Comment by bko | Hacker News Reader

Comment by bko | Hacker News Reader

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> as the stimulus packages have been targeted towards basic infrastructure and assistance programs for lower income groups.

This made me chuckle. If anyone is curious, this is where the money went [0]. To say that the money was focused on lower income groups is laughable. 2.9 out of 12 trillion allocated went to asset purchases, basically buying treasuries and mortgage backed securities. How many lower income groups hold treasuries?

[EDIT] If anyone is curious about an alternative view, I've been kind of obsessed on this topic over the last few weeks are wrote about it extensively [1] and tried documenting the ridiculous rise in asset price levels to levels much higher than even that of pre-covid [2]. To say that there's nothing going on when nearly all asset prices are 30+% past their pre-covid peaks is ridiculous.

[0] https://www.covidmoneytracker.org/

[1] https://mleverything.substack.com/p/where-did-the-12-trillio...

[2] https://mleverything.substack.com/p/where-did-the-12-trillio...

You have to think indirect effects though. Staving off a bond market crash probably is a good thing even if it does not directly help poor people. Ill-liquidity in the corporate bond market makes it hard to raise capital, which means less hiring, and hurts workers of all incomes. A bond market crisis is bad for everyone.

I agree to an extent. But that amounts to basically "trickle down economics" that protects the incumbents (large banks, many of which are foreign, mortgage issuers, etc). Notice how you don't really see any new banks being created? Why are bank stocks up 30% from pre-pandemic levels?

Put this into context. The 12 trillion in new spending/money allocation due to covid results in $36,000 for every man, woman and child in the United States. The government could have cut a 5 figure check to every person in America to deal w/ the fallout, or a fraction of the people most affected. Instead we decided to give it to large institutions. And we're arguing over 1,200 vs 1,600 stimulus checks.

This is key. GP is right that a bond crash would hurt everyone, but generating stimulus and routing it away from the working people is just trading pain now for more pain later - the bill will come due. There's no magic here.

Handing everyone a check directly increases inflation. There is no increase of the supply of goods, so everyone would competing for the same things and prices, raising prices. Poorer people spend more money paying off debt or purchasing consumer goods, so most of that money flows straight to the top anyways. Since this money comes straight from the money printer rather than through taxes, this means that the wealth gap gets exacerbated through stimulus checks.

Purchasing assets introduces liquidity, but isn't equivalent of handing people money. The Fed receives the equivalent value in the form of debt.

In theory, the increased demand that might cause inflation could be partially or fully cancelled out by a tax increase. (In practice, Congress is unlikely to do it.)

It looks like we are seeing supply bottlenecks in certain areas. The price of lumber is bottlenecked by sawmills and electronics are bottlenecked by fabs.

But I wonder what’s not bottlenecked that could absorb more demand?

The GDP is very high versus what most poor people have to spend, so I can't imagine this inflation is much of an issue.

There's more than enough stuff for people to be buying

Market corrections are natural and useful. Every time we print huge sums of money to rescue equities and make debt cheaper, who benefits?

Those with a high ratio of assets/credit to living expenses.

While market corrections create a higher degree of short term pain, allowing them for the last five decades would have gone a long way in preventing the increase in wealth inequality.

It doesn't make sense that investing in SPX is a guaranteed long term 10%/annum investment while nominal GDP growth is under 3%. It's an engineered phenomenon and benefits those who already have a lot of assets.

Isn't this how the fed injects money into the government? By printing it and buying government securities?

Correct. My assertion is that the Fed overshot this by increasing the money supply by ~24% in a single year, causing all asset prices to skyrocket (see link in original post). All the money sloshing around the market is exactly what makes it a bubble. Nearly all assets and industries are considerably higher in valuation despite having a much grimmer outlook with everything that has happened over the last year

It's not a bubble. If there's 25% more money, money is worth 25% less. It's not a bubble when things cost 25% more - it means your pay stayed the same - but the money is worth 25% less. This is great if you own assets and employ people and have "capital gains". It's not so great if you don't own assets and "earn income".

Yes and no - unless the cost of food, gas, electricity, housing and clothing also increased by 25%, it's hard to argue the dollar is worth 25% less.

Come to think of it - if the things that are predominantly bought by the 1% are devalued by 25% due to stimulus increasing the supply of money, but the things that are bought by everyone are not becoming much more expensive, isn't that empirical proof that trickle down economics doesn't work?

Most commodities like corn & lumber & gold - are up over 25%.

