equally distributed it amongst everyone, median ownership of Manhattan land would actually rise (not fall) to a minuscule, but non 0 amount. The previously wealthy Manhattan land owners however would lose tremendously.
...or structure policy such that supply increases?
> It actually doesn't account for what I'm talking about. It dismisses it without much substance while avoiding the topic that we're talking about which is:
It directly accounts for it - "if you don't acknowledge this, then there's potential for you to be priced out of markets even if your income is growing, but growing slower relative to everyone else" -> A purely nominal, non-real effect.
You could. But how does that refute anything I stated?
>It directly accounts for it
No it doesn't because real median income can’t fall when it’s below real average income and wealth is redistributed equally. It is not a purely nominal, non-real effect.
1. "focusing solely on your own income is too short-sighted. As the price of everything is dictated by the collective market (ie other market participants who also have disposable income). If you don't acknowledge this, then there's potential for you to be priced out of markets even if your income is growing, but growing slower relative to everyone else."
2. Redistribution can always increase median income when the average income is higher and we should redistribute to increase utility for this reason.
3. Recessions can be good because they decrease wealth inequality.
On your point #1, my claim is that the fact that I am citing real income directly addresses this point - people's incomes are rising even when you account for markets getting more crowded and people bidding up the price of goods. You say: "no, it doesn't account for point #2", which I agree with - I wasn't intending on responding to that point.
On your point #2 - this is one one where I mostly (although not fully) agree with you. Obviously there is no disputing the point around mean and median in the short term: that's just basic math. The issue is that there is no such thing as a "lump sum" transfer in a vacuum. If we could immediately do a transfer like the one you are suggesting without a shift in behavior, we absolutely should do it. But transfers impact expectations.
It is telling that you have picked land in Manhattan as an example since the supply is fixed so the effects I'm discussing don't play in - but for most goods and services people enjoy, the supply is not fixed despite your assertions. The US economy doubles in real output roughly every ~35 years or so (this may be slowing, ofc).
If you do a lump sum transfer to increase median income = average income, you will lessen supply in the future, causing a decrease in real incomes (supply-push inflation, as well as just economic downturn). Which brings us to point #3:
>>...or structure policy such that supply increases? > You could. But how does that refute anything I stated?
This is my response to point #3 which was the original point I was disagreeing with. In a recession where supply decreases, that makes everyone worse off - there are fewer goods for dollars to competing over, nominal income typically drops, etc. etc. There is no redistribution happening here - everyone is becoming poorer.
It even makes the point you are making worse - if the average income/wealth is dropping faster than the median income in a recession (which is the point the original commentator was making), then the upside from redistribution only lessens. ie. if the rich are materially worse off, there is less to redistribute from them to the poor.
Because we’re really concerned about utility, not wealth, and except at extreme levels of absolute deprivation, relative material deprivation is a bigger source of disutility than absolute deprivation.
(Technically, that makes wealth inequality a second order concern, though.)
Like I'm all for decreasing inequality when it boosts utility, and given diminishing marginal utility of money, oftentimes transfers from the wealthy to the poor are beneficial there.
But a recession does not improve utility for the poor, even if it does decrease inequality.
It seems like a 0% fed rate would corresond to a complete lack of 'distortion'--the effective rate is then 100% a 'market signal', no?
I would think--at least according to this author's thesis--that a moderate level of fed 'distortion', in the form of a moderate-but-certainly-not-zero fed rate, would be desirable.
The reason why a 0% interest rate on cash distorts the market is that it is inherently a government subsidy when the economy is declining temporarily.
I don't think any action the fed takes can reduce wealth inequality because of the simple reality that there is a capital class, and a class without capital.
Once one has capital, they can take any direction of the market in response to any market condition.
It "reduces" only in the sense that asset values decline for passive holders, but its hardly a different reality for those with negative/zero/five-figure net worth and the whims of those with 7, 8, 9, 10, 11 figure net worth.
Labor can certainly come out ahead. Market crashed (or at least tech did), and will likely continue to do so. If you're a rentier now, it doesn't mean you'll end up in the poor house, but you're certainly getting clobbered versus the sharp income increases skilled labor is seeing today.
