For a central bank there's no such thing as no policy. Even inaction is a policy.
(Of course, there are systems that work without a central bank. And can work very well in fact. But that's not what the Dutch as part of the Euro zone have.)
I'll admit I'm pretty furious at the fed right now though. As someone with a lot of assets in cash who was hoping to buy a house last year, I have been double penetrated by inflation and spiraling home prices. The housing market accelerated just out of my reach before I could make a move and my cash pile is on fire. I'd have moved back into the stock market to protect it, but it seemed risky given historical valuations and such. Now I'm poorer and I can't help but think Powell effectively just stole from me and I've been punished for being defensive and not participating in the fueling of an asset bubble.
I suspect you would have been a lot more furious at the Fed in the event they had sat back during COVID and presided over a deflationary spiral triggered by the lockdowns. Can't get a mortgage if you're out of work, ya know?
> As someone with a lot of assets in cash who was hoping to buy a house last year...
Let me stop you right there. Generally speaking, you shouldn't hold cash. Nobody should hold cash. Nobody should have ever held cash because even at the baseline expectation 2% inflation that's still a loss.
> I have been double penetrated by inflation...
Inflation is somewhere between 2 and 5%. That's not what I would call "penetration." Mild discomfort maybe.
> ...and spiraling home prices.
Housing affordability hasn't really changed on a monthly basis, because on a 30-year fixed rate mortgage the drop in interest rates from 4.xx% to 2.xx% means that a monthly payment two years ago on a $1M property is the same as it would be today on a $1.2M property. That's napkin math, I believe the spread is even larger IRL.
In fact, if you can lock in a 2.xx% mortgage in a 2-5% inflationary environment then it is in real dollar terms a zero-interest loan. Before factoring in tax deductions.
What's become more painful is making the down-payment.
> Now I'm poorer and I can't help but think Powell effectively just stole from me and I've been punished for being defensive and not participating in the fueling of an asset bubble.
You're not poorer, you're not as rich as you thought you'd be.
arcticbull said '... you would have been a lot more furious at the Fed in the event they had sat back during COVID and presided over a deflationary spiral ...'
Deflation makes cash have more purchasing power, so arcticbull your speculation is wrong. Completely backwards.
I suspect anything in between would have led to a huge spike in interest rates making borrowing yet less affordable no?
> Deflation makes cash have more purchasing power, so arcticbull your speculation is wrong. Completely backwards.
>> Can't get a mortgage if you're out of work, ya know?
So no, not really... unless you stopped reading before you got to that sentence ;)
"stagflation" is simply what happens when inflation keeps up with deflationary trends. It doesn't mean monetary policy is doing nothing. It likely means it's working as intended.
> Japan has had serious struggles fighting off deflation
But the CPI in Japan hasn't gone down, if anything it's gone up more years than it's gone down. Moreover, in what way is Japan terrible? Due to less inflation, there's less income inequality. Maybe deflation isn't bad.
In an inflationary economy, people spend their money quickly, since it's worth less sitting around. In a deflationary economy people hoard cash because the value of cash just increases in the bank. Why invest in anything (companies, labor, capital investment) if your money just earns 10% in the bank?
If enough people do that jobs disappear, as they realize they don't need to market any new product or service to make their money.
FWIW, they call that period in Japan "The Lost Decade(s)" https://en.m.wikipedia.org/wiki/Lost_Decades_(Japan)
Austrians and the HN community talk past each other because it's not easy to get the latter (which I am a part of) to see that their large salaries in FAANG companies are partly due to the Fed largesse.
If currency loses 100% of value, it will be worth zero. A complete, 100%, total loss.
A 500% loss would be spectacular! And not possible using commonly accepted laws of the universe such as math.
A dozen peaches experience 100% deflation. They completely 100% go to zero. There are zero peaches. They are gone.
What would 500% deflation do? Using regular math and experiences with donuts and peaches, what happens at theoretical 101% deflation? And 500% deflation? How can something be reduced more than 100%, the point at which it already disappeared?
So for example, a 500% deflation just means that one dollar today buys $6 worth of whatever it could have bought in the past (my math might be off)?
Inflation is about the loss of value, not deflation. 1£ today will be worth x£ tomorrow, where x < 1.
