Can anyone explain what this means for a noob?
We haven’t hit target inflation, because labor costs have been resisting upward pressure due to underemployment. The fed thinks it can paper over structural problems with cheap money, resulting in capital asset price inflation and increased wealth disparity...furthering barriers to real wage growth.
That is only true when the President has an (R) next to his name. (D)-type Presidents do not enjoy this privilege from the Fed.
It's doing great if you ignore budget deficit, multiple debt balloons (national/municipal/auto/student), and looming trillions of unfunded liabilities. What could possibly go wrong?
The problem is finance is by far the largest sector of the US economy, so when you look at aggregate GDP numbers, the US economy looks great because the modest gains in finance are more than compensating for the huge reduction in output in the smaller sectors. It's the same story for the stock market: the market cap of the stock market is heavily weighted towards technology stocks, which is compensating for the poor performance in lagging sectors.
Real income/wages are flat, the many tariffs and economic policy choices made by the current administration has slowed if not stopped manufacturing (steel tariffs especially), the rate of auto loan defaults is at a record high (see 2008 mortgage crisis), and worse. Adding $1 trillion of debt per year is insane and would send 2008-2016 debt hawks into a tizzy yet the current admin vastly increased the deficit over the previous administration. Most of this is tax cuts from the 2017 bill which disproportionately go to corporations and super wealthy. Tax cuts for corporations do not expire whereas those for citizens will sunset. These tax cuts have led to massive stock buybacks which artificially buoy the stock market (which is why it's the only 'good' thing about the economy as a whole right now).
The best news of each monthly job report, jobs gained, has been rolled back by later reports allowing the administration to trumpet growth and improvement but leave out how off the numbers really are each cycle. Also, most of the 'new' jobs are part time, low wage, low skill, or gig economy work that often doesn't pay a livable wage or is a supplement to another low paying or part time job. That pattern does not lend itself to a strong, robust economy but can create a short term projection that appears so.
We recently hit a known recession indicator where the Treasury yield curve inverted. An inverted yield curve occurs when long-term yields fall below short-term yields like when 1 year bonds have higher interest than 10 year. usually the long term investment has higher returns except when analysts or brokers predict a crash is coming. Since this metric was tracked, we have entered a recession within 24 months every single time the curve has inverted. This includes the negative bond rates we saw after 2008. Today we might be paying too much attention to this indicator for it to still work that way but it's still important.
For all intents and purposes, the Trump economy is not good, flat, and falling. We may see a massive correction once stock buybacks end or are banned, corporate taxes are raised by a liberal congress, or any number of policy changes. Manufacturing is set for layoffs and reductions through 2020 (see US Steel closing sites in Michigan) and I'm personally saving for a down payment on a house when the market crashes in my area.
I'm curious, what indicators are you going off to think they 'all' suggest the economy is strong? It may be your sources are lying by omission or spinning information to look good when it isn't a real representation of the economy, like pointing to stock market highs that mean almost nothing. We've crossed 26000 in the Dow averages like 5 times in the current admin, that isn't stable at all but a pattern of rise/fall boom/bust that is not sustainable.
I do not seem to find confirmation to the above.
Instead there seems to be slight growth in hourly earning, according to this
https://www.bls.gov/news.release/pdf/realer.pdf
(page 5, Jan 2020):
- Dec 2018: +1.3
- Oct 2019: +1.3
- Nov 2019(p): +1.1
- Dec 2019(p): +0.6
Mar 2019: -.3
Apr 2019: -.2
Oct 2019: -.2
Dec 2019, -.1 (noted as a .1 lift but a .2 CPI increase to offset to -.1)
Other sources do show a low growth rate vs a flat line, but it is still much slower than before the 2008 crisis: https://www.bls.gov/news.release/realer.nr0.htm
"From December 2018 to December 2019, real average hourly earnings increased 0.7 percent, seasonally adjusted. The change in real average hourly earnings combined with a 0.6-percent decrease in the average workweek resulted in a 0.1-percent increase in real average weekly earnings over this period."
A .1% real average weekly earnings increase YoY is hardly worth writing home about and more a sign that something isn't working for most Americans. It's basically flat.
you will see exactly the numbers I have posted.
