Banks, QE, and Money-Printing
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Western countries have been running fiscal deficits consistently for decades, QE and low interest rates for 10 years. Yet for academics and central bankers the only answer to growth is more debt.
Low interest rates benefit only the asset rich. They deprive everyone else of investment income. They also prevent essential restructuring as zombie companies stay alive instead of going bust.
High housing costs, caused by low interest rates, are causing a demographic crisis in the west. People literally can’t afford to start a family.
Our economies and culture have a skills crisis not a growth crisis.
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Edit: To provide some clarity on the comments below highlighting that housing costs are included in CPI. Each country calculates inflation statistics to various methodologies. CPI in the US includes a rent equivalent value which is independent of the actual cost of purchasing a home.
The weighting allocated to housing is also unrepresentative as those entering the job market in cities now are facing housing costs representing 50% of income when most inflation metrics have it at 50%.
The uttermost definition of capitalism.
"Our economies and culture have a skills crisis not a growth crisis."
Capitalism can't survive without growth by definition.
https://ourfiniteworld.com/2011/02/21/there-is-no-steady-sta...
Capitalism prefers growth. It causes growth, which is good. (Growth does not have to mean resource intensity.)
It does not require growth. Zero-grow and shrinking economies can allocate resources well through markets.
Because for everything else someone somewhere will need very tangible resources e.g. raw materials to build that phone you are using do X or Y.
The price of a CPU is unrelated to the price of sand. CPUs are 10000x faster over the last couple of decades. So there’s little or no correlation required between raw materials consumption and growth.
Do you really believe that computing comes cheap and is unrelated to climate change? I find that line of thinking extremely naive.
Let me share a few links:
https://www.nature.com/articles/s41558-018-0321-8
https://www.theguardian.com/environment/2010/apr/30/cloud-co...
etc.
No I believe something more subtle than that: that the same raw materials that make a computer of speed X can be used to make a computer of speed 1000X with the input of better design. So we have economic growth there purely through intellect with no correlation to raw materials consumed.
That would be wonderful, alas the data we have suggest otherwise. But if you have ideas of how that decoupling between ressource extraction and growth could work I would glad to hear/read them (for real, I would like to be more positive on those matters).
No [1]. They don’t [2].
> if you have ideas of how that decoupling between ressource extraction and growth could work
The universe of digital goods and services, for one. A few grams of metal and silicon producing as much value today as a car’s worth of steel did a century ago.
[1] https://www.eia.gov/todayinenergy/detail.php?id=10191
[2] https://www.wri.org/blog/2020/07/decoupling-emissions-gdp-us
https://davidmytton.blog/how-much-energy-do-data-centers-use...
2nd, check this link: https://ourfiniteworld.com/2011/11/30/thoughts-on-why-energy...
"3. Rest of the World. This group is the only group showing a favorable trend in energy growth relative to GDP growth, even in the last decade, although the pace of improvement has slowed. Two reasons for this favorable trend seem to be (a) continued growth of services, such as financial service, healthcare, and education, which use relatively little energy and (b) outsourcing of a major portion of heavy industry to Southeast Asia."
iPhones are produced in China. But the profits appear at Apple Inc.
And of course, the data has to be world-wide since the economy is globalized [1].
[1]: https://yearbook.enerdata.net/total-energy/world-consumption...
> The universe of digital goods and services, for one.
Digital goods consume energy, more and more of it. For now gain in efficiency almost (not quite though) offset the growth [2], and that is discarding all the energy and ressources needed to build the servers and chips in the first place.
[2]: https://www.iea.org/reports/digitalisation-and-energy#energy...
We agree on this. But nothing requires the base resource load to increase. That's my point.
Blaming capitalism for our ecological problem is a cop out. It makes it sound like we have to re-engineer our civilization to escape resource over-use. We don't. The changes are simpler. But making it look like our entire financial system has to be rebooted to effect real change helps punt the issue.
And again the data we have shows that GPD is positively correlated with energy consumption. I take your point that it does not have to be this way though, let's just say I am not convinced.
>Blaming capitalism for our ecological problem is a cop out.
Ok I deserved that, it is true that blaming capitalism is a bit of my go to card. But to be fair lets not act like our system of production has no impact on how we consume ressources. You have a point though: ressource over-use is not strictly a problem of capitalism, a thing to keep in mind for the proponent of the fully automated luxury communism utopia.
"The planet has a fever, and the cure is more capitalism, a prominent researcher argues" "This “decoupling” of growth from environmental degradation is showing up in other major economies as well, and even in some developing ones, MIT scientist Andrew McAfee argues in what’s bound to be a controversial new book. He asserts that the phenomenon represents a critical turning point in economic history—and an essential one if we hope to sustain a growing global population without decimating the planet."
https://www.technologyreview.com/2019/06/20/134845/the-plane...
I emailed him that his data is correct but how does his conclusion fit with the fact that the west just outsources energy heavy industries to China and pointed to some statistics supporting my question. He never replied. I think he may have fucked the chicken (as my professor always said, if you did a major f. up in science).
Capitalism isn't "a/many market(s)." Capitalism is much more than that, and one of those constituent pieces is profit-seeking.
Capitalism, that we have have since more or less 150 years requires the pre financing on a huge scale of industrial production. This requires debt that can only be, due to interest, paid back with growth.
There can't be a capitalist economy without growth by definition. From the link given by me:
"One big issue with even trying to stair-step fossil fuel use is the fact that our financial system needs growth to keep from collapsing. In order to pay back debt with interest, it is necessary to have economic growth, and financial growth and growth in fossil fuel use are very closely tied. Economic growth can be 2% or 3% above fossil fuel use growth because of efficiency gains, and economic growth in a particular country can be higher than that of world economic growth because of greater outsourcing of manufacturing to other countries. There was even a gain in the late 70s and early 80s, as we picked the low-hanging efficiency fruit and switched to using nuclear. But overall, there is no evidence that fossil fuel use, or even oil use, can be divorced from economic growth. If there is a big decline in fossil fuel use, it will translate to a decline in economic growth.
The need for economic growth in order to pay back debt even applies to our money supply itself. Money is loaned into existence. This happens when a commercial bank makes a loan and deposit at the same time. The problem is that when the money is created, not enough money is loaned into existence to pay back the interest as well. So economic growth is needed to create the additional money so that the debt can be paid back with interest.
Because of this issue, a Steady State Economy (economy without growth) requires a financial system with virtually no debt. It might be possible to have a little debt, but its use would be primarily to facilitate short-term transactions. Debt jubilees at regular intervals might be needed, to keep people from building up much debt."
This toy model ignores defaults and fiscal spending.
Defaults destroy debt in the absence of growth (in the process transferring wealth from creditors to debtors). Fiscal spending crates money with no debt (in the process transferring wealth from savers to borrowers). These counter-currents let the system stay stable while credit flows from savers (via equity) and creditors (via debt) to investments and borrowers.
Leveraged systems have a multitude of steady states in a zero-sum environment. Even more when tastes and preferences change as human tastes and preferences do.
> growth in fossil fuel use are very closely tied
I have debunked this in another comment [1]. Energy intensity of GDP has been falling for decades. The carbon intensity of our economy is falling faster.
No, it has not. While this is true for the US, she just outsources manufacturing to China. Hence the energy intensive steps are done outside the US. So your comment is true for the US but not for the world economy as a whole.
https://gailtheactuary.files.wordpress.com/2011/11/energy-in...
Nope [1][2][3].
[1] https://www.iea.org/reports/sdg7-data-and-projections/energy...
[1] http://theoildrum.com/node/8615
[2] https://dothemath.ucsd.edu/2011/07/can-economic-growth-last/
[3] https://www.declineoftheempire.com/2012/01/wealth-and-energy...
And this one as a bonus :-)
https://yearbook.enerdata.net/total-energy/world-energy-inte...
The first graph there seems to show a decreasing energy intensity since 2011. Is there something I'm not seeing here?
For instance, one source says that energy production in 2019 was 14,715 MToe (million tonnes oil equivalent) or 14.7 E12 koe (kilograms). The graph said energy intensity was 0.110 koe per $2015. That implies a world GDP of over 130 trillion in 2015$. But I thought GDP was around $80 trillion (maybe a bit higher using purchasing power parity).
I'm confused. Is energy intensity decreasing because somebody's using an inflated denominator (PPP dollars)? What's really happening?
