Bernanke Says U.S. Economy Faces a ‘Wile E. Coyote’ Moment in 2020
bloomberg.com
bloomberg.com
The risk is that fiscal policy is pouring more fuel on the fire at the precise time when the economy typically starts slowing, further inflating asset bubbles and making the Fed's job (to avoid inflation and keep employment high) much potentially harder and making it more likely a misstep will happen.
Popping bubbles or slowing their formation is inherently a tricky proposition (just look at the run-up in stocks from early 2017 until now); move too aggressively and you risk sparking a liquidity crisis and plunging your economy directly into recession; move too slowly and you end up with an even larger bubble later on to deal with.
This is tricky in normal times, but doing so while the other wing of government is actively stimulating the economy makes it much harder to gauge the impact of monetary policy and withdraw Fed support in a prudent and measured way.
So how did markets exist at all when the Fed was created? By your logic, they would have "gone off a cliff and never come back" long before that.
> When the government stimulates the already hot market with lax taxes and high spending it’s like pouring liquid oxygen onto a flame
Even after all the stimulus so far? No diminishing returns, ever?
Now, I think I agree with your larger point, that without the Fed this would be much worse.
I’m not a communist. Probably the market the US spread through the globe from 1945-2017 was a highlight. A pretty well buffered system, but not without it’s hard lessons and squandering of the individual wealth. There are clear examples of exploitation.
Most open system that tend towards homeostasis will exhibit boom-bust feedback loops (ecosystems, metabolism, gene expression, antibiotic resistance, human economies, etc.).
I'm not sure it's either possible or desirable to fight that at a fundamental level, although I do think politically it's a very good reason to provide a strong financial safety net.
I'm not sure what you mean by capitalism, but human economies are fundamentally self regulating homeostatic systems. You can engineer around that to make them more human friendly, or just, or dampen the swings, but you can't fight their fundamental nature.
I started my working life right into the jaws of the Great Recession and try not to forget that lesson.
Yes, there is. It's driven by individual credit cycles syncing up due to the economies of scale of financial distribution. Borrowing money fundamentally means more income today and less income (than otherwise) tomorrow. That drives cycles.
The business cycle of boom and bust is characteristic of capitalism as a system, and if anything, the elastic monetary policy that the Federal Reserve allows has softened the blows.
(What is hard to know is how much laundered money props up real estate in London, NYC, Miami, etc., and if we crack down on laundering, whether it will pop the bubble. Adam Davidson and Seth Hettena have written well on how we got here and why it will be difficult to unroll.)
And 1893, and a bunch of other times. But that might also be called the "business cycle". This nice tame business cycle that we've come to take for granted is created by the Fed; the sans-Fed business cycle was incredibly vicious.
In a nutshell, it is now believed by several researchers to have been a very narrow phenomenon with minimal impact to the national economy. Per Wikipedia
"While Mackay's account held that a wide array of society was involved in the tulip trade, Goldgar's study of archived contracts found that even at its peak the trade in tulips was conducted almost exclusively by merchants and skilled craftsmen who were wealthy, but not members of the nobility.[44] Any economic fallout from the bubble was very limited."
https://en.wikipedia.org/wiki/Tulip_mania#Modern_views
Taken at face value, this suggests that the tulip "bubble" was dramatically different from either the dotcom or the mortgage bubble, which had wide ranging participation and damage. One could argue that the latter two would have been impossible without the Fed.
But bubbles continued. I wonder if one can make a case that pre-FED bubbles were notably smaller than post-FED bubbles, factoring in the fact that the nature of modern economies may magnify bubbles. In other words, if there is a continuous upward slope to the size of bubbles from the 1600's up to now, then it would appear FED made no significant difference. But if there is a spike or jump when FED formed, it could mean they magnify them.
Some factors for US's continued growth: healthy demographics - due to immigration, low corporate tax rate, interest rate rising and dollar strength - attracting capital inflow, biggest economy in the world, biggest consumer market in the world, one of the most innovative for its size, balanced economy (used to be dominated by manufacturing, but now it is pretty spread out and consistent), good environment for rich to immigrate to, growing reshoring of manufacturing, leader in technologies, etc.
Instead of comparing US to the yesteryears, let's compare US to other countries in the world today and see why money is going to keep flowing into US for a long time.
Japan: seems to be on an upswing, the recent news of bring in 500,000 immigrants will help with the economy. Unfortunately, it still suffers from demographic decline, innovation staleness, 1.0% anemic gdp growth, competition from cheaper Asian countries for manufacturing, etc. Its paternalistic culture doesn't help to introduce women into the workforce and boost/diversify its economy. Still, a good place to live for many, and high standards of living. but not for investments.