I think you are looking at >".. Real average weekly earnings decreased 0.2 percent over the month due to the decrease in real average hourly earnings combined with no change in average weekly hours. Chart 2: Over-the-month percent change in real average hourly earnings for production and nonsupervisory employees, seasonally adjusted, December 2018–December 2019 ..."
Factory output will slow. And this will affect the entire nation’s export engine to the world, and including the US.
How do you think this will affect the stock market? It kept going up in a straight line, until the coronavirus outbreak, and then SPY fell 10 points off.
Sort of. It was a swapping of short term liquidity for assets across the curve. Which is why it was fundamentally different from what the FED is doing today.
"which is why it wasn't noticeably inflationary any of the times it was done"
This is quite a strong statement. I would disagree. My model says it was inflationary. The counterfactual is "what would the inflation/deflation rate be in the absence of QE all else being the same?". Such counterfactuals are hard to come by, which is why this is such a dismal "science." At any rate, it cannot be denied (IMHO) that actual QE depressed interest rates available to economic actors.
https://www.fxstreet.com/news/kudlow-feds-t-bill-purchases-a...
I agree that counterfactuals are almost impossible to know in economics, but if predictions on one side repeatedly turn out wrong, then that side is probably wrong.
You can find innumerable doomsayers that predicted hyperinflation, and a loss of faith in the dollar and bonds. All of those people were completely wrong, and in fact the dollar strengthened, yields plummeted, and consumer prices were stable.
https://fred.stlouisfed.org/series/BOGMBASE
QE has not caused excess inflation in terms of the consumer price level, but it has dramatically increased the price of interest-rate sensitive assets like real estate, equities, and bonds.
https://www.federalreserve.gov/monetarypolicy/bst_recenttren...
Would you say this is now the new norm? Or something that will come and go as the trends change in the repo markets?
So yea if U.S. government debt is defined as money, then I guess the U.S. government buying its own debt back with printed money is just "swapping assets". Surely however there are implications of a country indefinitely buying back it's own fiscal debt with printed money, even if they tend to be exaggerated since we're not exactly seeing hyperinflation now.
The dollar's dominance is slowly weening as Iran now sells oil to China using the Yuan. The IMF also has a potential replacement reserve "currency" called Special Drawing Rights (SDR). Though it's not technically a currency but instead it's more an index based on basket of currencies. That basket includes US Dollars, Japanese Yen, the Euro, Pound Sterling, and most recently the Chinese Yuan.
Although the Libra Wikipedia page indicates that idea has been deprecated:
> As of January of 2020, Libra is said to have dropped the idea of a mixed currency basket in favor of individual stablecoins pegged to individual currencies.
https://files.stlouisfed.org/files/htdocs/publications/revie...
The ultimate effect is an increase in the money supply just like normal expansionary Fed operations, just through different means.
Also QE1 and QE2 involved the Fed buying "non-traditional" assets like mortgage-backed securities that were toxic at the time and some of which "fade away" over their lifetimes (e.g. an MBS is not worth anything once all of the loans composing it are paid).
Fortunately it's boring and complicated which is a built in guarantee that a large percentage of people will never care about it.
"...recipients of new money enjoy higher standards of living at the expense of later recipients..."[0]
[0] https://en.wikipedia.org/wiki/Richard_Cantillon#Monetary_the...
+50 internet points for you!
Stocks go up and down. When the whole reason that stocks go up is because a arbitrary number inside the fed and treasury databases went up, I'd argue that move up probably won't last forever. If you time the market then maybe you could profit off of this. Timing the market is hard, even when you can see the bigger picture.
But no, the .01% are the PE people who are using this imaginary money to transfer possession of real assets to themselves with 0 interest loans which will be subsidized as "too big to fail" in the event the whole scheme doesn't work out and the executives who are buying their own stock with the money to trigger their own 7 and 8 figure incentive packages before the scheme collapses then further triggering their golden parachutes.
You aren't the smart money here (neither am I).
If your equities are going up 10% a year but you only have $20k in the market, but make $100k in salary, and your salary growth is falling behind the cost of living, you're not doing well, particularly compared to the person with $100M in the market and not going to work for a living.
Turns out when you create methods to transfer wealth within a society, whoever has the most power in that society usually uses it to capture wealth. We already have a type of de facto socialism, it's just controlled by the ultra wealthy for their own benefit.