>I have debunked this in another comment [1]. Energy intensity of GDP has been falling for decades. The carbon intensity of our economy is falling faster.
Both can be true, energy intensity of GDP has been falling even worldwide. But GDP and energy consumption is still correlated, i.e. you can plot a nice regression line in this plot:
https://ourworldindata.org/grapher/energy-use-per-capita-vs-...
There is some debate as to the direction of the causal link, it's probably dynamic and context dependant, but the correlation is definitely here.
Manipulating the cost of debt is the only instrument debt they really have so they just keep pushing that button. Asset bubbles are now so inflated that they can't really unwind the monster they have created. I would observe central banks are now guided more by capital markets fluctuations that economic fundamentals.
Something I never see mentioned is the rise of China. I think Western countries would have the confidence to accept a reduction in growth (higher/normal interest rates) if the US and European economies were still preeminent. A major recession in the US would require reductions in military expenditure which would change power dynamics in Asia and the pacific.
Also, the current level of divergence between housing prices and CPI is nothing out of the ordinary. It will correct itself over time (either houses will become cheap or CPI will catch up).
If you want a simple explanation as to why it is that CPI bounds houses and not the other way around - just look at the recent post-covid deurbanization trend (and the carnage that's going on in San Francisco or New York real estate markets). There's so much land that can be utilised once you understand that you really don't have to be in downtown New York. Then, homebuilding costs are basically CPI.
by saying this, you’re implying that there is some underlying “truth” to cpi and housing prices, but it misses the underlying critique that these measures are not representing the truth on the ground at all, as experienced by americans.
cpi and housing prices may be correlated, but that says nothing about whether they each measure anything of societal relevance (similar to the critique of IQ, for example). we should expect housing prices to correlate to some combination of gdp (or some near equivalent, since that’s also a measure that’s gamed politically) attenuated by population and wages, as those would be underlying ingredients in the supply and demand functions. then when the correlation falters, we could potentially diagnose how the economy might be failing a core function of providing shelter to the populace.
It wouldn't surprise me if the second is closer to the truth. Homebuying is close to where money is injected into the economy: when the Fed drops interest rates, mortgage rates drop, the home price you can afford for a given income goes up, and housing prices go up to compensate (particularly in land-constrained areas like Vancouver or the SF Bay). Other industries like food don't go up until that money has had a chance to circulate through the economy and make it to the average food buyer. I'd expect to see large increases in the CPI over the next decade, with housing last decade being a harbinger.
It is also a lie to say there is a single inflation number.
There are CPIs calculated including regional food, energy and real estate prices [1]. For policy makers, varying interest rates according to Syrian politics and Midwestern crop yields is too fine-grained. But to suggest the data are hidden is false.
[1] https://www.bls.gov/regions/new-york-new-jersey/news-release...
Americans especially should be worried about their income security at 45+ years of age, when health insurance premiums become $12k to $14k per year per person plus $15k oop max, in today’s money (who knows what it will be 20 years in the future).
If you lose your source of income that comes with employer subsidized health insurance in that 45 to 65 year range before you get to Medicare, and you have a medical problem, all of your assets might be in play since the sky is the limit when it comes to healthcare costs. Not to mention you will have lost ability to learn income if you are having to take care of yourself or your spouse.
Because that’s a totally different thing? It’s not like nobody measures it.
We don’t criticise the kilogram for not telling us if it’s going to rain tomorrow.
For example, I don’t care about housing in 90% of the country if I think only 10% is going to provide economic growth and opportunities sufficient to make me feel secure.
Or if you think you need more retirement savings than generations before because you think money will be worth less or returns will be lower, perhaps due to lower population growth, environmental concerns, etc.
Who that “everyone else” might be and what percentage of the population does “everyone else” represent in this context?
Keep in mind that there are other reasons they economy works the way it does. The end goal of a central bank or a government is not (contrary to popular belief) make investors rich, the end goal is stability and possibly prosperity for the society at large.
Housing purchase prices aren’t included because a house isn’t consumed within a year. The price of a house represents both current and future housing consumption. It’s not some conspiracy to hide inflation.
In other words, prices can change at a different rate than the percentage of income paid to rent.
The San Francisco, Los Angeles, Seattle, Washington DC-Baltimore, New York and Boston markets are not the only places in the United States.
There are lots of places in this country where you can get a 1 bedroom apartment for $500/month, or a 2,000 square foot house for $100k.
Meanwhile, wage growth in these high-cost coastal markets has kept pace with the housing cost increases, which is part and parcel with housing cost growths in these regions.
There's no doubt that there's been significant housing inflation in this country, but someone in Chicago making six figures is not paying 50% of their income on rent.
Are you saying that the Owner's Equivalent Rent calculation is not the same as housing costs? That sounds like a stretch.
Would someone help me understand what I'm missing here?
People are not forced out of their homes when their mortgages go underwater, they're forced out when they can't afford to pay the mortgage (underwater or not).
Massively aggregated statistics like the CPI border on bullshit. They have too many hidden variables and gloss over far too much detail.
“ In other words, while it’s possible for an individual bank to boost its reserves by selling assets to raise capital, it’s mechanically impossible for the entire banking industry to collectively raise its reserves industry-wide.”
Why not? I have confidence people would rally together to buy distressed bank assets at rock bottom prices.
The common person is forced to move their money to riskier and riskier financial instruments putting more and more money into the equity market - which again benefits companies and puts more money into the pockets of the rich.
If not equity, the ordinary person could try and buy assets such as houses which will become marginally cheaper - but risk going into even greater debt.
Assuming I got the math right, it doesn't take much to see current young people are getting screwed. In the last 4 decades wages have barely increased, but major assets like cars and houses are 8-10x what they used to be.
Add in the cost of schooling for 2 people, which in my mind roughly translates to the cost of 2 brand new cars for my parent's generation, and it's easy to see why young people can't afford anything.
Then consider that "household" income is coming from 2 income earners now vs 1 income earner 40 years ago and you really start to get a picture of how tough it is.
How is anyone supposed to start a family when they can't afford to start thinking about buying a house until they're 35. Frugal people from my parent's generation could have their house paid off by the time they were 35.
1. https://www.huffingtonpost.ca/ypnexthome/canadas-housing-per...
I’m one of the lucky ones. Learning the skills is not enough, you have to get a very good job and work your ass off for a decade for it to amount to enough to comfortably afford the housing, education, and healthcare for a family.
A generation ago getting that kind of quality job was much easier and just having the job put you in the family-supporting income range.
Don't me wrong, studying in-demand tech skills is great, but it's hardly a scalable solution.
Isn't enabling and educating the population the original scalable solution to low growth?
You're not going to get much growth if all you do is educate people. You also need to give them something to do, and that requires a national investment strategy.
This is exactly the difference between the insanely productive post-war economy, which developed and then commoditised electronics and computing, and the modern lazy bullshit job economy which is built on financialised gambling-at-scale and ad tech rather than game-changing creative invention.
But getting everyone into tech is a classic non-solution :) (It's kind of funny)
Where is that 1% coming from? It seems to me US salaries growth pretty much followed 3/5% average for the last 50 years, with some obvious drawdowns during crises.
Source: https://tradingeconomics.com/united-states/wage-growth
> In the last 4 decades wages have barely increased, but major assets like cars and houses are 8-10x what they used to be.
That doesn't make any sense. The price of a good should roughly follow an optimum of supply and demand. There is of course a spectrum in which it can oscillate, but your "barely increased" versus "8-10x" comparison is ridiculous.
Things are evolving inside a pretty much closed system. Of course that's not exactly true, especially with capital movements, and mondialisation, but the ballpark should be there. You cannot take conclusions if you don't study the full picture.
Take housing prices for instance. The main driver for real estate is not some conspiracy of evil super wealthy people. It's just the interest rates. If interest rates lower, then borrowing money is cheaper, people get bigger mortgages, which in turn inflates real estate prices.
> From 1984 to 2016 housing prices in the Greater Vancouver area have gone up 800% [1].
Real estate cannot be studied in geographical isolation. There are way too much factors that can cause local inflation. In the case of Vancouver's real estate, it is notoriously the flow target of a lot of Asian capital. I don't think that should be taken as an example.
Here's a graph of median personal income:
https://fred.stlouisfed.org/series/MEPAINUSA672N
And here's a graph of median house prices:
https://fred.stlouisfed.org/graph/fredgraph.png?id=MSPUS&nsh...
