Comment by qnt | Hacker News Reader

Comment by qnt | Hacker News Reader

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One of Keynes' major contributions was to _convince_ that aggregate demand was a strong influence on economic output, and that left to its own devices the private sector would not be willing or able to perform the countercyclical spending necessary to stabilise an economy during a recession (by stabilise I specifically mean increase output back to the long run productive capacity of the economy). GDP = aggregate spending = aggregate incomes. With such a large output gap unable to be restored by the private sector, you end up in a depression. So he convinced governments to expand the federal deficit in order purchase goods & services from the private sector in sufficient quantity to kickstart economic output.

So I think to say that he simply affirmed that aggregate demand exists is underselling his contribution - he managed to convince all the important policymakers of the time that it was important enough to overturn their prior thinking about how to use fiscal (not monetary) policy in a countercyclical manner.

The scare quotes around money printing don't help progress the dialogue around the mechanics and consequences of government spending either. Today with a fiat currency system, the government can enact countercyclical fiscal policy by simply crediting private sector accounts, and increasing a balancing government liability electronically (note there are _no taxes involved in doing this_). No money is 'printed' (the term conveys unrealistic connotations), private sector demand deposits are simply increased electronically.

The increase of these demand deposits is not inflationary unless they are used to purchase goods and services in excess of what can be supplied at a constant price level. So when we find ourselves in a situation where 20% of the workforce is suddenly unemployed due to a shutdown of economic output, the government can spend to help stabilise aggregate incomes without risking inflation, because no-one is buying stuff otherwise (and as a result, no-one would be making any income).

It is certainly true that a number of economic schools of thought have tried to use his name to legitimise their ideas, and he'd likely be disappointed with a few of them.

> when we find ourselves in a situation where 20% of the workforce is suddenly unemployed due to a shutdown of economic output, the government can spend to help stabilise aggregate incomes without risking inflation

The root problem with printing money is not inflation, it's wealth transfer. Printing money, whether it leads to inflation (increase in average price level--note that this usage of the term "inflation" is itself a product of Keynes, its older and more proper use was "increase in the quantity of money") or not, always means a transfer of wealth from whoever does not get some of the printed money to whoever does. In other words, it is a transfer of buying power.

In the current situation, where the transfer is spread widely across everyone and has the explicit effect of compensating people for loss of income due to no fault of their own, it is hard to argue that the transfer is a bad thing, and it won't cause much economic distortion or misallocation of resources because the printed money is going to be spent on much the same things as the lost income would have been spent on anyway. So the buying power is being used for much the same things as it was before.

However, in most cases of printing money, the transfer is very different. The way the US government has been doing it basically since the Federal Reserve existed, it is a transfer from everyone who is not a financial institution, to financial institutions. This causes serious economic distortion and misallocation of resources, because it significantly changes what the buying power is used for. That is why, for example, we have McMansions galore in the US and newly constructed office space sitting empty for years in many metro areas, while we also have many ordinary citizens having trouble making ends meet, crumbling infrastructure, and underfunded basic services: because printing money and giving it to financial institutions redirects buying power to housing purchased with mortgages and commercial construction funded with loans, instead of what the people whose buying power has been transferred away would have spent it on.

>it is a transfer from everyone who is not a financial institution, to financial institutions

I don't understand what this means. Aren't the victims you are imagining the hypothetical people who have large amounts of money in checking, savings, or literally under their mattress? And maybe this is ignorant, but I really didn't think that was a significant segment of the population.

I've read comments like yours a million times before, so I know your take isn't unique or novel, I just have never understood it at all.

I guess I can interpret you as talking about say inflation in the 1970s, but at this point that seems like ancient history and moot.

> I don't understand what this means

Suppose you have ten people and the money supply is a hundred dollars, of which each person has ten. And then suppose you print ten more dollars and give them all to person #10, so that person now has 20 dollars. That is equivalent, economically, to keeping the money supply the same but taking 91 cents from each of the other 9 people and giving it to person #10: in both cases, person #10 now has 2/11 of the total money supply, and persons #1 through #9 each have 1/11. And that means their respective fractions of the total buying power have changed the same way, since the buying power of money is the fraction of the total money supply that that money is equal to. So person #10 can now buy more of the things he wants, and everyone else can buy less.

In the case of the Federal Reserve printing money under normal circumstances, person #10 is financial institutions and persons #1 through #9 are everybody else.

> Aren't the victims you are imagining the hypothetical people who have large amounts of money in checking, savings, or literally under their mattress?

The "victims" are everybody who isn't getting some of the printed money. The fact that they already have other money doesn't change the fact that they lose buying power. Nor does it matter where their other money is stored. It could even be in assets like a 401k; as long as the assets are denominated in money (your 401k balance is in dollars), the buying power they represent is affected.