I happen to be in the Hayekian camp that says this isn't really a just a failure to correctly implement socialism, this is an actual property of all socialism. Obviously you could argue that, but this seems to historically generally be true.
I believe that even if a well intentioned Bernie type came in and created a wealth transfer system, over time that system would be captured by the powerful and still end up transferring wealth back to them. You can be guaranteed that at a minimum there will be an attempt to do this.
Ironically, a switch to a more truly capitalistic situation where businesses had to make money in the marketplace instead of rent seeking for conducive fed policy would probably be less friendly to large business interests on average.
You focus so much attention on the Fed you lose sight of the fact that rent seeking would shift from the Fed to the Customer.
The problem is fundamentally tied to conservative investment behavior. Given a rational choice, most people lend money to the people most likely to pay it back which are the same entrenched players the lenders are already dealing with.
Throw in the wage growth stagnation incentivized in order to put on the appearance of bigger growth numbers, and you develop a clot in the flow of money to the labor class, therefore decreased mobility from the labor to capital side of things.
Throw in hyperoptimization facilitated value deserts around rapidly consolidating industries, and you have a perfect positive feedback loop to enable wealth extraction from the middle class, while the capital wielders are scratching their heads wondering where all the new blood is.
Crushed with debt, bled dry by the XaaS revolution, exorbitant uncontrolled healthcare costs, and in a distorted market in which the name of the game is to try to keep people buying for the love of God.
Agriculture is already starting to suffer from over consolidation of the dairy industry since Walmart's vertical integration combined with USDA policies favoring the hyperoptimized industrial farmer over everyone else.
Something has to give. Will be interesting toseewho throws up their hands first; Bankers, Business, the Fed, or Labor.
https://krugman.blogs.nytimes.com/2010/02/13/the-case-for-hi...
> Yet when you have very low inflation, getting relative wages right would require that a significant number of workers take wage cuts. So having a somewhat higher inflation rate would lead to lower unemployment, not just temporarily, but on a sustained basis.
Furthermore, correlation is not causation, but if you look at graphs of when economic productivity diverges from worker compensation (https://www.epi.org/productivity-pay-gap/) the systemic divergence occurs suspiciously close to 1972, which is right after Nixon Shock, when the dollar ceased to be tethered to a neutral third party (flawed though it may be) and began to solely be in hands of policy interests. Yes, the EPI draws the line at 1979, but really? Do we not have eyes?
It's one of many reasons the markets might be going up, along with slow global growth around the world (where else should you put your money?) and potential global instability (Hong Kong, Iran, China; USD still a safe haven).
>artificial stimulus
What is the difference between natural and artificial stimulus?
>why the economy shuffles from bubble to bust.
You see this particular argument all the time, but one look at the data shows that the boom/bust cycles of modern times are few and far between relative to 30,40,50 years ago, and in particular when compared to the pre Federal Reserve days.
Booms and busts happen in every economy, ever, throughout history, with or without central banks.
A one-year $1,000 T-bill means that in one year from the date of purchase, it can be redeemed for $1,000. So if you pay $980 for it, then that means that your effective interest rate is 20/980 ~= 2%.
The Fed wants interest rates to stay low, so they're driving up the price of treasury bonds/notes in order to reflect that. That, in theory, means that financial institutions will prefer to lend to consumers/businesses/etc. for higher yields, rather than put their money into treasuries.
Usually these sell at auction and the Fed buys some of them, but otherwise the market determines what the future value of money will be based on general return on capital.
It is what gold bugs call printing money... or a money drop that goes straight to the leveraged banking system which lends out a multiple of the money from the Treasuries now held at the Fed and earns interest on the full levered amount. That has an inflationary effect, but mostly on financial instruments (stocks & corp bonds) since that's what banks usually buy with their new found money... and the Fed hopes that has ripple (wealth) effects on the rest of the broader economy.
"Investing" when there's nothing to invest in is pointless, and if you hadn't heard, unemployment is near all-time lows; companies are hiring.
Looking at it another way, it’s no different than some guy printing counterfeit US dollars in his basement and using them to buy real assets. The outcome is the same in either case - the counterfeiter and the government both get to spend newly created money while simultaneously devaluing of the purchasing power of the dollar for everyone else.