Xi Jing Ping: he is the dictator, therefore he is the country and the economy. Sadly, history has proven that a society cannot escape middle-income trap until it has transformed to a culture that promotes openness and innovation, something that a dictatorship has never shown to do. Therefore the country is dedicated to stealing IP from other countries and companies for a long time. If one looks at other dictatorships in the current era, they always exhibit faster economic growth than their democracy counterparts. However, once the easy growth is used up, the dictatorships are stuck in a decline. As evidenced by the country's 350%+ GDP to debt, 3 trillion of its 6 trillion wealth has fled to overseas, and 50% of rich wanting to leave. Also, evidenced by strict capital control, draconian rule of law, censorship, housing bubble bursting, fake GDP numbers claimed by many of its provinces, etc. The current government will try to hold on for another 10-15 years, stunting the economy. Xi Jing Ping will die, then the grab for power will throw the economy into chaos.
EU: several of its nation members are suffering EU withdraw symptoms. Greece would like to leave but its economy is too small to matter. Italy however, is another story. With the 3rd biggest economy in EU, and the recent elected populist leaders, Italy will try to pile on the debt to address its anemic economy and migrants issue. EU unfortunately won't be able to do much; threaten Italy with debt reduction (currently 120% of gdp), and Italy will leave EU. Do nothing, and Italy will bring down EU's fiscal health until EU disbands. EU doesn't seem to be viable in 5 years.
Emerging Market: current capital outflow indicates there are trouble brewing due to expatriation of dollar back into US. From Turkey to Argentina to Indonesia, the emerging markets are going to struggle paying back their dollar-denominated debts with the rising interest rates and stronger dollars. Flashback to 1998 Asian crisis.
Disclosure: I have no stocks in play.
All presidents are surrounded by financial experts. Also the ‘financial experts’ did a lot of mistakes and mispredictions through history, not sure if your point stands.
Having a businessman for president is arguably good, a country is not a business.
NB: Bernanke [1] is not the fed chairman and hasn't been since 2014 when he was succeeded by Janet Yellen [2].
Jay Powell [3] is the current fed chair.
[1] https://en.m.wikipedia.org/wiki/Ben_Bernanke
I'm not sure that's actually true. Yes, the govt. reported "official" unemployment number is 3.8% or whatever. BUT... that comes with a couple of big, big caveats:
1. Those numbers by definition don't include job-seekers who have left the market and quit being job-seekers. IOW, people who became so despondent that they gave up. But, there's nothing specific that stops these people (or some portion of them) from re-entering the job market to fill demand.
2. These numbers don't reflect underemployment where someone has "a job" but the job doesn't require the skills the individual actually possesses and pays significantly less than they would expect to earn in a "normal" position.
3. Wage growth is still very low, which suggests that the economy is not being hamstrung (yet) by lack of available workers. At some point, if demand exceeds supply by enough, you're inevitably going to see wage growth. A significant jump in wages would, IMO, be the best sign that there's an actual gap between labor supply and labor demand.
Note that I'm not saying that Bernanke's theory is wrong, but this one little point jumped out to be as something that's at least somewhat questionable.
1. If the person has stopped looking for a job, their likelihood of resuming their job-seeking is pretty low. That's especially true for the unusually large aging baby-boomer population who are taking an early retirement rather than seeking re-employment.
2. While that's clearly another indicator of the strength of the job market, it is hard to argue that no job is better than a job which isn't ideal for skill/pay reasons. If you have a suggestion on how to accurately measure this that'd be great.
Who knew that a single number was insufficient to measure something as complex as employment? Yeah, we need to look at the larger picture, but it's hard to say we have exceptionally low unemployment AND that this is a good time for a stimulus.
Absolutely. Don't get me wrong... I'm not arguing for or against any specific policy in the post above, or making any particular claim regarding Bernanke's argument. I just wanted to point out that saying "we're at full employment" is at least a little bit questionable as an assertion, at least if we take "full employment" to represent a situation where lack of available labor represents a threat to the economy, vis-a-vis other policy issues.
Maybe I'm just picking nits with this observation, but that jumped out me for some reason, when I was reading the article.
> at least if we take "full employment" to represent a situation where lack of available labor represents a threat to the economy, vis-a-vis other policy issues.
I believe that there are officially fewer unemployed people than there are open jobs in the US [1]. Not sure if that's the kind of "threat" you're looking for, but it qualifies, as a risk at least.