No, what I'm saying is the government failed to act sufficiently and forced the fed to act when they shouldn't have(or at least to the level they have).
> Generally speaking, you shouldn't hold cash.
Now come on that's not really true in the short term. Generally speaking, you shouldn't put your money in the market if you need it in the next 5 years. Sure I could have bought CDs but have you looked at rates lately? That wouldn't have helped. My only option would have been to pile into an asset, and by the time I needed to park my money assets had already appreciated above historical norms. I'd be gambling against a reversion to the mean.
> Housing affordability hasn't really changed on a monthly basis
The market I am familiar with and was planning on going back into is up about 35% from late 2019. You're also then gambling that these historically high valuations will hold going forward. Homebuyer sentiment has plummeted because folks like me no longer think paying these high prices(https://fred.stlouisfed.org/series/CSUSHPINSA) makes sense.
Did you really mean 5 years, or 5 months, or something else? I'm not sure if I can take this statement seriously, or if it's meant to be a joke. 5 years is a long time.
If you're young and you've only seen the market go up you need to familiarize yourself with normal volatility patterns. The market can easily take a dump at any time and fail to provide a positive return for years.
...or decades: "Nikkei index hits 30,000 for first time in three decades"
https://asia.nikkei.com/Business/Markets/Nikkei-index-hits-3...
According to whom? Right now, nothing pays out any yield, it’s stocks or lose to inflation.
I’ve followed ARCC, MAIN and GSBD for years, and there’s the more diversified Van Eck Vectors BDC ETF (BIZD), with an 8.5% yield. But I digress.
What should the government have done?
This is a factor worth considering for anyone who is currently looking to buy a home. As long as you can afford the downpayment, you could lock in a fixed-rate mortgage while your earnings or other savings could grow at a higher rate. This is analogous to what some companies have done in recent years, loading up on low interest debt.
If the Fed and the government are going to reward those who leverage up on risk, might as well. As '08 shows you'll even be rewarded when the crash happens
If interest rates decrease and home prices increase vs. interest rates increase but home prices decrease, then there is a point where the two will intersect, and there are many points around the intersection where the difference between the two is fairly insignificant.
How does the common expression go -- "The house always wins?"
Also, “don’t worry, just look at the monthly payment” is something that should only ever be said by a car salesman.
Depends how long you’re planning to save. You can hold treasuries or risk parity adjusted pairings. Or CDs ladders. Lots of stuff!
> On a 30 year fixed mortgage what else matters?
I think the general criticism regarding monthly payments is more targeted at products like interest-only mortgages, which were hot in the early oughts. Those aren't as common these days. Maybe some people have 10/1 ARMs and similar in mind, but that's a stretch. (Anyhow, today the spreads between ARMs and 30-year are ridiculously small.)
> Depends how long you’re planning to save. You can hold treasuries or risk parity adjusted pairings. Or CDs ladders. Lots of stuff!
You don’t know how long the search for a home will take. That’s the point.
I don’t think they intended to be holding cash, they were setting up for a large purchase and the timing was bad. But yeah, arguably when there’s no immediate prospect of the opportunity resurfacing, probably reinvesting that paper would be more congruent with the system we have before us.
Nah, holding cash is fine under some circumstances.
Yes, the 2% inflation that the Fed chose to aim for makes holding cash costly.
But everybody holds cash. It's just that higher inflation expectations makes people hold less cash in real terms.
But then, you can be angry at the Fed for choosing that particular inflation target. The Fed could just as well go for 0% inflation. Or even go for a stable nominal GDP 65,000 USD per year per capita in perpetuity. (The latter would basically automatically ensure its dual mandate. Though most of the proponents of nominal GDP level targeting suggest to target a slight increase over time.)
In such a stable nominal-GDP system, holding cash would be rational in many more circumstances than today, because in general cash would slowly increase in real value as productivity and thus real GDP improved.
That money that would have gone towards your equity, is being spent in interest. This is why people making 60k/yr. buy $65,000 trucks. Interest rates drop and they only look at the monthly payment amount.
You don’t always get the full tax deduction on a first home either. In high tax states the 10k deduction limit kicks in when your paying high state taxes + mortgage interest.
