I sometimes wonder if these sorts of economic projections end up being self-fulfilling prophecies. If everyone tightens up spending because they expect a recession, that essentially guarantees there will be one.
a few interesting reports: https://www.reddit.com/r/StockMarket/comments/aydpbu/first_h... https://twitter.com/paulkrugman/status/1110161228507348992
I get that the real world more complicated than this, as forecasting can be done for months out, but businesses can't magically fix the economy by continuing to spend the way they have been because it isn't sustainable.
It's when they "physically" can't spend that it starts to slow down (slowing income, access to credit).
I feel awful for those people whose lives have just been disrupted so. I’m particularly empathetic because, as a foster parent, I know very well what may happen to some of those families.
So I sometimes wonder, how do these managers who lay off people sleep at night? I mean they are just doing their job so that THEY themselves don't get laid off. And next I wonder, who are these rich rich people who want more money so that they hire people to lay off other people?
But I guess that's life.
That is part of the reason I took those jobs. Someone was going to do it, and I felt that I could do it in a way that kept the business healthy and was as respectful and careful about the humans impacted as possible (ensuring severance, having 1-1 conversations with every impacted person on my team, etc).
For context I was an executive brought in to restructure software companies after they were purchased or tucked in by the LBO side of a PE firm.
https://www.econlib.org/archives/2013/09/why_dont_wages.html
And it's about how the lower than usual rates it's currently at matter for what it says, which makes sense.
Then I noticed it was Paul Krugman making the observations.
Any prior points I had no longer seem worth adding now. ;)
The banks are secured by the govt which happens to be the biggest debtor to the banks.
Problem being the govt is really the people and when it comes down to it the people are on the hook for their own debts regardless of how it gets paid.
AND we bail out the corporations who spend too much.
I suppose inflation is paying for it, but I get the feelings that the semantics around whether inflation is "paying" for things have changed recently (or maybe I've been hearing too many ardent MMT evangelists).
When we "borrow" money from the Fed it is at interest. We have created a debt based system where everything is a borrow.
Fiat currencies are based on the value of the peoples ability to create value. When the people owe the banks more value than they can generate they are bankrupt. When the people and the govt ( the people ) owe money to the banks to the point they cannot generate enough value to cover the debts what will happen ?
I think we will see soon :)
The same website you linked to has an FAQ page dedicated to clearing up this misconception: https://www.federalreserve.gov/faqs/about_14986.htm
> The Federal Reserve System is not "owned" by anyone. Although parts of the Federal Reserve System share some characteristics with private-sector entities, the Federal Reserve was established to serve the public interest.
> Some observers mistakenly consider the Federal Reserve to be a private entity because the Reserve Banks are organized similarly to private corporations. For instance, each of the 12 Reserve Banks operates within its own particular geographic area, or District, of the United States, and each is separately incorporated and has its own board of directors. Commercial banks that are members of the Federal Reserve System hold stock in their District's Reserve Bank. However, owning Reserve Bank stock is quite different from owning stock in a private company. The Reserve Banks are not operated for profit, and ownership of a certain amount of stock is, by law, a condition of membership in the System. In fact, the Reserve Banks are required by law to transfer net earnings to the U.S. Treasury, after providing for all necessary expenses of the Reserve Banks, legally required dividend payments, and maintaining a limited balance in a surplus fund.
That is like saying any corporation publicly traded yet regulated by the govt is now part of the govt.
Any bank can apply to become a member and buy shares of the federal reserve. They simply are regulated by the govt.
Publicly traded companies area still owned by private people and organizations. The publicly traded nature subjects them to additional oversight, but they're still private enterprises.
Where can I buy stake in the Federal reserve? What was it's stock price history?
We can't because nobody "owns" the federal reserve, just like nobody "owns" the FBI or the Navy.
A corporation with employees becomes a member of the Federal Reserve. The job is to generate money from nothing, and get paid for it.
So as a federal reserve bank you create money, charge for doing so and then you change hats from federal reserve to local private bank and loan that money to the private sector charging profits for doing so.
You charge fees coming and going get salaries for both jobs and have no exposure for doing so.
Bonus if your bank fails you are insured by the people who are borrowing money from you.
And you think they are part of the govt
Here's yet another page from the federal reserve website that explicitly says that it's part of the government: https://www.federalreserve.gov/faqs/about_12799.htm
> The Federal Reserve, like many other central banks, is an independent government agency but also one that is ultimately accountable to the public and the Congress.