[1] http://money.cnn.com/2017/06/06/news/economy/us-job-openings...
#3 is clearly happening in tech.
There's a lot of interesting information here[1] regarding what employment related data is collected and reported by the BLS.
[1]: http://www.pewresearch.org/fact-tank/2017/03/07/employment-v...
#3 is clearly happening in tech.
True, and a handful of other areas as well. But that's still only a portion of the overall economy.
On a recent EconTalk[1], Edward Glaeser, the Fred and Eleanor Glimp Professor of Economics at Harvard, said, in their recent sample, 11.9% of U.S. men aged 25-55 have been jobless for over 12 months.
EDIT: quick googling, 11.9% of U.S. men aged 25-55 is about 7.5 million people.
http://www.econtalk.org/archives/2018/03/edward_glaeser.html
Which have been dusted off again now that a Republican is in office.
> Those numbers by definition don't include job-seekers who have left the market and quit being job-seekers. IOW, people who became so despondent that they gave up.
There's a large pool of people who gave up searching for jobs, and that happened under Obama. It was years of feeling helpless that swung so many Democrats in the rust belt to vote for Trump. Obama's policies greatly benefited coastal areas, DC was a boom town the entire time for instance, while simply ignoring large swaths of the country.
I'm not sure that's actually true. Yes, the govt. reported "official" unemployment number is 3.8% or whatever. BUT...
Upvoted your post. You are correct to be skeptical here. In fact there are even people at the Fed who don't agree with the assertion. Current President of the Minneapolis Fed has publicly stated that Labor Force Participation Rate would be a better measure. As I'm sure you can imagine, that isn't a popular view w/i certain circles.
While Ben may truly believe what he's saying, I mostly get the sense that he's trying to burnish his 'legacy'.
This lag between economic policy and outcomes is a big reason the US has such a disingenuous public debate. Getting what you can in the short term, while being deceptive about long term effects, has become a good strategy. [1]
[1] https://mobile.nytimes.com/2017/12/18/opinion/republicans-ta... “The essence of this strategy is to take tax policy out of the hands of experts and entrust it to activists. These campaigns do not usually have much credibility with card-carrying economists. ”
That has often been the case. Bush suffered through Clinton's internet bubble. then Obama suffered through Bush's real estate bubble. Trump now benefits from Obama's policies. We'll see what happens after Trump.
The current tax cut increases the national debt during a good economy. So this irresponsibility limits America’s options when this bubble (if it exists) bursts.
Half of those cuts reset. The primary item in the other half, the corporate income tax cuts, were a necessity to compete with the rest of the planet that has a more typical ~20% rate (including Europe, which has the lowest corporate income tax rates of any region).
The deficit is going to $1 trillion, the tax cuts are an average $50-$75 billion per year of that problem over the next ten years.
The tax cut is meaningless in that picture. It'll add at worst a trillion to the $30 trillion pile of public debt that will exist in 8-10 more years.
Good luck to the US. The yearly budget is $3.8T. Of that, only $1B is discretionary. $3T of tax cuts is three years of the entire discretionary budget. The cut is huge. And that cut wasn't Keynesian stimulus - it came during a good economy. Good luck to the US.
This time is not different
I'm not sure the dot-com boom and bust affected the rest of the economy nearly as much as it affected our industry. If there was a recession, it was the smallest in decades:
https://tradingeconomics.com/united-states/gdp-growth-annual
It was a modest recession, but it wiped out a huge amount of wealth held by "main street" investors. It was bad enough that Bush, a very, very pro-business president, signed into law the Sarbanes-Oxley Act, which is widely criticized as an onerous and needless regulation by conservatives.
Bush inherited a guaranteed recession, and then 9/11 occurred on top of that context.
Which then led the Fed to make stupid mistakes on interest rates, which helped spur immense asset inflation in the real estate sector, which then collapsed, which led to the great recession, which got Obama elected with a Dem super majority to go with it, which delivered the ACA.
Then the Fed lowered interest rates to basically zero, or below zero when QE is considered, for the better part of a decade to combat the great recession, which spurred / enabled extreme corporate debt binging, extreme government debt binging, and re-inflated both the stock market and real estate asset bubbles. The debasement of the dollar due to the Fed's abusive interest rate policies during the ~2001-2004 period also dramatically spiked both healthcare costs and college costs, while eroding US purchasing power and the US standard of living (represented by the simultaneous global skyrocketing of GDP in all other nations, as well as being represented in the epic commodity bubble (commodities are mostly priced in dollars)).