That is almost exactly an increase of 8X, compared to roughly 1.5X for personal income. Do you think an increase of 1.5X over forty years or so counts as "barely increased"?
Of course household income is higher because most households have two wage earners instead of one. But that's still around 3X to around 8X.
And the standard deviation for property prices has increased hugely.
This has nothing to do with supply and demand and everything to do with the difference between an unproductive rent seeking economy which sweats static assets - including the workforce - and a productive creative economy driven by innovation and invention.
For all the rhetoric, the current economy has a lot more of the former than the latter. And this is only good for a small number of incredibly rich individuals - at the expense (literally) of almost everyone else.
Inflation adjusted cost per square foot is $126 in 1978 and $146 in 2020, about a 16% increase. Inflation adjusted wages over the same years went from 24.5K in '78 to 36K in '19, for about a 46% increase.
According to these stats, housing is actually more affordable for the same home size.
Wage numbers from your fed link, and housing numbers from here: https://www.supermoney.com/inflation-adjusted-home-prices/
In my neighbourhood over the last ten years small-ish 1-floor homes built in the 70s and 80s have been consistently replaced with 3-story McMansion atrocities.
You can't buy a smaller, cheaper, house because they are not being built, and I suspect the reason I'd that their price per square foot would be sky high due to the cost of the land.
Hmm.. No? Which parts contradicts which other?
What I am saying is that the price of a good (say, a car) is not decided in a vacuum. It is merely an indirect side effect of the supply and demand optimum. What that means is that if the price of cars increases, it is a consequence of either consumers being willing/able to pay more for a car (demand driven) or cars being more expensive to build (supply driven). As I mentioned, this is not an absolute truth, since the term structure of the supply demand _could_ change due to external factors. I still mention that in the case of these goods, this is very unlikely.
For housing, the main factors are 1) what the investment will yield (rent expectation) 2) what the investment costs (interest rates). If any of these factors (rent, IR) changes, it will impact the price.
> Here's a graph of median personal income: > And here's a graph of median house prices:
You are comparing CPI adjusted versus point in time dollars here...
Abuse of the terms average and median absolutely slays me. Simply erases rising inequity from the conversation. I don't even know how to respond.
Maybe standard deviation would work. Is there a layperson's version of this phrasing?
Considering a large portion of mortgage payments go towards interest, this is a huge deal.
https://www.thetruthaboutmortgage.com/wp-content/uploads/201...
Source: https://tradingeconomics.com/united-states/wage-growth
Is the source taking the average or median for wage growth? I'd expect that the average has gone up because of the insane growth in executive pay. But I'd be interested in seeing the change in the median, which I'm sure is much less than the average.
Foreign buyers laundering money isn't inflation.
Millenials earn more than their parents did: https://www.pewresearch.org/wp-content/uploads/2018/12/FT_18...
They pay less on a monthly mortgage payment than their parents did: https://www.motherjones.com/wp-content/uploads/2017/10/blog_...
Also, two-earner households were already the majority since the late 1960s: https://files.taxfoundation.org/legacy/docs/22.jpg. The percentage of households where only the husband works dropped a bit from 1980-1990, but has been basically unchanged in the last 3 decades.
The thing you're overlooking is that the median young person lives in Kansas City (or whatever the equivalent is for Canada), not Vancouver. Those young people living in Vancouver are getting screwed for sure. They should vote out the liberal governments causing housing prices to skyrocket through overregulation, causing credential inflation by throwing money at universities, etc. Or they can move to Kansas!
The reference you gave for "They pay less on a monthly mortgage payment" is itself adjusted for inflation as noted on the chart. So using the questionable inflation figure itself to refute inflation isn't persuasive.
Intuitively also, I'm not sure I buy the argument that the median young person lives in Kansas City. I grew up with dozens of family members who actually did live in middle america (most of them as engineers at car plants.) Many of those jobs are not as cushy as they once were. Some are gone. From my own experience as an engineer, the weighted centroids of the job market are in SF or NY or DC, not in Ohio.
Of course, that is an engineering viewpoint, what about overall across professions? I dont quite understand this and i'd love to be educated. From everything I read, the traditional jobs in middle america have left and these towns struggle. My own experience is only anecdotal (e.g., upstate NY, western pennsylvania)
Yes, it's adjusted for inflation. But if housing costs were growing faster than inflation, the monthly mortgage payment adjusted for inflation would still be going up.
> My own experience is only anecdotal (e.g., upstate NY, western pennsylvania)
Head down to Kansas City, or east Texas, or pretty much anywhere in the sunbelt. These places are booming. They're full of young people, families, and tons of kids.
Its more important how the numbers are generated than numbers itself.
IMHO it makes no rational economic sense to live in a place like SF or NYC unless you are doing it for a while for experience or can land a very high salary job. For SF I would say bail if you are not making $300k by age 30. The only exception is those with no interest in starting a family and don’t mind living in a very small place forever. If you need space and don’t make bank, you will never build equity or significant savings. Real estate will eat everything.
* In an ideal world, workers would job hop aggressively to move up their hourly pay rate. They don't for good reasons (for their company, for the economy, for other non-tangible reasons).
* Having the M0 and M1 never grow is the ONE critical factor that MUST be there for workers to get their fair share of GDP growth. The economy growing and having a fixed M0 and M1 means workers get more buying power. Their negotiated locked in hourly rate when starting at the company can give them more buying power. In capitalism today, this is the ONLY way workers get their share of GDP growth.
* When M0 and M1 grow, then workers (except the top 20% in demand) are robbed of getting their share part of GDP growth.
* Workers are on a hamster wheel. Central Banks think they need to speed up/slow down inflation (compared to a frozen M0 and M1) causes the hamster wheel to speed up for workers to work harder for less and less.
* 1801 to 1899. There was zero to -6% inflation across those ~99 years. Salaries doubled. This is how the working class gets their fair share of GDP growth. Today they are robbed by central banks.
* Workers are robbed when banks get to "recapitalize" banks paid for by robbing workers (the bottom 80% of workers have nearly zero ability to demand their salary go up)
For example: suppose a TV costs 2x now than what it did 10 years ago, but it is also twice the size, for many countries this means 0% of inflation.
Problem is, you can't buy the old stuff.
For example, are cars now much faster, safer, etc... than cars of 1950?
Yes.
But, if you are buying your first car, you can't buy one from 1950, you either buy a car, or you don't, you either spend the 2020 price for the car, or you don't, thus this "correction" for technology development is bogus.
Or a personal anecdote:
My phone broke.
A phone now is ludicrously more expensive than it was years ago, but doesn't count in inflation because it also became a computer, that can do a ton of things.
Problem is, I don't need a computer, I need a phone, I want to do phone calls! But nobody sells those here, they only sell computers that happen to make calls, for the price of a computer.
If you want a 10 year old TV you can get one for a few bucks at most second hand stores – there are tons of them.
Phones are not that expensive. You can get a new decent Nokia dumbphone for about $20.
Ditto for phones. Call-only phones (I have one for travel) are dirt cheap, they cost less than a decent steak.
And the only way you see it in full is when you are self-employed. If you have employer-sponsored health insurance, some part of the increase is covered by the company - at the expense of your salary increase or bonus, of course.
These government granted monopolies make unnaturally high incomes due to regulatory capture.
My best solution is to legalize a science based healthcare. Although the cartels would never allow it, they have spent billions establishing Authority based healthcare.
The ACA limited how health insurance companies could determine premiums by restricting it to just someone's age, which means they can't take into account pre existing conditions or whether or not they're about to have a baby. ACA also forced insurers to not charge older, unhealthy people more than 3x what they charge 21 year olds who aren't expected to use any healthcare.
This means the premiums for younger, healthier people are going towards paying for older, unhealthier people. AKA a tax. Additionally, the nation is getting older and there are fewer and fewer younger people to divvy up these healthcare costs.
See this pdf from NJ showing how the age rating factors work:
https://www.state.nj.us/dobi/division_insurance/ihcseh/ihcra...
The ACA requirement for an out of pocket maximum for in network health care also made it so insurance companies have no ceiling per person healthcare spending, so if someone needs $5M of healthcare in a year, then that insurance company is going to have to pay for it, and it's going to have to come from everyone's premiums.
Bottom line is the amount and quality of healthcare people expect to receive is very costly. So if people want health insurance premiums to not go up so fast or go down, they need to consume less healthcare, lower quality healthcare, or they need to increase the amount of healthcare available so prices of the healthcare go down.
