The next recession

This is called the Law of Rent. Land prices function like monopoly prices, and rise whenever the value obtainable from the location rises compared to the best available rent-free alternative. Seeing how there's usually no rent-free alternatives, prices tend towards the entire value obtainable from the location for an average consumer.

For instance, the value of the location may be money and time saved on commuting. You'll generally find that the money and time you save on commuting about equals the higher land rents, netting out to no monetary benefit between the two options.

If you define a major city as > 1mil, then nearly 10% of the US population falls into that category. That doesn't include cities, like Portland OR, which are notorious for artificially capping housing. So it's likely to be closer to 20-25% (or more) of the US population.

1. http://worldpopulationreview.com/us-cities/

This is actually inherently necessary and the fact that the government hasn't been doing it more has been the cause of the debt crisis.

Money is created both by the government (directly) and by banks (whenever they make loans with less than 100% reserves, i.e. whenever they make loans). As the economy expands, the money supply needs to increase with the demand for currency to use for transactions, or there would be deflation (very bad).

When that money is created by banks, it necessarily leads to an increase in outstanding debt. And paying the debt back destroys the money that was created by borrowing it, so the only way to maintain the money supply at that level without the government creating any is for the amount of outstanding debt to never go down. Which, of course, means that it only goes up.

If you print unlimited money at some point it causes inflation, especially when people use it to buy stuff. But if, instead, they use it to pay down debt -- which is what happens when people have a high debt load -- all it does is replace the bank/debt money with the government money.

Which is actually really healthy, because it it gives people the few bucks back in interest-not-paid on the debt they no longer have. That has a much smaller immediate effect on prices (interest-not-paid per year is only a fraction of the principal paid down), but a very beneficial long-term effect because it leads to more wealth in the hands of people rather than lenders.

It also has immediate positive knock-on effects because with less debt, people are more financially stable. If you're leveraged to the hilt and an emergency comes up, no one will lend you anything more. You also pay lower interest rates if you can e.g. make a bigger down payment, which reduces the lender's risk (the asset is worth the whole loan amount even if it depreciates some), enhancing the positive outcome of people paying less in interest.

It did create inflation, and basically offset the natural tendency of the market. The fact that the money was inserted directly into the capital markets, instead of the consumer market probably caused a huge loss of efficiency on the deflation containing goal, a bubble at the capital markets and the requirement of collecting the money back once it starts flowing in a non-controlled fashion into the goods. All that probably caused some instability down the line, but the US seems to be dealing with it just fine.

Before QE, central banks mostly influenced the market via interest rate targets. If the "market" rate is higher than the "target" rate, that means printing money to buy debt in the market). (And before interest rate based policy, some central banks explicitly targeted money supply measures).

QE extended that from short rates (overnight secured) to long rates (long-dated government bonds at first, then other high quality collateral), because once short rates were near-zero all they could do was to target long rates (well, some central banks have experimented with negative rates but I think the jury's still out on whether that's really worth trying or not).

The thing is, that's not what people (at least used to) mean when they talk/talked about "printing money".

"Printing money" is normally shorthand for "printing money to give to the government to spend". This is generally viewed as "bad" because if government simply prints money to finance itself then it suffers none of the short term negative political or practical consequences of doing so via taxation. This means it also faces comparatively little pressure to spend efficiently, which results in serious misallocation of resources over time.

It is only a short step from QE to "printing money" in the "government spends it" sense though, and some central banks have gone at least some way down that path. If the central bank provides a significant bid into auctions of government bonds, either directly or because market participants know the central bank will immediately purchase bonds in the secondary market at a known, or fairly easy-to-guess price, then the government is really financing itself by selling to the central bank who is printing money.

It still has to pay interest, but it's no longer worried about being unable to raise the money, or the impact raising too much money will have on the rate of interest it pays.