I think you'll see this inversion very concretely at the edges; the FIRE-crowd holding on to their jobs for longer would be an example (many of those find them starting from scratch now). Or those evil "capital owners", basically any 60+ white collar employee trying to retire now, they're terrified and will be holding on.
Sometimes people get what they want; labor market is completely hot, and capital is down the drain. Seeing very little rejoicing though.
How much tax does a mom-and-pop (book)store pay, compared to eg. amazon (relative to size, income and profits)?
I live in a country that was once communist, and we still get a lot of very left leaning parties (literally with a red star in the logo), who always mention "tax the rich", but the effect of any such measure is, that poor people still pay (almost) zero taxes, rich people earn enough to make it worth it to avoid taxes (open a company in a tax haven country, move money around,...), and the middle class (engineers, developers, etc.) gets fucked.
Can't we first fix the tax laws, so that amazon would pay the same effective tax rate as smaller stores do? And then do the same for Bezos personally compared to a regular worker.
if you spend more than you make that year, then it reduces what you have to pay in taxes. people with savings that far exceed what they earn that year, that they actually spend towards something revenue producing, will not pay taxes on what they earn. if you have outside capital that you spend, and that exceeds your earnings that year, then you have no tax to pay. smaller participants can operate this way too. if they don't have capital and are barely making ends meet by spending what they earn on consumptive things (even if necessary) then they have taxes on what they earn. this is the same for larger organizations if they chose to operate that way. not everyone has access to capital, or savings, or willingness or the risk profile to use their savings towards additional growth. but if you do take the risk, then thats the reward.
Yes, sure.
But if you start another company in eg. cayman islands, then transfer your patents to that company, then that company charges you fees for those patents, and you earn zero on paper in your home country, and a lot in a country with very low taxes, you avoided the taxes in your main country. This is something large companies can afford to avoid paying the same tax rates as smaller ones do, while using the same (or even more) of the infrastructure that is paid by those taxes.
So there is a lot that other countries can try to legislate where the Double Irish With a Dutch Sandwich and other permutations have limited efficacy.
from your country's perspective, I don't know.
the post acknowledges that the numerical value difference will decrease, while also acknowledging that the reality is barely different at all. so if you really want to say "the distance between wealth is less unequal" then, congratulations?
if you looked at "wealth inequality" at the very bottom of an asset crunch or recession, and never even saw what it was at the top of an asset expansion, you would still say "wow wealth inequality is super wide" only to be flabbergasted or amused at how much wider it gets
so its kind of a useless distinction if the realities are so widely different either way.
because the latter is exactly what I’m saying is a bit of a distraction from reality, not that it isnt true
Is that a conversation you are willing to have, because we can all do math and just move on to the people that want to acknowledge the relevance of the realities
Inequality is measured by relative levels of wealth. When the group with the most wealth's wealth declines relative to the group with the least, inequality declines.
Are you trying to make some kind of point that, because it hasn't declined as much as you would like it to, it hasn't declined at all? I really can't tell.
I'm not making a point about which outcome is better at all, I'm making a point that the federal reserve can't do anything about that.
When people talk about "inequality increasing" over the past several decades, what they mean is the opposite of that spectrum compressing. In 1980 there were obviously very rich people. They were just less rich, relative to the median person than they are today. The Fed is responsible for a significant chunk of that divergence. That was the point.
I don't see at all how the Fed is manipulating market signals. Public companies are an open book. We know at all times what their financial fundamentals are. Fed does not manipulate this. Aggregate market sentiment develops in a thousand ways, the Fed really isn't puppeteering here.
> market corrections [...] prevent at all cost.
Fed-decision this week cascaded in the wiping out of trillions of equity. Can somebody please explain how they are propping up the capital class, or how they are preventing market corrections?
Consider the fed funds rate as the difficulty setting for business. Dialing it down is easy mode. Dialing it up is hard mode. When the difficulty gets dialed up, we inevitably discover that people that were believed to be smart businessmen and women were actually incompetent all along.
> Fed-decision this week cascaded in the wiping out of trillions of equity. Can somebody please explain how they are propping up the capital class, or how they are preventing market corrections?