It says right there that it is a government agency. Independent, yes, but ultimately accountable to the government. It's leadership is appointed by the government.
we are getting closer.
Now... lets say a company was allowed to buy shares in the govt and be able to act as a govt agency while remaining a private company.
So they contract themselves to do some work, pay themselves for setting up the contract, switch hats then do the work. Bonus if they don't do the job right they simply aren't liable.
They don't "buy shares in the government". I'm not even sure what that even means. Nobody can buy shares in the government because the government isn't a company. I guess you might be referring to government bonds. But those aren't shares, they're contracts to get paid a greater amount when the bond reaches maturity. The whole concept of "shares of the government" is just not valid because nobody owns the government. At least not in the US, there are some monarchies where all government assets are owned by the royal family.
Why does it have to be publicly traded? Corporations are exercises of government power by which people (who may themselves be corporations) are revocably delegated special powers created by government. They are, in a very real sense, aspects of the chartering government.
To the extent that they are permitted to serve basically unconstrained private purposes, that's not because they aren't part of the government, but because of what the hosting society believes about the proper application of government power.
Bonuses and salaries of bankers are quite expensive
It's still a part is the government, just one with extra layers of separation from the executive. Like the FBI.
1. Applications for membership by State banks -- Any bank incorporated by special law of any State, operating under the Code of Law for the District of Columbia, or organized under the general laws of any State or of the United States, including Morris Plan banks and other incorporated banking institutions engaged in similar business, desiring to become a member of the Federal Reserve System, may make application to the Board of Governors of the Federal Reserve System, under such rules and regulations as it may prescribe, for the right to subscribe to the stock of the Federal reserve bank organized within the district in which the applying bank is located.
[edited for formatting]
This is how the federal government made money off the bailouts. Well this and basically looting Fannie Mae and Freddie Mac.
Inflation begins (IMHO) when there's a lot of money in circulation: too much cash chasing too few resources, bidding up prices.
In a bank run, people are taking home bills because they want them to be "safe" in case the bank goes under (never mind FDIC, which most people probably do not understand).
Money sitting under the proverbial or literal mattress is not in circulation, and not going to cause the bidding-up of prices.
the thing that changes if the money is under mattresses is that the banks stop having money to lend and invest. I don't know if that creates inflation or not?
In the long run, the injection would need to be unwound when things are back to normal though, or else there might be inflationary phenomena in one form or the other.
It's a tricky maneuver to execute because you're doing it on the broad economy, not specific sections.
But while people are waiting for their cash, if they can still use digital banking, then they will probably stop worrying about it before their cash is actually delivered.
Organisationally, the FDIC might be challenged by massive bank collapses, though it's addresed this in recent past through forced bank mergers.
https://www.fdic.gov/deposit/insurance/assessments/mergers.h...
https://en.wikipedia.org/wiki/List_of_banks_acquired_or_bank...
First, too many people don't have a lot of 'cash' savings. Second, as long as most people's debit and credit cards continued to work, they probably would not notice bank receivership.
Most folks: don't have savings, have a chunk of money tied up in their retirement savings, and another chunk tied up in property/residence.
And the government stepped in, becoming a lender of last resort. And it worked (not well, maybe, but it worked).
Saying "the economy is powered by belief" isn't quite right. Finance is powered by belief and trust. But at the end of the day the "economy" is all the people out there able to work, and they aren't susceptible to bank runs.
It arises out of a recognition that the basis of prior financial obligations on expected return was false.
Options are debt repudiation, inflation, debasement, or collapse.
Everyone when there is an issue, the Federal Reserves stepped in, printed money and bailed them out.
The end result, the financial sector gets bigger and bigger over the last few decades. Privatize the reward, socialize the risk.
The effect of 2009's QE was to couple the full faith & credit of the financial system with the full faith & credit of the government, effectively backstopping the financial industry with the trust that the government had built up over 230 years. This worked, but it was not free. The cost was an erosion of that trust in government, which you see in movements like Occupy Wall Street, the Tea Party, Black Lives Matter, the alt-right, Trump, sovereign citizens, and Democratic Socialism.
As long as things are good, the government (and the financial system) can continue to build up that trust that they spent down in the financial crisis, and we'll have weathered the storm with no problems. Things are still not good for many people. And so the risk is that if there is another crisis in the next few years, while that trust is depleted, the whole society will come crashing down, like Syria or Venezuela. Not just a financial crisis, but a political crisis as well, because the two of them are now coupled in peoples' minds.