I DO have a problem with paying at least 50% more than the next highest spending countries like Switzerland or Norway - all with excellent healthcare systems - probably better than the US (except for the very high-end)
The prior is already happening with the introduction of PA and NPs taking over roles that MD/DOs used to do (for better or for worse, I've seen many discussions on how PA/NP education is very lacking and the bar to qualify is too low, which I agree with).
I don't know much about increasing supply of medicine, but that probably has to do with patent reform and/or FDA approvals for slightly modified medications.
There's also probably something about liability and litigiousness that is a factor of higher prices in the US.
oh wait. no it won't because you can't manufacture more land to build on.
$8 / hour was the 'retail' wage back in the 90's in this area, and now maybe it has gone up to $14. I would imagine the professional salary has gone up even less - it has certainly not tripled from 1998.
Housing has far surpassed the rate of wage increases even in areas where land is not constrained. It has far more to do with interest rates and the monthly payment.
But you are very much correct about the ""skills crisis", and unfortunately, the short term solution that has been used by politicians and corporations to evade responsibility, accountability, and having to reveal their failure … immigration … the syphoning off of skills from other societies; has only fueled the deepening of the damaging crisis.
I like foreign cultures and people off all of the world very much, but there has been a vast con job pulled on people for many years now … far longer than any of us are old … that simply replaced spending and having to solve difficult questions by simply extracting talent from foreign societies and cultures and countries.
The impact has been vast on both the origin and destination side. It has both immensely sabotaged the growth and potential of other countries that were deprived of the skilled talent, and it has also allowed corrupt politicians and corrupt corporate institutions to obscure their utter failure and incompetence and mask the immoral and evil damage they have done to people. It may not be a popular opinion here, but at the core of it, immigration is an evil concept that only serves the billionaire strata. You've never asked yourself why the millionaires and billionaires love nothing more than immigration, i.e., cheap labor that allows them to profit more?
Immigration is a sabotage of the origin countries too that are drained of their human energy and potential.
It's counterintuitive, but this is not true. Low interest rates actually inflate the prices of risk assets (stocks, bonds, real estate), greatly benefitting those who already own them.
New entrants have to buy houses at higher prices, which net net washes away the gains made from lower interest. Early movers during the transition may get lucky, but in aggregate, this is true. Think of how a bond works. Interest rates and bond prices are inversely correlated. Lower interest rates = higher bond prices = lower future returns. Its the same for Real Estate.
Also Re: your points about immigration--again, its counterintuitive, but you are also mistaken here. The market for talent is not a zero sum game.
Immigration allows for increased productivity in the global economy because talent is able to go where it can be best utilized.
That talented engineer would be wasted in Albania, because Albania lacks the capital, talent, and opportunities to best utilize the engineer’s knowledge. Albania loses nothing, but benefits greatly when that engineer moves abroad and contributes to making wireless networking accessible for all.
The global economy is not a zero sum game where somebody wins and somebody loses. This is often the hardest thing for people to understand about how the economy works.
And even if that weren't true, yearly immigration as a percentage of population growth/decline in most countries is extremely low. To attribute any of the social ills of a given country to it is foolish.
The world could become more productive and efficient if immigration happened more not less. Everybody wins when talent goes where it can best be utilized.
Real monthly mortgage payments have actually been going down relative to inflation: http://mjperry.blogspot.com/2011/12/payments-for-new-house-h....
Lyn Alden frequently makes the same arguments against CPI, in fact, most economists do. So this is a bit of a non statement.
If you want to get more speed out of an engine, you need both more gasoline and also more oxygen. If you change the amount of gasoline, without changing the amount of oxygen, you'll end up running too lean or too rich, and both conditions have negative consequences.
To boost economic growth it would be great to have both an increase in final consumption by the government, combined with moderation of interest rates. A combination of financial policy with monetary policy. But in the USA the Republicans have been sabotaging this simple process for decades. Final consumption by the government has stagnated, which has put the USA into a situation where it has had to lean much too much on monetary policy (low interest rates) to try pump the economy. This inevitably leads to distortions. The obvious way to fix the problem is to have the government increase the amount of final consumption that it is engaged in. Tax cuts do not help, what would help is an increase in final consumption, to directly drive economic growth and directly create jobs.
But the mighty Manhattan changed this. The people who were born to Long Island's households now have access to this city. This is an economic opportunity that is not available to anybody else's in the entire world. Would it be fair to incorporate this economic opportunity in the value of this home? I think so. The market thinks so.
This is a result of the winner take all economies will live in. Whether you are a person, a city or a country. The same logic still applies.
The main deflationary pressure is that more than 50% of the workforce has seen declining income since the 70s (men).
https://www.theatlantic.com/business/archive/2012/09/mens-ea...
There are many causes, outsourcing, different groups joining the workforce, shrinking unions, more income for capitalists and less for workers. In my mind the biggest killer has been the decline in productivity growth.
The Weimar Republic was the German government after WWI.
Many of us forget a simple detail about Weimar's hyperinflation: It was deliberate so they could pay off their reparations.
Worth reading: https://en.wikipedia.org/wiki/Hyperinflation_in_the_Weimar_R...
> The strategy that Germany had been using to pay war reparations was the mass printing of bank notes to buy foreign currency, which was then used to pay reparations, but this strategy greatly exacerbated the inflation of the paper mark. Since the mark was, by fall of 1922, practically worthless, it was impossible for Germany to buy foreign exchange or gold using paper marks. After Germany failed to pay France an installment of reparations on time in late 1922, French and Belgian troops occupied the Ruhr valley, Germany's main industrial region, in January 1923. Reparations were to be paid in goods, such as coal, and the occupation was supposed to ensure reparations payments.
> The German government's response was to order a policy of passive resistance in the Ruhr, with workers being told to do nothing which helped the invaders in any way. While this policy, in practice, amounted to a general strike to protest the occupation, the striking workers still had to be given financial support. The government paid these workers by printing more and more banknotes, with Germany soon being swamped with paper money, exacerbating the hyperinflation even further.
If they print money to put in stocks and real estate -> bad.
The one thing creates real value and enables more real value creation in the future.
The other one has no effect on the real economy and wages.
Driving real estate prices is even bad: at some point, no real economic strategy (aka. business model) is able to sustain the needed profits to pay for it, and no company can be profitable enough to justify the high stock prices. It therefore literally becomes to expensive to do business, because nobody can match the returns of the central bank buying up your garbage!
Increased real productivity. Imagine a toy town where only two goods are produced on opposite sides of a river. To trade them, risky river crossings risking product and person must be attempted.
A bridge removes that risk and cost. The town will become wealthier for having the bridge despite its cost. (Same for e.g. ancient Mesopotamian, Mesoamerican and Hohokam canals.)
> the government makes some money
If the government prints money to fund its deficit then inflation “taxes” everyone. It is analogous to a company selling stock to do something useful. The share count went up but the aggregate value (hopefully) will too.
Similar to a company emitting new shares to pay employees. It's the shareholders who are paying the cost via dilution.
Printing money does not automatically lead to inflation. Since inflation is just the price of stuff rising, the question becomes, when do prices rise? The price can rise for multiple reasons:
The price can rise because the company just wants to charge more, like Apple. The price can rise because a company's underlying cost rises. Maybe some type of metal became more expensive.
Either way, the only way that money printing can lead to inflation is if that money creates so much demand that a company needs to expand production capacity to produce more, and if that capacity has rising costs.
If a company expands from, let's say 65% capacity to 75% capacity, and has constant costs, then it doesn't matter. Then more people will be employed due to increased demand, and the economy will boom. This makes money printing a good policy.
If, however, the company goes from 85% to 95%, then the company might start to invest in extra capacity, which might add costs, and thereby might raise prices.
So, do prices rise just because a certain amount of dollars were added to an economy ? No, certainly not. Which is why the money printing should only happen when the economy is dysfunctional. Basically Keynes in a nutshell. :-)
Inflation literally is money printing. Price increases is not inflation. Price increases can be caused by inflation. Prices can remain nominally the same while money supply has increased.
> So, do prices rise just because a certain amount of dollars were added to an economy ? No, certainly not. Which is why the money printing should only happen when the economy is dysfunctional.