The government regularly spends more than it takes in from taxes by issuing bonds. People buy the bonds because the US government is considered quite safe. That in turn lets the government spend money, which ultimately makes its way into the economy as a whole. People use that money to hire workers, buy stocks, etc, making the economy look good.
But the Federal Reserve Bank has the ability to invent money for buying those bonds out of thin air. That means the bond prices stay high (and the interest rates low). That implies that the current strong economy is an illusion, and that's worrying.
The expected response of extra money being pushed into the economy without added value is inflation, and the inflation rate has crept up over 2%[1]. It's actually a little surprising that it has taken this long, since this is actually something they've been doing for over a decade. There is considerable debate about that, but it may be that the inflationary chickens are finally coming home to roost -- in which case things might get real bad real quick.
tl;dr: this indicates that the economy may not be as strong as we think, caused by economic manipulation by the Federal Reserve to make the economy seem stronger than it is.
The government never retires, and never has to pay off its debts. That gives it a lot of leverage, but it also obligates new citizens to a share of the debt as soon as they're born. Your parents can't pass their mortgage debt to you, but they do pass on their share of money that the government has borrowed.
So the government can safely borrow money, but at some point it will accumulate so much debt that people begin to doubt its ability to pay it back. Whoever is left holding the bag at that point will be in very deep trouble.
I don't know what point that is. Interest rates are still low, so the answer appears to be "not today" (and "not imminently"). But the article points out that the low interest rates may be something of a false indicator.
So as you say, responsible debt is good. But decreasing revenue via tax cuts, and increasing debt accumulation, at a time when the economy appears to be booming doesn't appear to be responsible. It reduces the ability to borrow in the future, at precisely the time you could be increasing that ability by paying down old debts. Especially if you're then covering it up by borrowing in a way that's hard for people to see.
Currency issuers can always pay any debt denominated in the currency that they issue. It is literally impossible for a currency issuer to be forced to default.
"But decreasing revenue via tax cuts, and increasing debt accumulation, at a time when the economy appears to be booming doesn't appear to be responsible."
That's a sane position, but the argument against a Federal Balanced Budget Amendment comes from the opposite case. You want the capability to deficit spend during recessions. The Federal Balanced Budget Amendment forces you to make the wrong decision of cutting spending during recessions, driving the nation deeper into recession.
When factories are idle and unemployment is high, it is vicious to claim that the best policy is to choose to throw more people out of work. Federal spending should be explicitly countercyclical.
This is straight up nonsense. All currency issuers have the ability to spend which is skew from their need to tax. Taxes do not fund Federal spending. Taxes destroy money, and thus control inflation. That is a fundamentally different role.
https://www.bradford-delong.com/2013/04/abba-lerner-1943-fun...
The rules are different for Currency Issuers (nations with a fiat currency) versus currency users (citizens, provinces, and nations on the Gold Standard).
For the United States, which is a currency issuer, Congressional appropriations create money. Taxes do indeed return money to the government from the private sector, but there is no need to claim that money is "recycled" for spending purposes.
Revenue is an obsolete concept for currency issuers.
> For the United States, which is a currency issuer, Congressional appropriations create money.
What is your basis for claiming that this is true?
> Taxes do indeed return money to the government from the private sector, but there is no need to claim that money is "recycled" for spending purposes.
Are you saying that it isn't recycled? If not, what do you think happens to it, and what is your basis for claiming that it is true?
> Revenue is an obsolete concept for currency issuers.
Only if you want staggering amounts of inflation. It is true that a currency issuer can just issue more money, and therefore could survive (short term) with no tax revenue. But that debases the currency, and in the end destroys it.
And, I'm going to need to see better answers to these points than "But MMT says it's true!"
[0]: https://www.wsj.com/articles/the-fed-is-buying-bonds-again-j...
https://www.stlouisfed.org/open-vault/2019/january/fed-infla...
At least it's been true for quite some time:
https://www.thebalance.com/what-is-the-value-of-a-dollar-tod...
It seems all invested parties are budgeting at least 7% annual growth in asset prices, from the government's pension fund liabilities to people's 401k and IRAs. Since, voters won't like to see their balances go down, the powers that be will do everything they can to prevent it. And in the absence of a growing young population, I don't see many options other than devaluing currency.
This is the modern equivalent (i.e. the vocabulary and implementation means have changed, but not the deed in itself).