There's a lot wrong with the Netherlands and Dutch people but economically everything is still chugging along nicely. Our sole saving grace.
If they could afford an X/month mortgage, so bidded a higher total cash price because X/month suddenly was a higher total purchase price due to lower interest rates, and the original poster could only afford a X-$300/month mortage, the original poster isn't beating them anyway.
There has been an extreme shortage of supply due to some combination of people not wanting to move due to Covid because of exposure to lots of people being required, people valuing homes with more space over apartments more than they did in the past, and people not wanting to try to "trade up" because the houses they'd upgrade to were also being hit by the price increase. That shortage is what fucked the original poster here, not stimulus checks.
Say that he's got $500K in cash but can put only $3.8K/month toward the mortgage, while the average person around him has $250K but can put $5K/month toward a mortgage. Average housing prices are $1.25M, so at 4.5% interest rates he's competitive. He puts down $500K and borrows $750K @ $3.8K/month for a $1.25M house, while the average borrower puts down 20% ($250K) and borrows $1M @ $5K/month.
If interest rates go down to 2.5% like they did now, the average borrower can now borrow $1.25M, so home prices go up to $1.5M. His cash stash still would require a $1M loan, which would cost around $4K/month, so he has been priced out.
If interest rates go up to 20% like in 1980, then the average borrower can only borrow $300K to maintain $5K/month, so home prices drop to around $550K and he can purchase with cash, or a tiny mortgage. All of the homes between $550K-730K (previously, roughly $1.25M-$1.7M) are now unaffordable to the average mortgage buyer, but are well within OP's range.
Inflation acts as a tax on savers and a subsidy for debtors.
Slightly tangental, but you piqued my interest. If it's clear the Fed can print more money, which causes inflation, which is a tax on savers. Then why do savers or anyone need to pay taxes? Could the Fed just not use inflation as a form of taxes in general? Instead of taking x% of people's income, the dollar could just print the money they need, and inflate the dollar's value to recoup their costs.
I'm not saying this is a good idea or anything. I am not knowledgable enough in economics to argue for/against this. It's just a food for thought kind of thing.
The macroeconomic answer is yes, assuming that you can control inflation and spend your money in a wise disciplined manner, you can do this. An inflation rate of 10% is basically a wealth tax on currency-denominated assets of 1/1.1 ~= 9%, collected implicitly. And it has many benefits. Administration cost is near-zero, the government just needs to print money and let price levels do the rest. As a wealth tax, it's progressive. It encourages consumer spending, and encourages people to hold productive assets rather than currency-denominated financial instruments. Aside from land & externality taxes, it's one of the best types of tax.
The historical reality is much nuanced, and negative. In reality, you never get uniform inflation across all prices; instead you get something called Cantillon Effects [1], where money pools at the places it's injected within the economy and at monopolies, and never makes it to ordinary consumers. This ruins a lot of the progressiveness of inflation: Google and Facebook shareholders will enjoy higher ad prices (which is happening now), but the ordinary service worker on the street still lacks the bargaining power to get a raise. And it's also easier to dodge than governments believe: instead of holding wealth in cash, wealthy individuals will simply hold stocks, cryptocurrency, art, NFTs, and other "floating" assets whose value rises along inflation (this is also happening now). Inflation also acts on a tax on the economic efficiency of businesses and consumers - instead of the government collecting the tax, businesses simply have to re-price all of their items, and consumers may need to find alternate sources if relative prices change.
The worst case, though, is that it's unclear whether it's possible to maintain steady, government-controlled inflation at appropriate tax levels (which would have to be about 50% to maintain government spending levels of about 35% of the economy). Looking at incidents of high & hyperinflation [2], it's very difficult to find time periods where inflation exceeded 20% but then did not go on to exceed hundreds of percent. Businessmen seem to have a binary approach to inflation - either they can think of a world of stable prices (where maybe they give 2-3% CoL increases each year), or they must grab all the money they can right now because all their costs are going up too and if they don't they'll go out of business. There are many historical examples where governments thought "Okay, we can tolerate just a few percent higher inflation to fund this one war, and the spoils will pay it back later" and instead they found themselves tipped into hyperinflation and unable to rein the economy back in.