Now we're waiting for the fallout from another round of idiotic Fed policies.
All in the name of initially trying to avoid or skate around a rather mild recession in the GW Bush first term - because no politician can tolerate a recession these days - the assholes at the Fed delivered more than a decade of immense suffering with more to come.
The fact that the US has enjoyed a economic boom post 2008, while the rest of the world struggled for several more years (especially Europe), can be considered evidence that it was the correct action to take at the time. The current expansion is the second longest in modern history.
(And it’s useful to go back in 2008-2011 and see what different economists were saying about stimulus and inflation. There was a big partisan divide.)
However in 2008-2009 the Fed policy was actually extremely tight. The recession of 2008 can not be explained by the monetary policy of 2001-2006. It simply does not add up. And even people who argue for the Austrian Theory (i.e. unsustainable investment boom in long term investments).
If monetary policy was to easy, then there is simply no way to explain nominal income. How can you explain this with 'Fed was to easy':
https://oregoneconomicanalysis.files.wordpress.com/2011/10/n...
The people who developed the Austrian cycle theory actually called this 'secondary deflation'. A static central bank policy can be inflationary or deflationary depending on the outside of the economy. Or more technically the stance on monetary policy depends on the Fed target rate relative to the natural rate.
What happened in 2008 is that the natural rate fell bellow the Fed rate and Fed policy became deflationary. They did not notice this because they observed false signals from high oil prices, you can read that in the documents from their late 2008 meeting. In the middle of a NGDP collapse they were talking about high inflation expectation, pretty insane.
The story of successive Fed created bubbles simply does not hold up.
Schrodinger's Obama Policies?
Even outside the market, people are hiring again, companies are making investments, it's a hell of a turn around.
What's your point?
> then immediately jumping, once the election results were in.
So your long-term retirement investment fund which should span over 20+ years increased somewhat drastically over a small percentage of it's perceived lifetime. Why is that superbly beneficial for long term fund performance?
> Even outside the market, people are hiring again
When did they stop hiring? Source data?
You must be a terrible investor then, the DOW under Obama went from ~7,000 to 18,000, unemployment fell from 10% to 5%, nearly 20 million gained healthcare under the ACA, and the economy gained 11.6 million jobs. Obama's numbers blow Trump's away.
- The United States added almost 3 million jobs in 2014, 2.7 million in 2015 and 2.2 million in 2016.
- The U.S. economy added 2 million jobs in 2017
http://money.cnn.com/2018/01/05/news/economy/december-2017-j...
Giving Obama credit to me is at the very least questionable - things were at rock bottom, they could almost only go up (and I supported Obama). There are so few absolutes to hold on to in terms of economic indicators for the layperson, but its hard to see how the Obama years were an economic catastrophe, and unfortunately we'll never know what the effect of a larger stimulus might have been (or no stimulus for that matter).
[1] - https://www.bls.gov/opub/btn/volume-4/people-who-are-not-in-...
In the meantime, politifact has a good breakdown of what he says about the issue and where the numbers come from (spoiler, they make some wild assumptions) [1].
[1] http://www.politifact.com/truth-o-meter/statements/2015/sep/...
https://www.scientificamerican.com/article/the-political-bra...
For the exact same story, see the ongoing student loan debacle.
I agree with your broader point: government policy is complex, we need a regulated market system because completely free markets don’t work, so we need a high skilled government that tries hard to get things right — and a legislative system that cares about the government functioning well.
Same with surveillance: It's either Bush's fault or Obama's fault. They don't see the steady progression over the years independently of who is in power.
The same sort of attitude ensures that third parties will never be considered. When people are driven to literally fear the 'opposition' winning, it means that the powers that be have effectively sealed their grip on power tight. Also even notice the media's focus on "electability." It's all rhetoric designed to get people to note vote for the candidate they want in power, but to 'strategically vote' and in the process completely undermine their own self interest.
Pair this with some institutional issues like ballot access and we have a system where the establishment has all but guaranteed their perpetual success.
Since we're discussing nothing short of the US government acting as an enemy to the citizens it is supposed to serve, I would suppose the next few prudent questions are:
1) What is the entity deploying this divide and conquer strategy?
2) Is this entity monolithic? Cellular? Organized or random?
3) What does this entity stand to gain and is it good for all?
Your premise is incorrect. The "sort of" part of my statement is important. There are lots of forces at play that cause this. I see it as sort of an emergent phenomenon and not the design of some clever genius or powerful organization.