Their decisions this week were to raise the rates, although they were actually a bit more dovish than expected, which is why the market rose on that day.
The way people consider the fed to be propping up the market is that, in the recent past, the fed has responded to market corrections by lowering interest rates and/or increasing QE. Both of which serve to prop up asset prices.
The behavior of the Fed at this very moment though is to raise rates, which is not propping up the market. The author of this post though is arguing that they should have raised rates even more, and the fact that they didn't is a gift to capital owners.
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.)
Isn’t it odd that during a period of economic turmoil, household wealth increased by the most on record? Indeed this strange dichotomy can be understood in large part by low rates and QE.
What would explain the increase of household wealth pre-2008, before QE was even invented? The economy was in turmoil for a few months but then everything picked up again. GDP, corporate profits surged. Unemployment fell.
Home prices and stocks surged in the 80s and 90s despite high interest rates.
The fed raised rates from 0% in early 2016 to 2.5% by late 2018 and the stock market and economy did fine.
Correlation does not mean causation, as it's said. 0% interest rates forever didn't help japan until possibly only very recently. why is it suddenly different here.
The economy was in turmoil in 2007? There were problems at a few banks, but other than that, spending and investment was extremely optimistic.
House prices hadn't started to decline, and they were coming off their biggest 6-year increase in a long time. HH wealth was at an all-time high for most of the year.
There's more to it than that. You also get to pay taxes on your $7 of capital gains.
The more money moves around in the economy, the more work gets done. When money stops moving, people lose their jobs, productive output drops, etc, etc.
We've seen about 11% inflation since 2019 already, but the m1 money supply increased by about 40% during this time.
I have yet to hear anyone suggest reasons why consumer prices will not eventually catch up to that 40%. There's a big difference between it happening overnight versus happening over the course of a decade, but it still matters.
On another thread:
Presumably, houses are included in this metric. You could sell your massively overvalued house now, and realize that gain in asset prices... But then you're probably going to either be paying inflated rent or buying another property with an inflated value so it kind of ends up being a wash.
https://fred.stlouisfed.org/series/BOGZ1FL192090005Q
You only get 36% if you measure from the bottom of the sharp V-shaped recession in 2020. If you measure from 2019Q4 to 2021Q4 you get something more like 29%. Still sounds like a lot, but compare 2002Q4 through 2004Q4 - that's also about 26%, it's just not so obvious on the linear scale.
In fact, if you look at the percentage growth over a two-year look-back, household wealth has grown by at least 20% on multiple occasions on that time series.
For comparison, this is what the same timeseries looks like if you plot it ending at the end of 2004:
I was hoping for an answer but alas there was none. Anyone have plausible theories? Is this an unexplained mystery or just an artifact of S curve growth?
It was a time of rapid change. That particular website is usually used to suggest that the only thing that changed was the gold standard, but it's been debunked and refuted all across the internet.
> ... observers from the 1950s to today repeatedly noted that, at one time, social rules curbed CEO greed.
https://corpgov.law.harvard.edu/2016/08/18/executive-compens...
Other sources -- sorry no links -- ascribe the genesis of such "social rules" to a US WW II norm of austerity among elites, who might otherwise have found ways to seize a greater share of the economy's wealth for their own dissipative pleasures.
Energy volatility and energy austerity https://pbs.twimg.com/media/FPjE8zVX0AQCFuD?format=jpg&name=...
If you're spending $2k/month on rent vs interest, taxes, and equity, with the idea that you'll get at least the value of the equity back when you sell (and probably more, when inflation is higher than a fixed rate mortgage) you'll come out ahead no matter how long you hold the debt.
And frankly 40 year mortgages are probably better than 30 years with debtors that can't afford the monthly rate. It's like 72 month car loans, it's a better deal for everyone.
We've already realized a ~10% increase in the CPI.
Presuming that houses are included in this metric, those are currently pretty inflated in value.
As of December 31st 2021, the market hadn't even really started to pull back yet.
If you say that household wealth has increased nominally, in terms of there being a bigger number of dollars, sure. But I think you have a pretty hard case if you want to argue that _Real_ household wealth has increased very much.