[1] https://mattstoller.substack.com/p/the-cantillon-effect-why-...
[2] https://en.wikipedia.org/wiki/Hyperinflation#Examples_of_hig...
No, the real problem is the deadweight cost:
The higher your inflation, the less cash people want to hold in real terms. But that amount of cash is what you collect your inflation tax on.
> An inflation rate of 10% is basically a wealth tax on currency-denominated assets of 1/1.1 ~= 9%, collected implicitly.
What makes you say so? Expected inflation would purely be a tax on cash. Currency-denominated assets like loans and bonds would just get a higher interest rate up front.
Your next paragraph describes exactly that 'dodging' of the inflation tax.
Btw, you can also simply dodge eg a USD inflation tax by holding Swiss Franks. No need for NFTs.
(Of course, if you have a capital gains tax levied on nominal gains, then inflation effectively increases the capital gains tax. The solution here is to charge capital gains taxes only on real gains. That's a real problem in the real world.)
> In reality, you never get uniform inflation across all prices; instead you get something called Cantillon Effects [1], where money pools at the places it's injected within the economy and at monopolies, and never makes it to ordinary consumers.
The Cantillon effect is controversial to say the least.
In order to work like Internet Austrians commonly describe the effect, people have to be idiots who act purely on historical data and do not form any expectations.
In the real world, when the Fed announces some future policy in advance (like a taper or a new round of QE), that announcement has effects on eg the stock market right away, even when the Fed hasn't added or removed any money yet.
In contrast, for the Cantillon effect to work as described, money would need to act sort-of like a liquid or gas and 'slosh around the economy' and get stuck in nooks and crannies.
If I understand the very basic gist of MMT correctly, it's basically that the government "invents" currency simply by spending. If the government wants to finance, e.g., an enormous infrastructure project, all it has to do is will it into existence and the money will get printed - mostly because the full faith in credit of the United States Treasury will make sure the right people are paid.
If this is true, what then is the point of taxes? Taxes are a buffer to "sop up" excess cash in the economy to keep inflation under control.
Another central tenet of MMT is that the end goal of tuning these knobs should be 0% unemployment, because that's when your economy is producing maximally.
I'm sure I got a lot of that wrong, because (like I said) I'm not an expert, but what you described reminded me of the MMT Wikipedia rabbithole I ended up in a few years back.
Unfortunately, MMT is either a meaningless tautology that doesn't change anything about our understanding of the world. Or, it's wrong. Depending on what definition the MMT people use at any one point in time during a discussion.
In some sense, they already do that.
But it's more complicated than it first appears.
First, most of the money the Fed+government makes from issuing money comes from seigniorage, not from inflation.
Simplified a bit, seigniorage just means that the cash people hold in their wallets (and bank accounts) took the government pennies to print, but the people offered real goods and services in exchange to acquire it.
Second, higher inflation makes people hold less cash in real terms. A simple illustration: when Germany had hyperinflation in the early 1920s, some people might have carried cash by the wheelbarrow, but even a whole wheelbarrow would only be worth eg a few apples and potatoes.
In contemporary Germany with a stable currency, it's not too unusual to carry enough cash in a slim wallet to be able to afford wheelbarrows full of apples and potatoes.
So if the government+central bank want to maximize how much real benefit they get from printing money, they can't just crank up inflation. In fact, lower inflation is probably better, if you want to maximize this.
So honest hardworking people got triple-fucked.
I can't imagine how well UBI would ever go. This should be the nail in the coffin for UBI for me, I will never vote for it.
UBI would help a lot with homelessness and blight. Also seattle is not nearly as bad as the rest of those places in 90+% of the area.
Having homeless people and a high crime rate does not == 3rd world. In fact, it only means many, many people want to live there due to the overwhelming economic prosperity that is clearly not equitably split.
Also fun fact: the three "third world" states you mention have a combined GDP higher than EVERY OTHER COUNTRY IN THE WORLD after the US, China and Japan.
Sure, GDP is higher, thanks to big corporations and wealthy NIMBYs camping out in their caves, voting for their own demise.
> many people want to live there due to the overwhelming economic prosperity
No one wants to live in Bay Area. In fact, most engineers I've talked to want to leave and they have been leaving in droves.