The prices while having not risen nominally are still artificially inflated. A dysfunctional economy is not a real thing. It is just the economy. If you are referring to a recession, printing money during a recession arguably may not cause prices to rise nominally, but it artificially inflates them. During a recession prices typically go down due to falling demand. This is a good thing. It allows people who are suffering to enjoy lower prices. Recessions are a healing process for a previous period of misallocation of resources. Money printing only serves to exacerbate and extend the misallocation. As the period of misallocation is extended and exacerbated, the recession necessary to balance that is larger and more frightening.
We left the gold standard because we were afraid to deal with the recession from the spending of '60s and we've been afraid to deal with our issues ever since. One day we won't have a choice. Tough times are ahead.
I think it would be best if we all start being more clear and specific when talking about "inflation".
Printing money DOES automatically lead to inflation. It leads to inflating the money supply or MONEY SUPPLY inflation. However printing money and inflating the money supply does not necessarily lead to price increases or price inflation. Most of us care about price increases, which are a symptom, but not allows present, of money supply inflation/printing money.
The article author does a decent job of defining these, but fails to be clear as the writing progresses.
Prices across the board could also go up if war breaks out. That's not inflation.
Those types of price increases are due to the supply side. Inflation is due to the demand side and the available dollars chasing the [same amount of] goods.
Price increases and inflation are not the same thing. They are typically related though.
According to who exactly? I encourage you to research this and determine the validity of your assertion, as I can't even find a single person defining it the same way as you are here..
> The era between the mid-1830s and the Civil War—a period economists refer to as the “free banking era”—saw a proliferation of banks. Along with these institutions came “bank notes,” a private paper currency redeemable for a specific amount of metal. That is, if the issuing bank had it. At times, banks did not have enough gold or silver to satisfy all of their claims. Bank notes, like the public notes that preceded them, also tended to depreciate. It is during this period that the word inflation begins to emerge in the literature, not in reference to something that happens to prices, but as something that happens to a paper currency.
> The term inflation was initially used to describe a change in the proportion of currency in circulation relative to the amount of precious metal that constituted a nation’s money. By the late nineteenth century, however, the distinction between “currency” and “money” was becoming blurred.
> In addition to separating the price level from the money stock, the Keynesian revolution in economics appears to have separated the word inflation from a condition of money and redefined it as a description of prices.
> When Keynesian economic theory challenged the direct link between money and the price level, inflation lost its association with money and came to be chiefly understood as a condition of prices.
https://www.clevelandfed.org/newsroom-and-events/publication...
Keynesian economists changed the word to suite the needs of Keynesian theories. It is equivalent to "newspeak". It obfuscates and confuses. There is a large portion of the population that does not believe in the implementation of or understand Keynesian economics(and definitions). They may not be very good at explaining or understanding their discontent due to these semantics changes.
Then again, maybe you are right. As Milton Friedman famously stated, "We are all Keynesians now."
That definition of inflation makes no sense in the current monetary arrangements, it's, simply, not how it works anymore. There is not an "amount of precious metal that constituted a nation’s money." If some people don't understand that, we should aim to educate them.
>>"Keynesian economists changed the word to suite the needs of Keynesian theories."
Whatever the historical meaning of a word, inflation means something very clear now
From https://en.wikipedia.org/wiki/Inflation:
"In economics, inflation (or less frequently, price inflation) is a general rise in the price level in an economy over a period of time, resulting in a sustained drop in the purchasing power of money."
You can't just revert the meaning because it suite your needs, and expect everybody agree. Whatever your feelings about it, that it what it means now.
To be clear, what you are referring to is a quote from the FED article I linked to and quoted. Before the Keynesian revolution, inflation meant increased money supply and was assumed to increase prices as well, because money was backed by or was gold/silver. Many people as you opined have a misunderstanding that money is still backed by gold and you are correct that they lack the education. The "change" in the definition was by the Keynesians. It is not accepted by everyone. The monetary theory change should not change the definition.
Why does my definition make sense to me? A price is a number, not a physical thing so it increases. Take the balloon analogy. Money supply is the balloon, inflated with dollars. Price is the balloon, inflated with numbers? Does not make sense to me. The term "price inflation" is a misnomer. It should be "price increase".
FYI: On this site we use "> " for block quotes. You used quotes and ">>" and included my ">". It was a little confusing.
Well, in today's world it is. Yes, not according to your 'old-school' definition of it. But if anyone says "inflation" today - it means price increases. Nothing more, nothing less.
> The prices while having not risen nominally are still artificially inflated. Care to explain?
> It is just the economy. If you are referring to a recession, printing money during a recession arguably may not cause prices to rise nominally, but it artificially inflates them.
Yes, I meant a recession. Please, once again, elaborate what you mean by "artificially inflated prices"?
> During a recession prices typically go down due to falling demand. This is a good thing. It allows people who are suffering to enjoy lower prices.
Ehh, ok. So what happens to those people when companies start making less money?
> Recessions are a healing process for a previous period of misallocation of resources.
Care to explain how resources are "misallocated"?
> Money printing only serves to exacerbate and extend the misallocation.
Lol, no it doesn't. Sounds like a neoclassical fairytale. In a recession, you are arguing that one shouldn't print money, because it only "extends misallocation". Please explain me a proper allocation and a misallocation. Makes no sense. Newly printed money would add demand - as it should. It would create jobs and have nothing to do with "misallocation", That "misallocation" sounds like a conservative argument. No one can explain or prove it, or even make sense of it, but if you keep repeating it, then people will believe it.
> We left the gold standard because we were afraid to deal with the recession from the spending of '60s No, America left it because it was a shit system. Capitalism is inherently monetary. Having a currency pegged hinders growth and only serves to avoid inflation for the rich. Rentier capitalism doesn't like inflation.
Apparently you are correct. The vast majority of people hear the term and think of price increases. As I noted earlier, the definition has changed. I gather most of my economic understanding from Austrian School economists which when referring to inflation usually mean increase in the money supply.
> Care to explain?
> Yes, I meant a recession. Please, once again, elaborate what you mean by "artificially inflated prices"?
When a recession happens there is a decrease in demand for products and services. This drop in demand causes an increase in supply of those same products and services. The increase in supply causes prices to fall. When the government releases more cash into the market, the supply of cash is increased. When people have a larger supply of cash, they can pay more for goods and services. If the cash infusion is at a certain level, prices may not increase nominally(compared to before a recession) because the increased supply of money prevented their drop. The term artificial refers the fact that the money supply is increased or decreased by government fiat. Hence, the prices are increased or decreased by government fiat. Government involvement in the market is artificial. Markets exist without government and with governments. When a business or person is making decisions based on market dynamics and a government steps in to alter the dynamics, that is artificial, because it is produced by a political agency. It is not a natural quality of the market.
> Ehh, ok. So what happens to those people when companies start making less money?
When these people and companies make less money, that is offset by the decreased price of goods and services. Companies pay less for material because demand has gone down, this allows them to continue to employ people and be competitive and profitable. There will be temporary imbalances of course, which will result in job losses and business closures.
> Care to explain how resources are "misallocated"?
> Money printing only serves to exacerbate and extend the misallocation.
Misallocation refers to capital that was directed to unprofitable sectors of industry at a macro and micro scale. Assume for a minute that government is not involved in the market at all. When businesses compete, they make different decisions on how many people to hire, equipment purchases, material acquisition, debt level, and many other things. They have decided where to "allocate" these resources(labor, capital). When one company makes a bad decision this can lead to less profit and eventually the failure of the business. If enough businesses make these bad decisions, a large portion of the resources have been "allocated" to sectors or markets that are unprofitable. They may survive for a time before one starts failing, then another, and another. This is what causes a recession in a market that is not influenced by government. As the recession progresses to the end, there are less businesses competing that have "misallocated" their resources.
When governments print money and allow business unfettered access to this money via low interest rates, companies take advantage of it. Because they have more money than their competitor they can pay more money for materials, labor, equipment. They can lower prices of their goods or services to temporarily out compete their competitors. When other businesses see what is going on, they secure more of the cheap debt as well. For a time, the businesses that make poor decisions(paying too much for labor/materials/equipment) can still compete because they have not ran out of cash. When the loan balance becomes too high, we reach a scenario where businesses start cutting back to pay the interest and principle. They start increasing product prices, cut labor, sell equipment. Due to the fact that the government has increased the amount of money available to these companies beyond what they normally would have, the government increased the amount of "misalloctated" resources. Coupled with companies en masse gathering debt to stay competetive, this results in a larger recession, because a larger percent of the market is based on capital that was acquired through fiat rather than competition. Companies and individuals enter this new recession with larger balances and larger portions of their cash balance is subject to interest payments. This means the selloff of equipment must be larger, labor cuts must be larger, and material acquisition costs must be reduced to a greater extent. This results in a greater recession or depression. The money printing exacerbated and extended the misallocation.