Another reason for higher market interest rates is it's a forcing function on entrepreneurs to make them think harder about what they spend social resources on.
Think of it this way with an interest rate of 0* , you merely need to trade a dollar for a dollar in order to service the debt. Many would be entrepreneurs will pursue ideas which have an EROI in the [0-1]% range just because they're expected to return _something_ . However this deploys many societal resources that marginally keeps them from better ideas, should they simply wait or innovate longer. If interest rates were, say, 5% then entrepreneurs must find ways to increase resources by 5% at a minimum just to service the capital. I think this is part of why we've seen so many shitty ideas come from startup over the years. Because a net 0 outcome has minimal repercussions . Yes obviously everyone wants to be a billionaire, but thinking of every gamble having a spectrum of outcomes, it means a gambler can continue to gamble on lower payouts if the "rake" is much lower.
* Consider all of this net of inflation and mandatory minimum returns etc. so that we can speak simply about interest rates.
With interest rates so low, money is poring into the stock market driving it up. This is helping the wealthy. But I also think the interest rate problem is caused by wealth inequality, with more invested money chasing fewer productive lending opportunities, and this is because more money is in the hands of savers and less in the hands of spenders.
I personally am hoping after the inflation rate comes back down we see larger net wage inflation than price inflation, returning money to the hands of the working class. (Of course, it would be tricky to push for this too much as a policy because we certainly do not want to cause a wage-inflation spiral. I don't think that is a given though. As they say, the best cure for high prices is high prices.)
And that's the point where inflation will be stopped by policymakers.
The asset bubbles that have been blown up were of no real concern because that makes the rich get richer, and is indeed regressive.
Now that it looks like wage inflation for the average joe might happen (which is not regressive at all), it suddenly has to be stopped at all cost.
But ultimately this will trigger an extraordinarily painful recession/depression in order to accomplish it.
There's two ways out of this. One would be to tolerate wage inflation until it caught up with asset price inflation, with rates rising naturally as investor expectations for inflation increased, this would actually produce more stable long term higher interest rates. The other way is for the fed to jack up rates until the economy goes into a recession, throwing a massive number of people out of work and destroying retirement savings for the rest of the bulk of the population and then having asset prices readjust downwards (which must eventually happen). But that latter path won't result in high long term rates since the bond markets will price in the coming recession and that the fed will once again drop rates to zero in the depression (and ultimately we have to eventually hit the "pushing on a string" condition where fed can't even reflate asset bubbles by ZIRP).
The very fact that everyone in the managerial class is so terrified of the current inflationary environment is why everyone should be more concerned with the fed slamming on the brakes and the coming disinflationary depression.
And the Fed is not quantifying stealth consumer inflation, which people do notice in spend, namely "shrinkflation" where consumer goods manufacturers reduce the amount of corn flakes in the box and hold the price the same. This was a trend happening before the headline inflation number started to move.
The Fed doesn't calculate CPI; BLS does. And they do consider quantity [1]. Mainly to account for quantity discounts. But it takes care of shrinkflation, too.
There are other arguments for higher interest rates, but the analysis in the article strikes me as too simplistic.
It isn't important. It's been made important by financiers.
What the last 50 years have shown is that trying to manage an economy by trying to influence the amount of credit is a fool's errand.
Instead we should set that ship free - and leave it up to the private sector to determine interest rates amongst themselves. That means anchoring monetary policy at zero base rates.
Instead we should be rationing firms access to labour by pushing for higher wages with a much higher minimum wage and preferably a guaranteed job for all at the higher minimum wage.
What we need to make firms efficient is reassuringly expensive labour. That way they will use the cheap access to capital to borrow, invest in technology and drive forward productivity - solely so they can use less of the expensive labour.
It's time to get banks, lending, and finance out of the prime path. As the Chinese have.
When I take the risk to loan out money, I want more return than zero. Why would anyone bother at zero?
Maybe reading the enabling legislation would be useful. https://www.law.cornell.edu/uscode/text/12/225a
' maximum employment, stable prices, and moderate long-term interest rates. '
I'm interested in the forgotten 'stable prices' part.