> I really didn't think that was a significant segment of the population.

Everybody who doesn't get new money the Federal Reserve prints under normal circumstances is almost all of the population.

>as long as the assets are denominated in money (your 401k balance is in dollars)

This seems to me like saying that if the size of an inch shrinks, things measured in inches will too. I mean, for the sake of argument, maybe they will shrink and maybe they won't, but the choice of inches vs. cm can't affect that; it's extrinsic. This sounds very much like something I've read for decades, that it matters greatly if oil is denominated in dollars, and it's made no sense to me in all that time.

>Everybody who doesn't get new money the Federal Reserve prints under normal circumstances is almost all of the population

People complain about stagnating real wages, but I'm unaware of exponentially declining real wages, let alone the same happening to investments, as you mention, like 401(k)s. I don't see how the details matter; if there was significant wealth transfer from almost everybody, then it would be obvious.

I think you are saying that somehow, in emotional terms, the banks are a vampiric drain on the economy. But how are they doing that? If they somehow make money vanish, then doesn't that mean it isn't circulating and causing buying power and inflation? In which case how can it matter? If all the excess money is being hoarded by a tiny number of people who are not spending it, isn't that protecting us from the ravages of inflation? If I have a trillion dollar coin, regardless of where I got it, it's nothing, unless someone takes it seriously when I say "please make me 10 aircraft carriers".

The idea that financial institutions possess all wealth is so weird I'm not sure I can believe anyone believes it. You can look up how much they are worth, would you say that the published figures are misleading, or do you think that regular public financial companies and banks are vastly outweighed by other entities?

> This seems to me like saying that if the size of an inch shrinks, things measured in inches will too.

No. Read my example of the ten people again, carefully. I don't think you have grasped it yet.

> People complain about stagnating real wages, but I'm unaware of exponentially declining real wages

I have said no such thing. I have no idea where you are getting this from. I have said nothing whatever about wages.

> if there was significant wealth transfer from almost everybody, then it would be obvious

It is obvious. See further comments below about McMansions, etc.

> I think you are saying that somehow, in emotional terms, the banks are a vampiric drain on the economy.

No. I am saying that the government is favoring financial institutions over everyone else by printing money and giving it to them. That does not mean financial institutions in themselves are not necessary. It just means they are being favored by the government, and this has negative effects and should be stopped. See my post in response to qnt upthread about misallocation of resources.

> If they somehow make money vanish

I have said no such thing. Where are you getting this from?

> If all the excess money is being hoarded by a tiny number of people

I have said no such thing. You are reading a lot of things into my post that are not there.

The financial institutions are not hoarding the money the Fed prints and gives to them. They are using it to make mortgage and commercial real estate loans, because that is what they are allowed to use it for under current policies. Which in turn means more economic incentive for people to produce things that can be bought with those loans: McMansions and commercial real estate, well beyond the amount that would actually be bought in a free market with no government interference. And, as a result, we have, as I said, McMansions galore and empty commercial real estate all over, while other things that people need or want more are unnecessarily scarce, because the economic demand that would have motivated people to produce them has been taken away and transferred to financial institutions.

> The idea that financial institutions possess all wealth

I have said no such thing. I have only said that when the Fed prints money and gives it to financial institutions, that is economically equivalent to transferring some wealth to them from everyone else. I have never said it transfers all wealth to them. I have not even said it transfers most wealth to them.

> The financial institutions are not hoarding the money the Fed prints and gives to them. They are using it to make mortgage and commercial real estate loans, because that is what they are allowed to use it for under current policies.

Again I think there’s a misunderstanding of monetary operations that lead to these conclusions. Banks absolutely do just sit on these reserves [1]. Banks do not lend reserves, nor do they need reserves or deposits in order to make new loans. Bank lending is constrained by the demand from creditworthy borrowers, and regulatory requirements. This [2] is a useful primer on modern lending mechanics

[1]: https://fred.stlouisfed.org/series/TOTRESNS

[2]: https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...

> Banks absolutely do just sit on these reserves

They have been to a much larger extent since the 2008 crash, yes. But not before that, as the graph you reference shows. What I am saying is by no means limited to the time after 2008.

> Banks do not lend reserves

There is a minimum reserve requirement, but for virtually all banks it is minimal--3% last I checked.

> nor do they need reserves or deposits in order to make new loans

They absolutely do depend on central bank policy, precisely as your second reference says: "The amount of money created in the economy ultimately depends on the monetary policy of the central bank."

What your reference is describing is not in any way inconsistent with what I said. It is simply describing the details of how the process works. Yes, the official line is that the banks create money by making loans. But how much money they are allowed to create this way is determined by central bank policy.