> No, America left it because it was a shit system. Capitalism is inherently monetary. Having a currency pegged hinders growth and only serves to avoid inflation for the rich.
Please explain. How does pegged(commodity) dollar hinder growth, given the history of the US dollar peg and substantial economic growth? Avoids inflation for the rich?
So how is that a bad thing? You keep demand high and you keep companies from LOSING money, ie., they keep people employed.
> Markets exist without government and with governments.
Maybe, maybe not. But it sure is a shitty market without a government. If governments don't set up regulations, rules, and intervene, you're pretty fucked. I could easily be a big scammer then.
> When a business or person is making decisions based on market dynamics and a government steps in to alter the dynamics, that is artificial, because it is produced by a political agency. It is not a natural quality of the market.
Okay. So you are saying markets should rule and the people should not have a say in what is going on the country? Why is it bad other than you don't seem to like government?
> Companies pay less for material because demand has gone down, this allows them to continue to employ people and be competitive and profitable.
But you need to think in cycles. As you state yourself:
> There will be temporary imbalances of course, which will result in job losses and business closures.
This will lead to a recession if the government doesn't intervene. As observed, in reality, capitalism works in cycles. Up and down. What happened when we had the sort of capitalism that you want? A depression. The depression wasn't solved before government stepped in during WWII to increase demand. Magically waiting for demand to pick up aint gonna happen.
> Misallocation refers to capital that was directed to unprofitable sectors of industry at a macro and micro scale. There is no such thing as misallocation. In real life, people set up businesses because they believe they can start a company that is profitable. Some people set up businesses where they think they can create a demand for their product or service, others set up knowing that demand is pretty much there. If you cant sell your product or demand isn't there, the company goes bankrupt. It didn't work. A new company will start somewhere else, where the workers are needed. So are the ways of capitalism.
> When governments print money and allow business unfettered access to this money via low interest rates, companies take advantage of it...
Let me stop you there. I am not talking about money printing in the form of debt. I am talking about debt-free money printing which the government has the capability to do.
> Please explain. How does pegged(commodity) dollar hinder growth, given the history of the US dollar peg and substantial economic growth? Avoids inflation for the rich?
"So, on every score, the gold standard period was less stable. Prices were less stable; growth was less stable; and the financial system was less stable."
and more importantly:
"(...) The loss of gold forced the deficit country’s central bank to shrink its balance sheet, reducing the quantity of money and credit in the economy, and driving domestic prices down. Put differently, under a gold standard, countries running external deficits face deflationary pressure. A surplus country’s central bank faced no such pressure, as it could choose whether to convert higher gold stocks into money or not. Put another way, a central bank can have too little gold, but it can never have too much."
"This brings us back to where we started. Under a gold standard, inflation, growth and the financial system are all less stable. There are more recessions, larger swings in consumer prices and more banking crises. When things go wrong in one part of the world, the distress will be transmitted more quickly and completely to others. In short, re-creating a gold standard would be a colossal mistake."
https://www.moneyandbanking.com/commentary/2016/12/14/why-a-...
Since the currency is pegged, it will constrict the supply of money. When production increases, but the money supply is constant, it will create deflationary pressure. Deflationary pressure = prices fall. Prices falling = recession. So whenever the economy was growing, the gold standard made sure to halt that growth by letting prices fall and introducing fiscal austerity.
So why does this system fit the rentier class? Well. If you have a high inflation, then assets will deliver smaller returns over time. And the rich don't live on wages, but assets like stocks, land, property, bonds etc. If you are only getting 3% on a loan/bond, and the inflation is 3%, then in the end, you get 0.
> Essentially the equivalent of climate change denial for economists
I don't know him, but that sounds like a stretch...
The bridge isn't free - the resources needed to build the bridge (time, steel, engineering attention, government attention, etc, etc) are being reallocated from someone else who would have used the resources to do something. If the bridge is more productive than whatever the person the money came from wanted then there will be more stuff in the future and prosperity likely increases.
The problem with money printing is it is all but impossible to figure out where the resources are being reallocated from - with taxes it is fairly obvious. With money printing it is not. It may well be impossible to say what we lost to get the bridge built because we can't figure out what would have happened if the money had not been printed.
It seems to me that, following your logic, if you don't "print the money", it's also impossible to know what would have happened if the money have been printed.
It is a high bar on the word 'impossible' not to be able to guess what the rough impact of a tax is.
If you print money to buy stocks, the money goes into the capitalists' pockets, where it tends to stay, because capital is already extremely highly concentrated and avenues for investment are few at this scale. Also you get the adverse externalities mentioned by GP.
Whereas if you pay workers for infrastructure, you get some infrastructure (I. E. Productive capital) and the worker will actually spend their money, thus enabling other workers to create value in turn.
All of this is about putting workers to work.
You can try to order the workers to work, with a central planning system (soviet Russia, or any large multinational corporation such as Google) or with money.
But if you give money to rent seekers who are already full of money, they are not going to put workers to work, which is what is currently happening in the West.
I disagree. The workers' work is the cost of building the bridge. The value comes from the infrastructure's utility / ROI.
If we assemble a group of workers to build some useless infrastructure, say a bridge connecting nowhere to nothing that won't be used by anyone, we just effectively handed out money to this group of workers (for their time) without adding any real value to the economy.
From the labour of the worker. Notice that does not depend on where the money comes from in the first place. In our economic models, value always come from human labour (or capital, which is crystallized labour).
But of course those models are lacking, crucially they implicitly consider natural ressources as infinite, a fine assumption to make in the 19th century but is now quite ludicrous.
Every additional banknote you put into circulation reduces the value of every existing banknote by a teeny-tiny bit.
The money comes from everyone holding the currency. When you print money you devalue all the existing money, this is called inflation. So effectively "everyone" paid for the bridge that is holding your currency.
edit: there are a lot of misconceptions about money printing and inflation here. Please be weary of that.
Money is about how those resources are used. Whoever has the money can mobilize those resources for any goal of its choosing. The value can only be measure in function of what those goals are.
It's obvious that you can't choose turn a $1B yacht in insulin, but you could redirect the economy to produce more insulin and less yachts (or the other way around).
The believers in Laissez-faire, will tell you that the system, by itself, will produce the exact quantity of insulin and yacht necessaries. In other words, they think that the optimization function and the utility function are all implemented in the power of markets.
In the other side of the spectrum (a totally centralize economy), they will tell you that the optimization function and the utility function can be wrote by hand.
Personally, I think that the optimization function have to be learned by the markets, and the goal function have to be handcrafted. The economy is just a machine that really doesn't care, it will create yachts or insulin or whatever.
- MacroVoices Podcast[0]
- The Market Huddle podcast[1]
Lyn has been a guest on the Market Huddle (so you can hear her talk through this article) and Stephanie Kelton has been interviewed on MacroVoices.
[0]: https://www.macrovoices.com/
[1]: https://www.youtube.com/channel/UCTNgTBKATr18Z7kR32rKOBw
A huge exogenous shock with no potential for moral hazard seems like a pretty clear case where a sort of social insurance (i.e. a government bailout) would be the optimal solution.
https://www.amazon.com/Deficit-Myth-Monetary-Peoples-Economy...
Quite BS imo
Well he said it was MMT, didn't he? ;)
Inflation (in controlled amounts) can act as a redistribution mechanism between debtors and creditors (basically a way to lessen the huge inequality gap we have today).
You think we had it bad, check out what happened here: https://alphahistory.com/weimarrepublic/great-depression/
I seem to remember something else, rather alarming, that happened after that...
The arguments are unconvincing because the USD could lose that status.
The same applies to the UK, Japan, Canada, Australia and the Eurozone among others.
"Rather than ramping up spending, Bruning increased taxes to reduce the budget deficit. He then implemented wage cuts and spending reductions, an attempt to lower prices. Bruning’s policies were rejected by the Reichstag but the chancellor was backed by President Paul von Hindenburg, who in mid-1930 issued his policies as emergency decrees.