Why do banks have to follow the federal rate for certain types of loans? IIRC the rate is used for interbank loans against federal reserve deposit requirements, but why would they follow the Fed rate for this rather than some other market force? I don't think it's required by statute (is it?).
What, if anything, prevents banks from ignoring federal benchmark rates all together?
If they go too far one way, people will use other banks. If they go too far the other, they waste money.
Also, there comes a point where they could just invest that money in someone else rather than offer the service themselves, and make more money. That keeps things from going too far that direction.
And finally... Deciding things is hard. When someone else decides things for everyone, legally, it's an easy choice to follow it. Most of the time that's price fixing and is illegal.
Bingo!
That's the answer, the fed funds rate is a price fixing tool. Banks via the federal reserve governors meet to decide the base interest rate from which most other interest rates are derived. Aka the "price" of money. This is done to optimize the rent seeking activity of loans. The banks want to optimize how much interest they extract from the productive economy without harming it to the degree it stops growing or shrinks.
Related, most people think the Fed IS the government but it is not... it's banks... https://www.stlouisfed.org/in-plain-english/who-owns-the-fed...
Banks don't have to follow the federal rate. It's the "zero risk" rate that anyone can get. Beyond that, higher return generally means higher risk, with the risk premium set by the market. If you originate a loan with a wildly low APR, then you'll certainly get borrowers, but nobody will buy the debt from you, and you'll lose money. If you try to originate mortgages with higher than market APR, you won't have any takers.
I am by no means an expert, but this doesn't make sense to me. If the choices are runaway inflation and making higher interest payments and making the debt to GDP ratio worse, the choice seems obvious.
No.
The Fed is raising rates. They raised rates yesterday. They say they intend to keep doing so through the end of the year. Net interest is a low single digit percent of the federal budget; it's lower as a fraction of GDP than it was in the 90s [1]. Most of the federal debt is fixed rate--raising rates now only affects future borrowing.
The real limit on rates is growth and employment. If the economy falters because people are spending all their money on servicing debts over goods and services, we'll see a crunch. That's not happening. The opposite is happening: inflation is surging.
"US inflation, which peaked at 14.8 percent in March 1980, fell below 3 percent by 1983...Volcker raised the federal funds rate, which had averaged 11.2% in 1979, to a peak of 20% in June 1981" [1]. For comparison, we're currently around 8.5% [2] and 0.75% to 1%, respectively. Long-term rates are below 4% [3].
There is no need to tip the economy into a recession at this time. If we needed to, the constraint would be--as it was in Volcker's time--political. If we were suffering double-digit inflation, I suspect the will would be there.
[1] https://en.wikipedia.org/wiki/Paul_Volcker#Chairman_of_the_F...
[2] https://fred.stlouisfed.org/graph/?g=rocU
[3] https://home.treasury.gov/resource-center/data-chart-center/...
The diminishing effectiveness (in part based on global unison from 2008) meant that the federal reserve could not reach its target 2% inflation a year from 2008 until 2021.
In a history of being under inflation targets by .5% for 14 years, 8.5% in one year is partly a headline grabber. And we have wage growth happening.
This is an excellent point. Between January 2012 and January 2022, CPI-U grew at 2.2% annually [1][a].
[1] https://www.bls.gov/regions/mid-atlantic/data/consumerpricei...
[a] (281.148 / 226.665) ^ (1 / 10) - 1
I think the question is: can we sustain 5%+ interest rates? The answer is no - unless GDP increases precipitously or government spending declines A LOT.
Imagine 5% is the new norm. In 30 years, the government will have 100% of public debt at 5% interest. At 139% debt to GDP - that's 7% of GDP going to debt financing. Federal revenue is only ~18% of GDP.
That means 38% of taxes would go to debt financing. And if trends continue - within 30 years, public debt to GDP would likely be closer to 180%. So 50% of taxes would go to debt financing. It's simply not possible long term (unless there is some MASSIVE unknown boost to productivity to save us).
Interest rates might go up to 20% for a year here and there. Who knows. They'll be hovering around 0 or negative and steadily going lower for most of our lives - unless we reach the singularity.