Your assertion is not strong enough and your self referential call out to authority is suspect or at the least misplaced.
It is absolutely divide and conquer and it absolutely is an organized effort.
My assertions were posed as questions only to guide the light.
Anyone with eyes to see will know this. The problem is most of those eyes lack the courage and faith to speak.
Some governments seem to be quite bad at this though. States differ in pension liabilities and I haven't looked at the federal level.
Only if the electorate is intelligent / educated enough to call bullshit do they temper their bullshitery.
(Just three recent examples of the nonsense of the day. Yesterday or tomorrow, different nonsense, but always nonsense over serious discussion.)
But it's not so hard to say that you can do it.
Really, it's an issue of policy not pensions.
Additionally, pension have to be managed and administrated. This is pure wasted money. Every pensioner would be better off taking the money that is set aside for their part of the pool and putting it in a Vanguard index fund. When you start to withdraw, you know how much you have left and you haven't paid tons of kickbacks along the way. When there is a recession, you can scale back your withdraws until there is a recovery, etc.
Fixed benefit pensions can never be anything but a pyramid scheme. Otherwise, your pension would be more by doing what I state above because the administration is near zero. The pension funds have never done better than the S&P over any reasonable time window. Pensions will always have unnecessary overhead.
Also, fully funded is only fully funded when it can survive the company going bankrupt tomorrow. People like to redefine it as liability less than X, but that just means underfunded.
Granted, if you have kids you might want the leftovers from your retirement to go to them, but that's not a social problem. Further becase pensions take less money so a subset can always just buy life insurance.
PS: The biggest issue is benifits not including inflation, but again that's a policy issue.
Assuming we don’t want to live in a society in which vast numbers of elderly live in penury this isn’t true. It’s well known that when retirement savings are the responsibility of the emoloyee then they don’t save enough.
What you say about bad governance is certainly true and incompetent or badly incentivized leadership will exacerbate problems. I don’t know what the solution is for the U.S. but the current system is going to make us end up with a society with large numbers of destitute elderly. Shifting the onus to the employee via 401Ks is just kicking the can down the road so to speak. It also allows politicians and voters off the hook because the liabilities aren’t on the books. On paper it looks good but the reckoning will occur.
(There are a lot of arguments to be quibbled over here, but when the average American can't calculate interest I'm not going to point to them as the best steward of their retirement)
If pension payouts floated as a percentage of overall asset value, then they would a great retirement strategy. But promising people a guaranteed (generous) fixed-income is not sustainable in the long-term.
Sure it is. It's inherently problematic because it assumes perpetual growth of population and economy. Also, there is a difference between pensions and 401ks and IRAs. 401ks/IRAs will run out. Pensions can never run out. In other words, you can outlive your 401ks/IRAs, but you can't outlive your pension.
Or put it simply, with 401k/IRAs, you can't take out more than you put in. With pensions, you can if you live long enough. So who makes up the difference? The workers or taxpayers.
When it comes to economics and religion, the "experts" and activists tend to be one and the same and neither seems to be credible.
https://www.nytimes.com/interactive/projects/cp/opinion/elec...
One of our the "greatest experts" predicted eternal collapse of the markets after trump's election
"If the question is when markets will recover, a first-pass answer is never."
and an endless global recession.
"So we are very probably looking at a global recession, with no end in sight."
> This lag between economic policy and outcomes is a big reason the US has such a disingenuous public debate.
Economic policy doesn't cause recessions. The business cycle and the FED raising and lowering interests cause recessions. No matter the economic policies, there will always be a recession. I believe it was jamie dimon who said we usually get one every 8 to 10 years.
Tom Nichols’ book The Death of Expertise is relevant here.
——
As for your specific points: - Paul Krugman, on his major predictions, has been incredibly prescient. He was talking about media bothsidesism, a major reason for this political moment, in 1999. He said America was being lied into war in Iraq in 2002. He predicted the effects of stimulus in America and Europe. The guy is a genius and so he becomes a target for his political enemies. (Re the stock prediction: he withdrew this in a few days. It was a minor prediction. The predictions above were long term predictions.) The issue is that conservative economics has been captured by the conservative propaganda machine which amplifies minor corrected predictions like this while ignoring the huge long term mistake that the right’s “economists” made about inflation in response to stimulus.
- The business cycle causes recessions, yes. Not sure what you mean by economic policy. But both monetary and fiscal (tax) policy has big effects on entry and exit from recession. And also public debt affects provision of public policies like the social safety net.