Bruning’s measures failed and only contributed to increased unemployment and public suffering in 1931-32. They also revived government instability and bickering between parties in the Reichstag."
Or from wikipedia:
"From 1930 onwards, President Paul von Hindenburg used emergency powers to back Chancellors Heinrich Brüning, Franz von Papen and General Kurt von Schleicher. The Great Depression, exacerbated by Brüning's policy of deflation, led to a surge in unemployment.[8] In 1933, Hindenburg appointed Adolf Hitler as Chancellor with the Nazi Party being part of a coalition government."
One thing I heard Stephanie Kelton and other MMTers has always emphasized about MMT is that the main question of the theory isn't "Should we print the money?", but "HOW should we use the printed money?" The money-printing is already conceptually independent from yearly budgets; the big question is how we're going to use that money so that uncontrollable inflation does not occur (which the Keynesians failed to answer with stagflation). If the newly printed money improves the strength of the "actually existing" national economy, then its currency will become competitive with others and a hyperinflation moment like Weimar would probably not happen.
2. Hyperinflation isn't a natural result of regular inflation. There have been countless governments that have engaged in deliberately inflationary policies. Basically none of them resulted in a hyperinflation spiral.
3. Hyperinflation isn't even caused by spending policies in the first place! It is the result of a collapse in national revenue, forcing a government to print money to honor debts that it can't otherwise pay. This leads to a collapse in confidence in the currency, and more printing, thus the spiral. I'm not aware of any nation anywhere that "printed money" for new spending and ended up in a hyperinflation state. You have a counterexample?
However, I lived in Africa. One of my best friends (at the time) lived in Zimbabwe. I lived in Uganda (I think that nation made the news, as well).
There's another country that has had a hyperinflation problem: Venezuela (I think it's still going on).
When you have to use a wheelbarrow to carry money to buy a loaf of bread, then something ain't right.
Hyperinflation doesn't cause despots, but good old-fashioned misery for the masses goes a long way towards it.
It's really easy to be clinical and analytical, when we don't have to pay the price, ourselves, but I can tell you, from personal experience, that walking past psychotic young men, carrying loaded machine guns, backed by the government, every day, kinda sucks.
A lot of people in the world have to do exactly that.
The one issue that I have with the tech social media scene, is how divorced we become from simple, basic humanity. Everything becomes strawmen and examples.
See http://bilbo.economicoutlook.net/blog/?p=3773 for the true story about Weimar.
It encourages irresponsibility and debt, and discourages people from saving, planning for their future, and over all acting in a way that is not filled with instant gratification, or extremely leveraging themselves
That provides good short term growth, but then you have recessions and depressions because at some point those balance sheets have to be balanced
Unexpected inflation is. Predictable inflation is easy to account for.
I live in New York. My basket of goods included until recently rapidly-increasing real estate prices. That is the benchmark against which my money managers are judged. It is true that this forces them to invest more riskily. But that is a systemic lever inflation and interest rates are designed to tweak: low interest rates beget risk taking.
What is happening today, the marginal rate @ or below zero there are no savers, that is equally as bad as high interest rates where no one was taking any risks
Based on what? Savings are the rue of Keynesian economics. And they at best do nothing in monetarist frameworks.
> the marginal rate @ or below zero
Marginal nominal rates are between 0.09% (1 mo.) and 1.63% (30 y.) [1]. Real rates are negative [2], but to the tune of -1.22% (5 y.) to -0.26% (30 y.), which hardly discourages rainy-day saving. For anything more than that, surplus capital should be invested, not hoarded.
[1] https://www.treasury.gov/resource-center/data-chart-center/i...
[2] https://www.treasury.gov/resource-center/data-chart-center/i...
Housing prices are going up = average citizen is happy, or at least not concerned
Fiscal austerity & inflation = average citizen is alarmed and votes you out of office
So yes, it's essentially a magician's version of the hard choices government has to make.
It's required for both; the fact that Congress has delegated monetary policy and not recalled it, and not done the same with fiscal policy doesn't change that, it's just the mechanism by which it provides ongoing consent to the Feds decisions in monetary policy.
Now spend $100. Tax it at 1%. Then the next person gets $99 income. Spend it all again. Tax that at 1%. Then the next person gets $99.01. Tax that at 1%. And so on like a stone skipping across a pond.
When you get to the end of the sequence and total up the tax take, what is the value?
You'll be surprised.
Now work out why that doesn't happen in the actual world. The answer is that somebody didn't spend everything they earned straight away. And that's what a deficit is.
Reserve currency status does afford increased deficit-spending capacity. But it isn’t an immutable, environmental variable. Deficits and reserve currency status interact. If a country runs up large deficits in the name of its reserve currency it affects others’ inclinations to hold the currency in reserve.
Precisely where this happens is difficult to predict. It involves many levels of animal instincts. That it happens, however, is well evidenced.
By analogy: we know the plane will safely travel at a 300 flight level. There is theoretical work for higher FLs. Do you point up the nose of a fully-loaded plane until the wings or engine or fuselage fail?
Piloting federal fiscal policy on MMT is akin to steering the plane to FL 100 and keeping an eye out for a stall. You might get lucky. But you should have experimented in smaller and more-controlled settings first.
Not necessarily. Reserve currencies facilitate international trade and finance, things which may not exist in their present form without the United States. There is no rule saying the world must have one.
Everyone could wind up owning their trading partners’ currencies. We could revert to a commodity standard. Or free trading zones could emerge with synthetic currencies.
https://qz.com/africa/1291372/chinas-yuan-gets-support-from-...
In the early days its easy to be unimpressed and rightfully so, but its certainly a signal of potential change in the order of things.
Through monetary policy. When the Fed creates a dollar it destroys a dollar of assets, e.g. by buying a bond.
Fiscal policy is different. When Congress appropriates it creates new money. That impacts the real economy differently. (This is why every crisis involves central bankers calling for fiscal stimulus. It is more powerful.)
[0] since we are discussing MMT, we should note that the term “fiscal” is a reference to metaphor that is not at all appropriate to modern fiat currency systems, and that so-called fiscal policy isn’t constrained by a fisc and is just as monetary as what is traditionally called “monetary” policy. But it's easier to use the classic terms than “taxation and spending” in place of fiscal and “central bank credit” in place of “monetary”.
Nobody who decides the policy will have read the theory anyway, so that doesn't really matter.
It requires a suspension of disbelief to accept that economic policy is decided based on theory. It is the same fig-leaf as copyright supporting artists, then the law clearly being written by groups like Disney based on their own convenience.
Not decided on. But influenced by. Or at least, who gets to be influential is influenced by it.
MMT’s political bullet point of “deficits don’t matter so spend like crazy” empowers a unique set of policies. So those actors push it so voters will accept the cost of their goodies.
> the same fig-leaf as copyright supporting artists, then the law clearly being written by groups like Disney
Disney helped draft the Constitution?
Good job that isn't what MMT says then isn't it.
Quite why people insist on putting up that straw man I don't know. It just makes them look ridiculous.
MMT says when you run out of things to buy at a price worth paying the spending automatically stops, and that means you can only really buy the unemployed.
If you want anything else you have to tax first to make what you want to buy unemployed. Then you can buy it.
It's no longer a matter of running out of money, as that is impossible, it's a matter of running out of unemployed to deploy.
Reserve currency is essentially a myth. It's just an artefact of double entry bookkeeping in banks.
There are lots of reserve currencies. Every floating rate currency held outside its native borders is "reserve". It's just somebody holding the money - aka savings.
Many countries do that for mercantile reasons to avoid a dutch disease at home. Norway is one, China is the main other.
"Piloting federal fiscal policy on MMT is akin to steering the plane to FL 100 and keeping an eye out for a stall"
It's just excess savings, which are automatically offset by a Job Guarantee. Basic accounting really.
Deficits are just an accounting residual causes by people choosing to save. For there to be a deficit at all somebody has to choose to hold the money. Or there won't be one.
This is empirically false. Offshore currency holdings make offshore financing in your currency easier. That makes financing deficits less likely to produce domestic inflation.
Quantity and diversity of the offshore holders of one's currency matter. There is a qualitative difference between the U.S. dollar and Argentinian peso.
It isn't. It is accounting fact. Every currency held outside its borders is a foreigner saving that currency. That's all a reserve is.
Lots of people like to hold US dollars. Fewer Argentine pesos even within the country.