We can’t sustain 5% real interest rates. But nominal GDP, rates and tax take are inherently linked; if short-term rates are 5% for 30 years it’s because inflation and/or the economy are going gangbusters. That will drive up GDP and tax collection. Until it doesn’t. Then we have a recession and all those numbers go down.
This isn’t infinitely extensible. But we’re nowhere close to federal debt servicing being a constraint on the Fed or the Congress. Inflation, instead, remains the check.
Not a constraint in the SHORT TERM. Long term, it is absolutely a constraint. As I said, Interest rates can go up. But long-term trend will be hovering around the negatives (unless there's a MASSIVE boost to productivity).
For domestic-currency debt, no, it is not. Inflation and politics are always the constraint.
When you're in 350% public debt (state & local) to GDP - inflation is not a problem! It's a gift! A recession is the problem.
There would be a massive recession. (And/or inflation.) That's the point.
What is not possible is for the federal government to wind up in a situation where interest payments are dominating the budget, inflation is low, there is political will to service the debt, and yet magically the Congress can't appropriate the money. It can. It always can.
Federal debt servicing is not a constraint on rates per se. It's a constraint because it requires either debt monetization (inflation) or high rates (recession) which are politically difficult.
> inflation is not a problem
How did you interpret "inflation and politics are always the constraint" as "inflation is not a problem"?
Also, the Fed mostly thinks about output and rates in real terms when thinking about the long term.
This is a strawman. I said nothing about the Fed wanting 5% rates.
I'm simply saying rates are not going to be higher for a LONG period of time because - if you look at the math - a sustained period of high interest rates with our current public debt to GDP means that public spending would have to fall dramatically (which would crush GDP in itself - a negative feedback loop).
Substitute 5 for any non-negative number, and you'll see that any number higher than 0 LONG TERM means a cut to public spending.
You multiply the increase by ~3.5x (to include effects from state & local governments) and then you multiply by ~4x (because taxes aren't 100% of GDP - their ~25%).
A 1% LONG TERM increase in interest rates means a ~14% reduction in public spending (with the same tax burden).
The US Federal Government is already spending about ~14% of GDP on SS, Medicare, Medicade, and Debt Service. Considering that our tax revenues is only ~17.6% of GDP. Good luck cutting spending by 14%. Let alone 2x or 3x that.
The only way the fed will keep rates at 5% for 30 years would be if we had a gangbusters overheating economy going full tilt with near zero unemployment for the entire time. In which case the GDP graph will be up and to the right the entire time. And in that scenario GDP (and thus tax income) will be rising faster than debt and interest payments rise.
Put that aside though and assume that we somehow end up in a situation where debt servicing is a huge chunk of the budget. There are tools to solve that problem. We can accept more immigrants and give more incentives for existing citizens to have kids to kickoff population growth. We can increase tax rates to payoff some of the debt. If you want to get esoteric the Treasury can mint coins and deposit them at the Fed - something the US Government does every year, creating brand new money out of nothing. Yes this would amount to some monetization of the debt but it is a possibility. All of these strategies and many more have pros and cons. Perhaps in reality we'd use a mix of many different strategies.
[1] https://www.treasurydirect.gov/govt/reports/pd/feddebt/fedde...
i think it's more political. A while back I was driving to pick up my son from a school thing and there was an interview on NPR with the fed. I can't remember the exact date but a number of months ago. The fed was going on and on about how great the Build Back Better plan is and was going to be and now the inflation that was beginning to show was all due to supply chain issues and will be sorted out in a few months.
I think the fed didn't want to raise rates and held out this long for political reasons only. Now, not raising rates presents more risk to the administration in power than raising rates and so here we are.
https://www.npr.org/2021/11/03/1051877079/treasury-secretary...
Tech has been Americas golden goose for the last decade and high interest rates are like kryptonite for tech. All those flashy startups burning hundreds of millions with only negative profits to show for it are a direct product of a low interest rate environment.
The fed knows that raising rates will likely result in the goose losing most of its feathers, and the carry on effects from that.
I wish the federal government realized this so that they'd fix Bay Area housing
Who exactly at the Federal Reserve was praising an Executive branch policy "on and on"?
To do so would be an extraordinary lapse from the principle of central bank independence. Evidence is required.
https://www.npr.org/2021/11/03/1051877079/treasury-secretary...