But it can also absolve itself of responsibility for paying the interest bill, by giving the government a claim over the "profits" made by the central bank, including interest income on its government bond portfolio. So the government pays interest to itself on bonds it sold to the central bank. Some governments/central banks have done this.

That only leaves the government concerned about principal repayment, and the theoretical view that QE is temporary and will be wound down still constrains behaviour here.

As a separate point though, I don't think QE is the sole cause of the asset bubble we're arguably experiencing. I'd put much more blame on the ultra-low short rates of "conventional" policy personally. QE being withdrawn is much less of a problem than short rates going up for that.

Historically, negative real returns on stores of value were the norm. Before financial systems existed, almost all investments had negative returns if you didn’t put work and energy into them. To store value, you had to accumulate stuff, buildings or land. Most options either had high maintenance costs, were subject to risk of damage from natural causes and theft, were very volatile or required hard labor to get production out of.

Even in societies with financial systems, getting low risk, hassle free, liquid, positive real returns has been difficult for most of history. This just reflects the natural laws of thermodynamics that tell us that everything tends to decay without a constant supply of work and energy. In general, most things require maintenance to keep their worth.

The 20th century was probably the most notable exception. Because of unprecedented demographic and technological growth, positive risk free real returns were easy to find. The recency effect probably explains some of the confusion people have about this. It is possible that under favorable conditions, wealth can have positive returns and even compound into very good long run returns but it is not a guarantee and there is nothing natural about it. It may not continue forever, particularly amidst an aging and retiring population in a world no longer as rich in easy to exploit natural resources.

While people are used to get negative returns on very short term purchases, you buy fresh vegetables at the supermarket, even if they degrade over time, many can’t seem to accept the normalcy of negative returns on longer term assets. In nature, squirrels’ nut caches have a certain percentage of losses from theft and spoilage. Real returns tending towards the negative is natural even if they can seem unusual for people just out of the 20th century.

Of course, the danger always was whether they could unwind in without making a mess. They seem to be doing well so far.

No, it isn't. Print enough and the currency fails. The lesson has to be learned over and over again, in part because there is an endless supply of deniers whispering magical thinking into the ears of the powers that be.

QE didn't lead to this only because they stopped. That time. We're still left with the precedent however; giveaways like "cash for clunkers," bailing out UAW and public sector pension funds... all those supposedly "good" things done with magic money from Washington, enabled in part by QE funded deficit spending.

What evidence can you cite that they won't turn to QE again to try to paper over whatever bump in the road comes next? What assurance do you have that they'll stop printing next time?

You don't have either. That's why it's a question.

QE did lead to rampant inflation in asset prices (housing, shares, etc.). It just didn't lead to rampant inflation in consumer goods.

That's purely because of how it was "spent" (on buying up treasuries). If it was spent on actual goods and services then it would have kicked off inflation in consumer goods instead.

Many people also saw a recession coming, because recessions always come eventually - it's a normal part of the economic cycle.

Relatively few people saw that these two things would result in many of the largest financial institutions on the planet coming near to collapse.

Even fewer people got the timing right. And not many of those had the courage of their convictions to actually place bets on it.

Because in the UK prices didn't fall, but the requirements for purchase became significantly more difficult.

There are always lots of reasons to be concerned, lots of leverage that could crash catastrophically (and often does). Whether that triggers an actual recession or just a correction is the nebulous part. I mean, the S&P is down ~6% over the last 5 days. Are we at the start of a recession right now? Would you be willing to actually bet money on your answer? For the people who do: Are they just lucky, or actually insightful? How would you know the difference?

People have always worried about politics interfering with recession recovery - I mean, hell, a big part of the tea party's agenda was opposition to TARP and ARRA (I'm not going to go so far as to say that's WHY the tea party exists, though). Not to be too politically cynical, but I think it's fair to say that politicians will do everything within their power to protect the wealthy and the status quo and any opposition to that will be for show.

They aren't though. Also, it's a bit rich to blame economists when all they do is advise politicians who very often throw all the advice out the window.