Democrat doesn't miraculously fix it in 2 years. Strong republican congress in 2022.
Where have I heard this story before.
At the end of the day, monetary policy is not social change, moral evolution, or political coalition building. These things happen outside the Central Banking system and are just as important for a functioning economy.
I know this sounds controversial, but at this point quite frankly the deficit does not matter. There is so much debt in the world, we are likely heading towards a global debt write-off.
It doesn’t help that China has essentially been spewing entirely fictitious accounting numbers for the last 20 years. It’s not even about padding an extra 10-15% anymore. There are journal articles out there claiming that Alibaba, a company as big as Oracle, is making up whole cloth 95% of it’s accounting statements. Ridiculous...
Do you have a source for this? I'm not doubting you, but I've never heard this and would like to learn more if possible.
we are likely heading towards a global debt write-off.
Household debt: https://fred.stlouisfed.org/series/HDTGPDUSQ163N
"Public" (Government) debt: https://fred.stlouisfed.org/series/GFDEGDQ188S
Yeah and he is totally wrong in that. His own writing before the recession argued for that to be false.
Once in power of the central bank many other people were involved and they were not willing (in the beginning to use those tools). Eventually they figured it out but by that point it was way to late.
The problem was that people were so obsessed with inflation that the central bank flat out refused to go above 2% and that would clearly have been needed from a monetary perspective.
This was a clearly a flat out instiutional failure from the Fed and Bernanke tried his best in his book to shovel that under the table.
We know this because the meeting are public, they were debating about fear of to much inflation in late 2008 when all economic indicated were pointing to a major collapse.
> At the end of the day, monetary policy is not social change, moral evolution, or political coalition building. These things happen outside the Central Banking system and are just as important for a functioning economy.
But those things did not cause the economy to collapse. The economy collapsed because of a massive demand shortfall with NGDP going almost 9% below trend.
> I know this sounds controversial, but at this point quite frankly the deficit does not matter. There is so much debt in the world, we are likely heading towards a global debt write-off.
Easy to say. But the fact is that those things almost never happen and the only cases where it did was after major wars.
> It doesn’t help that China has essentially been spewing entirely fictitious accounting numbers for the last 20 years.
Whatever they claim go to China and see the growth.
This would also be a global abolition of the private pension system, FYI.
People keep talking about debt write-off, but interest rates are bouncing off the lower bound. These are difficult to reconcile.
One day the rates will (probably) rise. At that point, it will be more painful even to pay the interest.
That can't be any good. The very foundation of modern nations is built on good accounting purposes. In fact, I read a book about how double entry accounting was one of the fundamental reasons for the growth of the British and later the American empire.
And yes while the deficit doesn't matter, good accounting absolutely does. Fudge those numbers and people lose trust in the system. That's how you create economic panics...
To flesh out my question a little further, let's say that the fed decides one day to change the fed funds rate from 1.75% to 2%. They put the bonds up for auction and find out that they were only able to auction off the allotment of bonds at an effective rate of 1.8%. Is this typical? Or is it usually the case that the bond buyers will quickly hoover up whatever rate they are given?
Maybe a more formal way to put it- is the elasticity of demand for these bonds low enough for the fed to have complete control over the fed funds rate such that they can set any interest rate they desire?
Banks don't typically borrow from the Fed as it's viewed as a sign of being unable to borrow from another bank. It's part of the reason the Big Banks were forced by the Fed to ask for a loan during the 2008 crisis, so smaller banks could ask for loans without looking weak.
"[..] the central bank (that is, the government) can always set bond yields at whatever level it chooses including zero."
A different question is if institutional arrangements will allow it. But even when they not, if the crisis is big enough they will. See the example of the debt crisis in the Eurozone. It finished the day that governor of the European Central Bank decided to do "whatever it takes" (1), even if the operations that they are doing are technically illegal in the framework of the Eurozone.
(1). https://qz.com/1038954/whatever-it-takes-five-years-ago-toda...
Changing that rate does cause impacts on the rest of interest rates (e.g. bonds), though.
Did you mean to say 17 instead of 7?
He said that subprime was "contained" in 2008, IIRC.
The Mises Institute (an avowed hater of the Fed) has this, for example: https://mises.org/library/ben-bernanke-was-incredibly-uncann...
Something to consider is that in times like these money are flowing in the wrong direction, instead of going from developed countries (US, EU, JP) to developing countries with better return rates (Emerging markets) it is the other way around, going into developed countries estates, bonds and stocks even with low returns which look already overvalued. That would normally read that there is way more liquidity than actual growth and the valuations are not accurate.