Also, the very fact that banks can create money this way, whereas you and I can't, is government favoritism of the banking system. In a sane economy, banks creating money out of thin air by making loans would be illegal, since it would be considered as what it is: counterfeiting money. But in our insane economy, this practice (fractional reserve banking with maturity transformation) is considered completely normal: notice how your second reference treats the idea that banks would only lend out money that is given to them as deposits as a quaint old-fashioned misconception, instead of obvious common sense.

This is ‘Quantity Theory of Money’, or modelling money as a kind of commodity. I think it is dangerous because it is intuitive, but empirically useless. Fiat currency cannot be thought of as a commodity, rather it is a token or unit of account.

I take what you say as ‘losing buying power’ to mean that a lower quantity of real goods and services can be purchased for the same amount of currency. There isn’t any evidence that this has happened following the Fed’s QE programmes, despite most mainstream economists freaking out about the same point at the time.

The creation or destruction of dollars has no bearing on the purchasing power of the dollars held by anyone else. It is only when new dollars are used to make purchases in excess of existing supply constraints that you create inflation and erode the purchasing power of the currency. That is not to say it is a useless metric, but you need to look at what is being done with the money rather than just looking at the amount outstanding.

Japan is an interesting example of this with 30 years of history to look at. Money supply has expanded by multiples, while consumer prices have remained constant since the mid 1990s.

I also think this fundamentally misrepresents the mechanical operations taking place when the federal reserve “prints money” (guessing to mean QE). They are simply creating dollars to purchase bonds from the private sector - it is essentially an asset swap. The financial institutions give up their bonds, and gain dollars in return. No new money is injected into the private sector by doing this. The dollars that the banks receive usually just sit in their account at the federal reserve, not doing anything in the real world. Your examples would be more valid if discussing government fiscal stimulus programmes, for example spending $2T on infrastructure, since that is a direct injection of nominal wealth to the private sector.

> ...a lower quantity of real goods and services can be purchased for the same amount of currency. There isn’t any evidence that this has happened following the Fed’s QE programmes, despite most mainstream economists freaking out about the same point at the time.

AAPL in feb ~$320 AAPL today ~$385

TSLA in feb ~$900 TSLA today ~$1500

Inflation is not equal across all sectors of the economy, is a transfer of wealth that disproportionally benefits some.

> I take what you say as ‘losing buying power’ to mean that a lower quantity of real goods and services can be purchased for the same amount of currency.

It's not a matter of quantity, it's a matter of which goods and services get bought. Shifting buying power means shifting demand, which means shifting the economic incentives for producing goods and services. In the case of the Fed's QE, which gave printed money to financial institutions to back mortgage and commercial construction loans, the result was to shift production of goods and services into those sectors and out of other sectors. Hence, as I said, McMansions galore and empty commercial real estate all over the US, while at the same time other things that many people need or want are in short supply.

> The creation or destruction of dollars has no bearing on the purchasing power of the dollars held by anyone else.

Yes, it does. See above.

> you need to look at what is being done with the money

Exactly. And when the government plays favorites by printing money and giving it to particular entities, the wrong things get done with the money: too much of things that people don't want or need, not enough things that people do want or need. In short, misallocation of resources, resulting in waste and unnecessary scarcity. The historical evidence for this is massive, going all the way back to at least the Roman Empire.

Your example is backwards; the McMansions, oversupply of CRE, TARP and the rest of the 2008 fiasco was the result of private sector speculation. Private sector misallocation of credit, not public sector.

Look at US private home starts [1] for example. All the misallocation was done well before QE started, and no-one was building new homes for years following the Fed MBS purchases.

[1] https://fred.stlouisfed.org/series/HOUST

> the McMansions, oversupply of CRE, TARP and the rest of the 2008 fiasco was the result of private sector speculation

Enabled by a combination of the Fed printing money and giving it to financial institutions for mortgages and commercial real estate loans, and Federal government policy requiring financial institutions to give loans to people who would not normally qualify for them, in the name of expanding home ownership.

> Private sector misallocation of credit, not public sector.

There certainly was private sector misallocation of credit, but it was enabled by the above policies plus the belief on the part of the private sector financial institutions that, if push came to shove, they would get bailed out and the loss would be put on the taxpayers, not them. Which is exactly what happened.

> I don't understand what this means. Aren't the victims you are imagining the hypothetical people who have large amounts of money in checking, savings, or literally under their mattress? And maybe this is ignorant, but I really didn't think that was a significant segment of the population.

Yes, they are the victims. They are not a significant segment of the population any more because of the current monetary policy focused on perpetuating artificial demand. Interest rates near 0, constant inflation, and maybe even assets hyperinflation have contributed to decimate not only savings but savers. Now you are a fool if you keep any considerable amount of money in the bank beyond living expenses. This did not use to be the case.

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