Consumer prices don't change as fast. It will be interesting to see if commodity prices go down, or how much of the increase is passed on to consumers.

In the US - 41% of electricity generation is mostly debt-financed - Nuclear and renewables - which is cheaper because of the Fed setting the price of debt. Another 40% is natural gas, which is also getting cheaper because its production is largely financed with debt - which is also set by the Fed.

So the price of electricity & housing is largely price fixed by The Fed. I would expect inflation there to stay "stubbornly low" indefinitely.

Good point on your second statement.

On your first statement, it's less that the dollar is not losing value, and more that scarce items are gaining value compared to non-scarce things. So your Netflix subscription is staying the same, but the house near the coast has doubled. Inflation is never the same across the board. All it means is that a smaller group of people are laying claim to the scarcest items, and they are crowding out the hopes of an increasing number of people to one day be able to afford those scarce items.

Yes and...crucially, assets are 25% more expensive to buy. I.e. if assets are things that are "bought by everyone" and not just by the 1% or .0001%, then the dollar is worth 20% less for that purpose.

It also means you pay taxes on wealth that was never created.

Presumably, to decrease the money supply, the mechanism must be the same but in reverse: selling treasuries and private assets back into the market for cash and then eliminating its existence.

If the securities don't sell for much more than it was bought, accounting for fractional reserve banking, the money supply increase is effectively permanent.

So if we take in the permanence of the increased money supply, can we really say we are still in a bubble if the value of the dollar against securities is simply lower?

If it's a bubble how do you see it crashing? Would a move from asset prices to inflation of everyday goods do it?

That's a tough question to answer. I think it will come down to consumer prices but there are a lot of other things that can skew that. For instance, businesses don't want to raise prices so sometimes they'll cut corners to reduce costs. You've seen this in chocolate bars where the typical bar shrinks over the year and then eventually introduce king size to allow for some price inflation.

Measuring cpi is also incredibly complicated. I was shocked it's been so low forever considering over 50% of the index is housing, healthcare and education, three products for which we've seen high price growth for decades. So the official number may be "managed" especially considering that trillions in pensions and social security cost depends on it's reporting.

But the money supply grew so fast, i don't think any massaging of the data will be able to hide it indefinitely

There's no political will for things like higher interest rates or reduced spending, among either political party. The new generation has never seen mortgage rates in double digits

I see future price controls and other draconian measures to try to deal with the fallout. Example is gas lines in 1970s. It'll eventually hurt the real economy as artificial scarcity from price controls hurts business.

Only thing is somewhat certain about is something will happen. This seems insane that a unit of account can just grow 25% in one year with no signs of stopping with no consequences

It's not just politicians and "the new generation" who don't want double-digit mortgage rates. Surely it is also regarded as a present impossibility by the banks.

I mean, barring massive inflation, a double-digit mortgage rate would put so many home owners in default that it would make the global financial crisis of 2008 look like a birthday party for small children.

The "something will happen" part I agree with. I think we will need to come to terms with the fact that our world has crossed the inflection point on the S-curve that all growing populations are confined to. And that will mean dismantling current financial mechanisms such as "interest rates".

I'm dead serious - I don't know how the financial system will look like in 2100, but I'm convinced that "interest rates" as we know and use them today will be something taught only in "history of economics" class.

Most US mortgages are fixed rate mortgages, so increasing mortgage rates would not affect the monthly payments people have to make for their homes, therefore it would not cause home owners to default (in the US).

In May 2019, adjustable rate mortgage applications were only 6.2%:

https://www.mba.org/2019-press-releases/may/mortgage-applica...

Sure, there has been very little reason to take out an adjustable rate mortgage when you can lock in a historically low rate which has been the case the last couple of years. However ARMs were one of the things that caused the market to collapse in 2008 and as rates tick back up over time it's likely that they could become an attractive option again. The other thing is that at some point people need to sell and what is barely affordable to so many now at 3% will surely become unobtainable for many more when rates are 7 or 8%. At some point doesn't it turn into a mobility crisis as there's less and less people who can afford to buy.

If we are asking the big questions, it's worth considering what the macro-economic impact would be if taxation was ended, and the government funded itself solely through printing money. The discourse is all about lowering the tax burden on the rich so they can innovate. But my intuition is without taxes, the rich would be hit harder with inflation than the middle class. So even a strong progressive taxation system can be seen as a giveaway to the rich.

The rich tend to keep their money in assets. Inflation only makes the rich richer.

> I mean, barring massive inflation, a double-digit mortgage rate would put so many home owners in default that it would make the global financial crisis of 2008 look like a birthday party for small children.