Beating the other team in the short term is seen as more important than the long term health of the nation. You can see this play out in the tax cut, deficit spending and many other examples.
> Who cares if the world explodes in 6 years? I need to be reelected in 2.
Market slowdown, you'll want your bonds.
Recession, you'll want your cash.
Depression, you'll want gold and barterable goods.
Economic collapse or apocalypse, you'll want food, medicine, and alcohol (possibly the most barterable good, also delicious).
In any case anybody reading this in a major city faces non zero likelihood of disaster (take your pick for your city, hurricane, earthquake, tornado, terrorist attack, war) and should be stockpiling 3 liters of water per person in the house per day you want to be able to survive on your own, alongside 2k calories of food, trash bags, etc. I say have a stocked liquor cabinet as well because my experience in Backcountry many week hikes has taught me you can get nearly anything in return for good liquor :)
I've also heard strong arguments for the stockpiling of pornography and certain chemicals that are valuable in tbe production of medicine or just used as general reagents, don't know too much about chemical stockpiling though.
Careful for the prepper rabbit hole, it runs so very deep ;)
Potassium permanganate - A swiss army knife of a chemical. It can be used to clean certain contaminants from water, clean wounds, start fires, and it's cheap as dirt.
Aqua Regia - A mixture of muriatic acid and nitric acid. I can imagine this being useful to smuggle gold through bandit warlord checkpoints. George de Hevesy dissolved a nobel prize medal to hide it from nazis. Acids in general are useful.
Sulfur - Depending on your location, this is the hardest component to obtain for making gunpowder. The other components can be made from pee and cooked wood.
That's all I can think of off the top of my head. Note: I am neither a chemist nor a prepper.
However after this winter's experience where two feet of snow ran the supermarkets out of fresh food, I'm going to keep slightly more food and folding money on hand.
But remember these are long-term processes. Ultimately your connections and community will become important in economic collapses, because they're usually very slow-motion.
It analyzes the citizen responses to several catastrophic disasters. Turns out, people don't turn into ravaging wolves in a disaster, they immediately begin to help their neighbor, with no regard to race color Creed etc. It's when the national guard comes in that issues start arising...
Also:
Potassium iodide in case of nuclear fallout ($9 for 2-week supply)
Chlorine dioxide for water purification ($10 for 1-week supply)
Both are pretty shelf stable (4-6 years) so you don't need to keep buying them.
Tuck away a few hundred bucks in small bills. It will be more valuable than a chest full of gold when you really need it. It suuuuuuuucks to be caught without physical cash in an emergency.
https://www.sciencedirect.com/science/article/pii/S105752191...
From the cited text: "The question is considered why the economics profession has failed over most of the past century to make any progress concerning knowledge of the monetary system, and why it instead moved ever further away from the truth as already recognised by the credit creation theory well over a century ago. The role of conflicts of interest and interested parties in shaping the current bank-free academic consensus is discussed."
[0]: https://www.amazon.com/Principles-Economics-7th-Mankiws/dp/1...
In that sense maybe I'm wrong and maybe Sowell is the good choice, just decide your ideological viewpoint on the economy now, read enough to defend your viewpoints to other laymen and let that be that.
"Money Mischief" by Milton Friedman is a good short one monetary policy.
"Fault Lines" is a solid book by Raghuram Rajan.
Those will get your more interested than reading raw economic textbooks, imo.
I was in attendance and it is worth noting that Bernanke did not take any questions from the audience (apparently unexpected by some of the staffers) and that he did not remain for any of the (illuminating in my opinion) panel discussion that followed.
Suggest that people pay attention to the remarks of Mr. Warsh, who in my opinion actually should have gotten the nod to be Fed Chair -- though I understand completely why that would have been untenable for many.
Last thing I'll add: some of what is said openly during Congressional testimonies, these fora, and the like is knowingly contradicted in private conversations.
So a sharp correction? But isn't that what a bubble does? Why not just say we're in bubble fueled by artificial growth caused by numerous government subsidies.
Consider, e.g., real estate prices in a relatively stable area after that area is plunged into a long-running war. Prices will sharply correct, but talking about a "peace bubble" is a bit disingenuous.
This means your unit of currency buys less over time. What is 'wrong' with this is that inflation is a transfer of wealth—some people even go so far as calling it theft or a 'stealth tax.'