Actually having fewer people hold you currency makes it easier to run. You just make your budget in that currency balanced by increasing taxes. If you have lots of people saving your currency then let them - and accommodate the savings.
> Reserve currency status does afford increased deficit-spending capacity.
The key point of MMT isn't that fiscal balance (deficit v surplus) doesn't inherently matter as much because there are conditions (whether “reserve currency status” that you've focussed on it something else) that Trump it for the countries of concern, it's that fiscal balance is ultimately an illusion based on a metaphor (the fisc, a finite purse filled by revenue and depleted by spending) that simply fails to reflect reality for a country whose budget operates in its own fiat currency, and that the financial constraints on such a country have to do with monetary effects of decisions, not fiscal balance.
> If a country runs up large deficits in the name of its reserve currency it affects others’ inclinations to hold the currency in reserve.
Sure, the sum effect of the governments decision making on demand for the currency, and those value of the currency, (the kind of reserve considerations you discuss here are an aspect of this, not categorically special) is exactly the kind of monetary consideration that MMT holds is a real constraint. But fiscal balance itself isn't a useful yardstick for that.
> Piloting federal fiscal policy on MMT is akin to steering the plane to FL 100 and keeping an eye out for a stall.
No, it's more like guiding nap-of-the-earth flight with a radar altimeter rather than a barometric altimeter calibrated to the long-term average global pressure at sea level. Monetary effects are the actual hard constraints, fiscal balance is a distant, murky proxy with an uncertain and time-and-conditions-variable relation to the actual constraint that obfuscates rather than clarifies.
It's naive to think that people will still value the dollar and assets which earn revenue denominated in dollars when everyone knows that the value of the dollar is always approaching 0.
I think something big is going to happen when big investors collectively realize that it's not just the dollar which is losing value, it's also all assets whose earnings are denominated in those dollars.
If gold was worthless, then all gold mines would also be worthless. Somehow people still haven't gotten their heads around that.
She says the deficit doesn't matter because a government that prints its own money can wipe out the debt with a few clicks of the button (if they so choose). The debt number doesn't really matter. It can be paid off by a large injection of printed cash. But that has other implications. Ultimately, it's inflation that we really care about, not the deficit. And there are better tools for controlling inflation that hurt fewer people than the current monetary policies in place.
This is the part of her argument that I found unconvincing. The tools sort of work. But once you have inflation and inflation expectations a tremendous amount of political capital and pain must be spent to get out of it. A system which regularly subjects itself to such a test will eventually fail it.
Quite BS imo.
Why are you against additional saving?
https://capitalisnt.com/episodes/the-right-and-wrong-of-mmt-...
I've read a lot of economics articles and this article was hard to follow. The writing was just not clear and concise. For example, she defines several types of inflation early on, and then does not define which type she is referring to later in the article. Wolf Richter is my favorite current economics pundit at the moment.
https://www.rba.gov.au/media-releases/2020/mr-20-28.html or https://www.abc.net.au/news/2020-11-03/rba-cuts-interest-rat...
We've finally joined the club.
Can someone please share some good primer articles about monetary policy, QE and how central banks work? Thanks!
There's a documentary based on his book, which may be a quick introduction to the content (although I'd still recommend the book): https://www.youtube.com/watch?v=5-IZZxyb1GI
What a paradox is this capitalism, the system is supposedly trying to "help" people, but some people is trying to make money out of it while some others need it to be alive and nobody can live without the others. And loop.
Besides that as time goes by it seems more clear to me this is obviously non sustainable, although I might be wrong as I have been thinking this for years and keeps working :)
Wage-earners, and fixed-income households if inflation indexed are largely untouched by inflation.
Wage-earners see wages increase with inflation. Possible slight lag, but effectively little.
Cash savings of course devalue.
Asset holdings (real estate, equities) appreciate with inflation.
Debts are reduced -- values fall as money is diluted (the gain side of banks' loss).
Per definition the poor don't have much savings. Their wealth is mostly in durable consumer goods: Car, television, furniture, etc. The market prices of these goods rise with inflation.
"Fair" != "a socially just policy'.
Some wage earners. The poorest of the society work for a minimum wage, and that wage won't be increasing anytime soon.
Flipside, bond rates serve 2 purposes. First, it's what the government borrows money at; the second is what everyone else borrows at. These are counter points, if the economy needs boosting you lower rates but at some point the giant pension funds stop buying. This almost always occurs right around where bonds real yields are negative or 0. That is to say the Inflation target of 2% is higher than the bond yields.
When those big funds stop buying, like they mostly have at the moment. The central bank is the last place for the government to fund itself. This is a strong sign the country has become bankrupt. https://tradingeconomics.com/united-states/central-bank-bala...
The US government is obviously bankrupt.
Inflation is a hidden tax on savings. The boomers did not save enough money, they wanted to retire based on debt given to later generations. Extreme inflation is coming and will be taxing their savings to pay off the debt.
The fact that new money is mostly backed by debt is irrelevant because those who own a lot of capital assets know that they will always be able to use their assets as collateral to take increasingly large loans in the future... Wealthy capital holders can always take new, bigger loans to pay off old smaller loans.
Those who value growth above independence must enslave themselves to banks in order to guarantee that they can keep borrowing in perpetuity. If you know that you can borrow in perpetuity to buyback your stock and make repayments on your old loans, then you can rest assured that debt is never going to be a problem for you. You can just do what the government does with treasury bonds; issue new bonds to pay off your old bonds; the government is not the only institution which can do this.
Japan and Europe disagree.
You can't increase the supply of a currency (or anything else) without it losing value unless the supply of goods can keep up with the supply of currency but that doesn't appear to be the case these days. The best you can do is hide the surplus currency from the markets as long as possible. But eventually, something will happen which will force the hidden currency to enter the markets.
Also, there is a myth that technology is causing exponential growth in efficiency but the reality of the last 10 years is that everything has been getting more bureaucratic and less efficient (I'm a software engineer so I've seen this first hand).
What it ends up as is savings - bonds. When those bonds are spent they generate a sequence of further transactions and taxation that pay off the bond.
Bonds are essentially a store of taxation as well as value.
The problem is that there is a limit to how much treasuries you can sell to the market. For a long time US government was able to exploit internal and foreign markets to run deficits, but the "free lunch" has ended. No one wants to buy those treasuries at the proposed rates and volumes anymore. So what did the US government do? If we remove the extra steps, it effectively coerced the Fed to print money and give it to the government. If it's a one time thing, economy may handle it, but there is a strong temptation for politicians to keep doing so, which can only end in disaster.
Why is there? Given that Federal spending puts the reserves in place with which Treasuries are purchased, how can there be a limit?
It's just an asset exchange.
"No one wants to buy those treasuries at the proposed rates and volumes anymore."
(i) What is the bid cover on the latest auctions (ii) Why do you think that matters anyway? The Fed can just leave the bank reserves in place - as it is doing by QE.
In a well working system this additional power is used to accelerate economic growth, so interest rate is compensated by additional taxes, otherwise government has to allocate bigger ratio of collected taxes to service its debt or loan more and more. The first option is not popular with politicians for obvious reasons, while the second one can not continue indefinitely. More you try to loan from market, higher rate will be required (i.e. market will trust a government less), higher the rate, more difficult it will be to service the acquired debt (i.e. a government will have to be either really efficient with its spendings, or otherwise we return to the step 1).
Arguably market trust in the US government has already passed level of sustainability, so it has chosen to loan from the non-market source, which I believe in the end degrades trust put into the whole dollar-based economy. Granted, the level of trust is really high, so assuming the current QE is a one time thing, this should not be fatal, but if such harmful policy continues...
No, but there is an oil sump in an engine, and that stops it seizing up.
"By issuing treasuries a government loans economic power from markets"
OK. Let's test that. Let's say Scotland issues a new currency. Let's say the Scottish government believes it has to get money from markets to spend.
Where are 'the markets' going to get the Scottish currency from to buy the bonds?
Now do you see how you have the monetary operations backwards.
Bonds are a reserve drain. You can't do a reserve drain until you do a reserve add.
"More you try to loan from market, higher rate will be required"
There is no operational mechanism for that to happen. For rates to go up prices have to go down. If prices go down then the Fed simply QE's the Treasury out of circulation and forces the price back up.
The Fed has complete control of the yield curve all the way up the maturity. You get to play in the Treasury market on the whim of the Fed, and under no other conditions.
You are assuming full employment in these scenarios... why?