Not necessarily. The percentage of new mortgages that are ARMs (adjustable rate) is very low.

> ARMs accounted for just 2.6 percent of mortgage applications in recent weeks and fell to 2.2 percent this week, according to the Mortgage Bankers Association.

Not sure about existing supply but I think it would be single digits as well. And most ARMs are longer (e.g. 7-1 or 10-1) meaning the floating rate portion doesn't kick in until 7 or 10 years in (respectively). Mortgage rates have been low so long I imagine most people with older arms refinanced long ago or built up enough equity where they'll be able to refinance at higher rates if they had to.

So existing mortgage holders wouldn't be hit with higher costs. However the valuation of their home would likely tank making a lot of mortgages effectively underwater (you owe more than the asset is worth). You will see a lot of people do strategic defaults or try to re-negotiate their balance. If I owe 500k on a home worth 450k, I might be fine with it, but if the home was only worth $250k, I would definitely consider a "strategic default", walk away from my mortgage, take a hit on my credit and buy essentially the same home at half the price. But lenders aren't stupid more realistically they'd negotiate down my balance and there would be federal programs to encourage refinancing.

https://www.bankrate.com/mortgages/arms-disappear-from-mortg...

>You will see a lot of people do strategic defaults

Worth noting that not everyplace is California (although half of HN may live in CA, I donno).

There are 12 non-recourse states in the US: Alaska, Arizona, California, Connecticut, Hawaii Idaho, Minnesota, North Carolina, North Dakota, Texas, Utah, and Washington.

Outside of those states, you couldn't necessarily just walk away.

> This seems insane that a unit of account can just grow 25% in one year with no signs of stopping with no consequences

The equation of exchange is MV=PQ, not M=PQ. The velocity of money (V) is falling right now as the money supply (M) is growing, that’s why increasing the money supply hasn’t had consequences (yet).

https://en.m.wikipedia.org/wiki/Equation_of_exchange

https://www.reddit.com/r/mmt_economics/comments/mi2jl0/thoug...

Bitcoin will happen. This injection of money can be seen as a cashout of the current system, selling as much USD as the market can take while it is still possible.

My opinion is that the stock market is setting the tone for what is going on and that at some point the major players might want to cash out their position causing stock prices and consumer sentiment to drop. Although I wonder if it’s more profitable for them to cash out slowly as prices keep getting pushed up thanks to the relative lack of a bond market and other manipulations.

Increasing interest rates.

I don't know enough to estimate the likelihood of that happening but it seems like the obvious danger.

Higher rates are the solution, not the danger. The danger is the economic waste from artificially lowering rates, causing bubbles and massive misallocation of resources.

Owners of the stores that sell everyday goods compete for the same housing.

>By printing it and buying government securities?

They also printed money to buy billions $ worth of corporate bonds like General Electric Ford, GM, AT&T, etc: https://www.google.com/search?q=%22federal+reserve%22+buys+c...

Example list: https://www.investopedia.com/the-fed-s-corporate-bond-portfo...

The Fed also bought (continues to buy?) private bonds, which keeps the cost of money low for big players.

https://www.cnbc.com/2020/12/16/fed-decision-december-2020-f...

The fed just credit the account of the government. The securities buying part is just a legal requirement.

I think you are confusing monetary policy with fiscal policy.

Is it reasonable to conflate the actions taken by the Federal Reserve and the phrase "stimulus package"?

I tend to default to not doing it, as "package" has some implication of legislative action, and the Fed is somewhat separated from the rest of government.

Like in your comment, Congress didn't allocate the money the Fed used for asset purchases, the Fed did.

I liked this guy's take:

"Two Centuries Of National Debt In One Year: Putting 2020 In Perspective"

http://danielamerman.com/va/ccc/H3TwoCenturies.html

First of all, when did $12 trillion did allocated?

You can either choose to count spending or liquidity injection. Otherwise, you are double counting. If the government spends $3 trillion in stimulus financed entirely by debt, that dries up the liquidity for businesses, which creates a liquidity trap that sends us into another Great Depression. To think of it another way, the treasury could have just printed $3 trillion to pay for the stimulus without issuing bonds, which would have a similar effect.

Actions from the federal reserve are not part of the stimulus packages though right?

Stimulus packages are legislation passed by congress vs independent actions taken by the Fed.

Wait, it's been $12 trillion??

More like $6T. OP seems to be counting Federal Reserve actions as "stimulus packages" which is pretty non-standard if not outright wrong

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