Not everyone got it, so it wasn't universal.
They shut down most small businesses, so the benefits of the extra income were consolidated in a few major companies.
The housing market went up because people who were previously happy to live in an expensive small apartment in a busy city were suddenly forced to stay inside most of the time, and realized they would rather have a bigger place.
Though since we're talking about it, I think UBI might work if we also outlawed fractional reserve banking.
Currently, new money is created when banks lend out more than they have, I think they like to call it "leverage." This creates a type of inflation, but the only ones benefiting are the banks and the people/businesses they choose to loan money to.
Instead of allowing leveraged bank loans, we could create the same inflation by blatantly printing new money every year and distributing it equally. This would give the benefits of inflation to everyone. If you wanted to start a business, instead of getting a cheap loan you would have to crowd fund it, because all the money(power) that was in the hands of banks is now everywhere. If we needed to control inflation, we could have taxes and remove the money collected from the pool instead of using it.
It would be a bit of a balancing act to make sure enough people keep working, and that prices don't get too high, but I think it's doable.
1) I don't think UBI would be that much money per person. The UBI proposals are alternatives to food stamps, not jobs.
2) The people with money to burn and buy assets and $20 burgers would lost more than their UBI due to taxes.
Aside, in expensive west coast cities we already have $20 burgers
I am fine with providing social services to alleviate homelessness needs. Getting these people jobs would be the way to go. For those that cannot find jobs or are mentally unstable - they can continue to live off welfare.
UBI would go to 99.9% of the polulation that is not homeless.
> So honest hardworking people got triple-fucked.
You're absolutely right. Real wages are actually down. If I wasn't a relatively rich SW guy and was a laborer I might be out in the streets lighting shit on fire right about now. I feel frustrated because I might not be able to buy a home again for a year or two, but there are people who are seeing their dreams disappear forever in front of their eyes. Imagine being a low-skilled person who was aiming to buy a house in a lower-tier market until outside speculators and investors move in, searching for anywhere they can park their leveraged cash piles before inflation sets them aflame. I can only hope that these piles of capital go up in smoke as the malinvestments driven by fanatical fed policy prove unwise.
Yes, that is exactly it. The economy falls apart if everyone saves too much. Money is an imaginary number designed to facilitate separation of labor, if too many people save and retire early then there won't be enough people working.
FWIW I am the same way, and used to be angry about it, but I have accepted it for what it is. I bought my house 15 years ago at the height of the last housing bubble. I was under water for a while, but I didn't qualify for any of the assistance because I bought a house I could afford. If I had bought a more expensive house, or if I made slightly less money I would have been able to get some money from the government. It was all based on the ratio of income to mortgage payment, which is still kind of annoying.
Only way I could cut my losses in my mind was to pay off the house as quickly as possible, to save money on interest. So now it's paid off, and for the first time since a year after I moved in Zillow has it at a higher price than I paid for it, though just barely.
But back to the point, don't keep your assets in cash, or any one thing for that matter. Index funds, mutual funds, commodities, collectables, anything that is easy to sell and will generally go up in price with inflation. These policies are meant to encourage people with cash to do things with that cash, instead of hoarding it.
Yes, this I recently learned is called the paradox of thrift. [1]
[1] https://www.investopedia.com/terms/p/paradox-of-thrift.asp
See this in the case of Greece vs Germany. Germany is trying to boost exports by cutting back on imports. If Greece would retaliate by following the exact strategy there would be less trade between them overall. Meanwhile if both countries tried to boost imports, then both of them would be better off.
How exactly does Germany do it? The government is simply enacting policies to destroy the bargaining power of labor. Yes, Germany is trying to compete with Greece based on labor costs. It's trying to pass off a questionable economic policy that destabilizes the eurozone as strength because of moral attachments to export industries and saving money while blaming the other side for importing its products and borrowing to pay for them. This is why the eurozone is a failure and every country should have its own currency.
The central bank can always just keep printing enough money to keep nominal GDP stable, if they want. No matter how much people want to save.
Sorry, that was a bit sloppy. When we say that eg the Fed prints money, we mean that they buy assets with newly created money.