This is because the purchasing power that you had in your unit of currency isn't 'lost', it is actually transferred to the institutions creating the money. If you had $1 worth of pennies in your pocket, and inflation was 1%, it is like an invisible hand reaching into your pocket and stealing a penny. Do that a hundred times and you can 'create' $1, but by the time this is done, you will find that your $1 can only by 99 cents worth of goods and services now. In a fiat based, fractional reserve system that we have today in the West, the institutions that are reaching into your pocket (AKA creating money) are central banks and commercial banks.
For example, say the Fed (the central bank for the US) creates an initial $10m of reserve currency, this is then used by commercial banks to 'create' an additional $90m through loans from that $10m reserve. It is therefore commercial banks, not central banks, that predominantly create currency in society—and depending on growth and circulation (economists call this velocity) in the real economy, creates inflation. You see if the creation and circulation of money was perfectly in line with the growth of the economy than there would be no inflation. The real problem is that the growth in monetary supply has far outstripped the growth of Western economies. Indeed there is a compounding effect of inflation.
But yeah, I can understand that this material may seem unbelievable... I have included a URL to a YouTube video where a Bank of England (the central bank of the UK) representative actually says in no uncertain terms that commercial banks create most of the money in the economy.
The important passages are:
"...banks create additional broad money whenever they make a loan"
"Now, while this is nothing new, it's sometimes overlooked as the main way in which money is created and it runs contrary to the view sometimes put forward that banks can only lend out deposits that they already have."
"In fact, loans create deposits, not the other way around."
Source: https://www.youtube.com/watch?v=CvRAqR2pAgw
I've tried my best to quickly find Fed resources but these facts seem to be obfuscated or not officially made available.
For further information see the following:
Werner, R.A. (2014). Can banks individually create money out of nothing: https://www.sciencedirect.com/science/article/pii/S105752191...
McLeary, M., Radia, A., & Thomas, R. (2014). Money creation in the modern economy: https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...
I wish I could upvote this more. If only the majority of people understood this basic fact.
I wish more people understood that most of the time wealth is transferred, not destroyed.
While this is technically true (at least for some interpretations of "inflation"), it's important to realize that the wealth transfer effect you describe still occurs in this case. The only way it would not occur is if the newly created money was distributed exactly in accordance with the current allocation of money: in other words, if the economy grows by 1 percent, every current holder of a dollar gets a penny. But of course that's not how money creation is actually done.
If you are so convinced this is true you should be a rich in a couple years.
Be very careful betting on the market going down. You not only have to be right, you have to be right soon enough.
Saying 'at some point in the future prices might be lower' without a time attached to it is an intellectually empty statement.
[0] https://www.marketwatch.com/story/help-my-short-position-got...
All that's assuming that Bernanke is right both in direction and in timing. It also assumes that interest rates will do the usual thing this cycle which, given the strange stuff that the government is doing to intervene, may not be a good assumption.
Note well: I am not a financial advisor, and this is not investment advice.
Trump would love lower interest rates but the Fed, tends to run itself without much political influence. These people are all "adults" and very accomplished and knowledgeable.
They set the FED rate and everyone else falls along. They have been actively raising rates, with more rate hikes expected in this year to cool inflation, and the economy by extension.
At the very least the US will have some wiggle room to lower rates when the economy slows down again.
While true, one of the lessons from 2008-9, and part of Bernanke's point, is that monetary policy alone can't always accomplish the task. If we use up all the extra fuel in the run-up to a rough patch, we risk not having enough to get us out of the rut ahead.
Go back to 2008 and look at their policy and meeting. The fact is that they were talking about HIGH INFLATION in the meeting in late 2008.
They did not lower interest rates to zero and had a policy of sterilization (selling bonds to buy troubled housing assets, instead of buying the troubled with new money).
The did not even deliberately end this policy, the market forced them because they were running out of T-Bonds. Later the called this 'QE1' but it was not really QE, it was them preserving a minim of T-Bonds (and that's their own account).
While they did go on to do QE1/QE2 they also payed interest on reserves to prevent that money from creating more inflation. And this was very deliberate policy, they explicitly said 'We are doing this to prevent the money from going out'.
The fact is that while nominal income collapsed in 2008 the Fed did nothing while the economy collapsed, like Nero in Rome.
How can you claim that a bank that can print infinite amounts of money could not do anything against this:
https://oregoneconomicanalysis.files.wordpress.com/2011/10/n...
Friedman, Bernanke and many others have written about how the central bank could do much at the zero bound and other countries like Switzerland showed that this is true.
The Fed failed as a institutional because they didn't plan for 0% interest, not because its impossible to do anything.