USA can you use Federal Reserve to monetize debt at low rates. Europe and others can't.
Pensions have been hit hard since 2008 because laddered bonds no longer yield sufficiently.
The solution is a worldwide government debt default, with UBI after pensions default. While I don't want this socialism, world politicians seem to follow Klaus Schwab's idea on this.
If supply decreases but there's also a ton of cash splashing around, then people try to use it to get things... But there's not enough things, so the price of everything gets bid up.
More than 20% of all dollars in existence were "printed" in the last 2 years. This, on it's own, would tend to increase inflation. Combined with supply side issues, we can see how it has definitely increased inflation.
Inflation itself is also an issue in terms of making sure the supply side works well. Prices don't go up smoothly and uniformly for everything at once, rather there's chaos and delays as every step of everything gets renegotiated, and a cascade effect from that that causes more disruption.
So, you want to deal with inflation, probably. Increased rates mean less money being "created" in the form of credit, which means fewer dollars splashing around, which means fewer dollars to bid up the prices of short supplies, which means lower inflation, theoretically.
Most of inflation right now is being driven by shortages, firm profit taking, and wage increases.
The first two can be solved and should be solved by increasing supply and competition.
The third is not a problem at all. The capital side has taken the lion's share of productivity increases over the past 30 years and that has certainly impacted consumer's ability to spend. Wage increases are a good thing in this case and will drive further improvements in productivity and automation.
When supply is too low, inventories are restored by producing more goods than we consume. That also happens to be the definition of saving. Higher interest rates incentivize saving. Therefore, higher rates create the correct incentives to resolve a supply-side problem.
It's sad the author feels they even need this disclaimer. Its interesting how much gets lumped into a political cause (that requires inheriting all associated political causes of that party).
"According to Taylor's original version of the rule, the nominal interest rate should respond to divergences of actual inflation rates from target inflation rates and of actual Gross Domestic Product (GDP) from potential GDP"
https://en.wikipedia.org/wiki/Taylor_rule
Some argue that the reason we have seen such extreme speculative bubbles in recent history is because the Fed has no Taylor Rule-like systemic policy related to market factors. They are free to make policy completely divorced from the market.
https://www.ft.com/content/ece92145-443d-4e94-bfa9-7fe06cb9c...
The Fed's mandate does not do this, and we very often have way to much debt followed by short spikes of not enough debt, so we are destined to continue the boom and bust cycle.
The way I see it the major problem happens to be with when we take out debt on zero-sum goods. When you take out debt and create something new with it, and that debt pays off, everything is fine. When you take out debt to buy something like land, it messes up a fundamental balancing force and speculation runs amok.
Raising rates will likely massacre debt dependent companies.
What you really want to be concerned about are enterprises, large or small, established or starting out, that are impacted by first order effects of interest rates. The obvious examples are the mortgage and real estate industries.
Second order effects are going to be harder to suss out but companies that have large lag times between production of a product and receipt of cash for that product will be adversely impacted. Companies with costs that are hard to restructure are also problematic because (in the US) getting rid of people can be much easier than getting rid of long term leases or debt in raising rate environments.
That is to say, in a raising interest rate environment lots of other items top the list of problematic before VC funding. In fact, it _may_ lead to companies getting more freedom as the VC funds needn't return as much as they do in the current rate environment.
As always, keep enough money on hand to ride out a job search, keep your skills sharp and your professional network built is about all that you can say you should do to prepare for changing macroeconomic regimes.
Secondly, we can immediately ban the purchase of Crytpocurrencies, to drive down the price and hence attractiveness of mining and electricity rates.
Government action needs to be at the supply side.
What's the mechanism here?
However, it is supposed to be independent from the politicians on a day-to-day basis, and people seem to like it that way.
I believe you are somewhat wrong in stating the Fed is not government.
Admittedly the title alone kind of tells you they have a bias.
Edit: Why are you apologizing for people that do not care about you and also rule over your life?
Honest question. Why do you think an organization that literally controls money would have the average persons interest in mind in any way whatsoever? Every other aspect of politics is corrupt to the core? Why would this be different?