Especially if a certain foreign power and its allies act accordingly to Nietzsche's "That which is falling, deserves to be pushed"
Obviously we don't have the alternative universe where President McCain opted to do nothing for comparison. But looking at the economic boom we're living in 10 years out, it's difficult to make an argument that the government's handling of the housing crisis was poor. I have a hard time coming up with an outcome more ideal than what we got.
2008->2018 was a much nicer decade than 1928->1938.
That's why the government stepped in and bought the mortgages from the banks - if the banks had had to account for the losses on those loans it would have brought down the entire system.
Has anyone seen this happen in practice? Any HNer who is management have to lay people off because their executives say “we have no problem getting capital right now but we think it might become more difficult in the future.”
I never quite understood that one. Feels like the churn would be more costly than keeping those contractors onboard for a month.
I've seen full-time employees laid off at one point, given severance, told not to look "too hard" for a new job, companies reported numbers, and hired back the same people in the same roles a few months later.
When the beliefs are overwhelmingly pessimistic, stock prices drop. Why should companies behave any differently with respect to layoffs?
10-20 years ago, maybe. It's now driven largely by semi-autonomous algorithms monitoring swings/trends. I'd argue that it finds a 'simulated' price rather than a 'correct' price. The stock market is much less susceptible to emotional speculation than it used to be, for better or for worse.
A quick google yields multiple articles claiming various percentages for algorithmic vs meatspace trading. Investopedia claims that as early as 2010, upwards of 60 percent of all trading was done by algorithm. That number has risen since as computation has become cheaper. Source: https://www.investopedia.com/terms/a/algorithmictrading.asp
Also, I didn't say it was better. IMO it's probably just as volatile/dangerous. It's just harder to predict as it's not as rooted in actual emotion/speculation.
You don't need to be the smartest person in the room to be good at trading, you just need to know what everyone else in the room is thinking. Algorithms are part of the room now, so they try to predict what other algorithms are thinking.
overwhelmingly as accounted for by head count or size of portfolios?
Interest is basically the adjustment made to value having money now vs having money in the future (how much would I have to pay you next year in order for you to not ask me to pay you now). An interest rate of 0% means $100 now vs some arbitrary point in the future are of equal use to you, which is irrational. Obviously getting $100 now is better than getting $100 in 5 years.
In fairness, interest rates aren't that low. I'm not sure if interest rates equal to inflation would be the same thing as interest of 0% in a 0 inflation world. I'm not an economist.
[1] https://www.usgovernmentdebt.us/federal_deficit_percent_gdp
[2] https://www.reuters.com/article/us-usa-economy/u-s-economic-...
Where does this come from? the 10-year bond rate was closer to 3% for most of 2018 [1].
==So that's a 4x ROI correct==
You can't calculate ROI with an I. In this case, that is the 3.9% of GDP mentioned. Going forward, we may gain more tax revenue than we would pay in debt servicing each year, but that ignores the initial investment we made.
In reality, you would need to show that the present value of your annual tax revenues (0.29% of GDP - 0.076% of GDP) is larger than the 3.9% of GDP invested initially.
[1] https://www.thebalance.com/interest-on-the-national-debt-411...
"3.9% of GDP invested initially" How is this investing 3.9% of GDP? It costs 0$ in investment for the government to issue new bonds. The only way federal debt costs the country is in the interest spent on servicing it. As long as the tax base increases faster than the interest spent on servicing debt (and also accounting for population growth) there is no economic problem with increasing the federal debt.
And again, I am not arguing that the things we are spending the government money on are rational. I think we could do a lot better by cutting military spending and increasing funding for non-military research and infrastructure without deficit spending (which is certainly possible). But technically the current deficit spending is not unsustainable
What if the increase in GDP happened only because you borrowed money and spent it? What if you don't spend an equivalent amount next year, and that increase in GDP went away?
In this case, you want the money borrowed to be paid off completely by the taxation on increased gdp.
Which would be 1.03 * 3.8%=3.914% of gdp (deficit to be paid back next year) to equal 0.19 * 2.9%=0.551% (tax collection on increased GDP) of gdp, which it is very far from. Add the fact that the increased GDP is normally as welfare/income of poor people, which is taxed less.
This of course leads to main question. Is the growth sustainable? If the govt borrowing+spending go away tomorrow, would the GDP not contract? If yes, Then this growth was unsustainable and was debt fueled.