Typically that asset is government debt. But they have been known to buy other stuff as well. And if they run out of government debt to buy, and nominal GDP still hasn't picked up, they can keep buying up the rest of the world.
Just to keep in mind: real GDP = nominal GDP - inflation.
Printing money like isn't expected to do much for real GDP.
I have no problem with policies meant to encourage people to do things with their cash, but only if proper social measures are taken to provide safety and well-being for those people if and when unfortunate events strike e.g. encouraging people to not save their money is a little bit more palatable in a country where socialized health care, public transportation, free public education, etc..
In other words, perhaps people wouldn't need to save so much money if more of their basic needs were covered. In my country (USA), not having savings is like playing a game of Russian roulette with one's financial well-being, assuming one is fortunate enough to have enough income to even have savings.
> These policies are meant to encourage people with cash to do things with that cash, instead of hoarding it.
Which cause the rich to get richer, and the poor get poorer.
This cannot be overstated enough. In the USA a myth has developed about "personal responsibility" in which people have a choice, they can save for retirement or they can spend their money on other things; we tend to forget that for roughly half the country there is no such choice because just paying for basic living expenses (food, shelter, clothing, and transportation to a job) will leave nothing to save. People bought the myth and allowed defined-benefit pension plans to be replaced by IRAs and 401k plans.
"Which cause the rich to get richer, and the poor get poorer."
The rich should get richer if they are compounding their investment returns over time. The problem is that for more than 40 years America has been in the grip of politicians who have attacked government programs of all kinds, insisting that we cannot afford to pay for anything that benefits the poor while also insisting that we have to cut taxes on the rich (naturally, the tax cuts also benefit those very politicians). The fact that the poor cannot invest (for lack of capital) is not the reason they are getting poorer; they are getting poorer because for decades we have reduced the scale and scope of government programs that benefit the poor (or that benefit everyone equally).
However, asset inflation is not quite the solution it seems, as the government taxes the illusory capital "gains" due to inflation. I suspect the stock market surge over the last year is mostly fake inflation gains.
It's not really possible to make 100% gains out of 5% inflation. Not every price increase is inflation!
The increase in the price of stocks isn't really inflation (except with respect to CPI) because 1 share of AAPL buys you far more CPI goods than 1 share of AAPL bought you 2 years ago. For it to be "inflation" and "entirely illusory" 1 AAPL share, while priced at $150 would have to only buy you as much a 1 AAPL share 2 years ago at $50.
That makes the increase in asset prices "ROI" not inflation.
What you're seeing is a massive increase in personal savings among Americans, recently at near all-time highs. [1] Combined with FINRA margin debt at near all-time highs due to the low-cost and broader availability of loans. [2] That's my theory anyways.
[1] https://fred.stlouisfed.org/series/PSAVERT
[2] https://www.advisorperspectives.com/dshort/updates/2021/08/1...
BTW, what the shares of one company does means nothing in this discussion. What the S&P 500 does means something.
(2) ok the same exact thing applies to SPY shares and doubly so when you include dividends. I mean AAPL is 7% of the S&P500 and 12% of the NASDAQ and so is fairly representative but your point is well taken.
There are two reasons why stock prices go up. Inflation raises revenue expectations. Lower interest rates raise the value of future cash flows. This is especially bad with land because it can absorb any additional money you get from lower interest rates. Low interest rates make your car cheap but not your house... It's a big problem.
Financial markets don't seem to expect either. Inflation expectations (via TIPS spreads) are where the Fed wants them.
Inaction is the only policy. All the other actions are stuff that these people do to justify their existence .
With all due respect for Jerome Powell, Bernanke etc. these people are kind of frauds.
They are the only academic which are globally known and get all the respect and bows as well as recognition.
But their craft is a pseudoscience. The Nobel committee knows this, in fact the Nobel Prize for Economics is commonly referred as such but in reality it's:
"The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel"
Worlds apart.
If they were real men they'd pick a real science and face real irrelevance like real men if they are wrong or fail to make important contributions. Only in economics people are still around after getting it wrong so many times.
It seems like the more wrong you are , the more recognition you get, as people anticipate that economists who shoot frequently will get it right more than those who shoot infrequently given the randomness of their predictions