Hacker News Reader

Comment by seanmcdirmid | Hacker News Reader

Interest rates really should have went up a couple of years ago. Not just for the sake of stemming inflation, but what good is the tool of lower rates in bad times when they are already at bottom in good times?

If something goes wrong (or more wrong) we will have no effective economic tools available because they are constantly running as if we are in crisis already.

View on HN

You are right but they have only one tool left and that is to print money. Which is what the Fed has been doing for 18 months and why the stock market is only up and up as all this money is chasing equities. We are really about to find out what MMT can and can't do. If it can't, we could end up in a depression (not recession).

> Which is what the Fed has been doing for 18 months

More like 13 years.

Nobody wants to be the next Jimmy Carter who lets the fed raise interest rates to stem inflation because it invariably triggers a recession that gets said president and his party voted out of office. So rates will stay perpetually low.

Eh, we had high interest rates in the 90s and it worked out. Also, involving politicians is a huge mistake, the Fed needs to recapture its independence so it can make tough decisions. As for the rest, we as a society have become too petulant, expecting a forever boom and doing hardly anything to mellow out the boom bust cycle. And it’s not just the USA either.

If you never stop drinking, you never get a hangover?

If we get hyperinflation, maybe housing will be affordable again?

Tough time for retirees and folks who put money in the bank already (and not the stock market), but what else is new.

> If we get hyperinflation

This isn’t hyperinflation, nor is it on the precipice. It’s not in the same ballpark, it’s not in the same league.

The only way the US experiences hyperinflation is if the petrodollar system completely collapses along with several other shocks to the system at the same time. Not impossible, but completely separate and distinct from current fed policy.

It currently isn’t, hence the ‘if’.

There are a lot of ‘if’s’ in the world. In the context of this conversation it was pretty clear that this if was indicating some level of real likelihood. My point was that it just isn’t likely at all. No more than it was before this year anyway.

We’ve got one large ‘once in a century’ shock going on now. Bretton woods was less than a century ago.

I don’t know how we would even quantify in any real what odds on any of these events practically speaking. Do you?

This isn’t even the biggest inflation shock in the last 50 years.

A lot of the inflation we are seeing is due to base effects from last year. Oil prices literally went negative at one point and are only back to pre fracking boom levels.

The last shock in the 70’s caused large scale socio economic changes and power shifts, and the ‘currency’ was brand ‘new’ at the time (less than 20 years since Bretton Woods, still riding high on post WW2 prosperity, etc)

The demand collapse and now demand spike we’re seeing only started occurring very recently (less than 6 months ago for the spike), and we don’t know what will happen. We’ve never had anything like it occur in a modern economy at this scale.

So probably not going to end the world or anything, but we really don’t have any precedent for this situation.

The situation is absolutely unprecedented and it’s going to be a real challenge for policymakers to get the balance right.

In retrospect, some level of inflation was going to be inevitable. The question is how to balance it with employment and growth going forward.

Agreed. A big question in everyone’s mind i think is if this is ‘permanent’ inflation ‘catching up’ from all the QE and money printing/stimulus, or a temporary spike as pent up demand from the drop last year unblocks and rushes for the door, and will subside afterwards as the larger deflationary (consumer price wise) trend continues afterwards.

I personally suspect it will be a 70’s style ‘step’ (down related to buying power of a given dollar, probably not visible in relation to other currencies though, and up in prices), albeit without a strong hike in interest rates that happened under Carter and caused really weird other effects. They didn’t have the overall consumer price deflation due to tech and global trade like we’ve had for awhile now.

It would be nice to have a crystal ball, but alas.

COVID, climate change, and near-term high inflation in the dollar are all system shocks that will unravel the petrodollar in pretty short order. We’re following the Argentina school of monetary policy, so it shouldn’t surprise us if we get the same hyperinflation here.

Yes, but those are generally long term structural factors, where near term fed policy isn’t the primary driver.

The petrodollar system was always going to come to an end at some point, the problem has been that we’ve governed over the last 40 years as though it was a fact of nature.

Unravel the petrodollar and replace it with what? There are no better alternatives.

At the end of the day, the petrodollar is a geopolitical arrangement, it’s end and subsequent replacement will be drafted to reflect whatever the new geopolitical order comes to be.

Which will remain the United States as the sole superpower. China does not have a blue-water navy and won't for another decade+, which means they cannot regulate oil shipping routes worldwide like the USN. Russia can't project naval power outside their region. The entire EU collectively doesn't have close to the naval power that the US does, and does not have the resources to keep routes open.

The petrodollar is The Prize the US receives for being willing to enforce global shipping lanes across the world's oceans. Without that overwhelming force, things rapidly collapse as Iran shuts the Strait of Hormuz.

Which is why I didn’t say I expected the system to be imminent danger of collapse.

Someday? Probably. Now? Unlikely.

All of which only really matters to those of us on this side of the ocean. China doesn’t need to project naval power, they project economic and political power due to being physically closer and a large exporter. Belt and road is their method for controlling the transport of goods. They can get oil/gas from Russia and the Middle East over land via trucks and pipelines.

Which is why I think the next 10 years will display how little control the US military is able to exert. 20 years of pointless war have ground the US military into dusty incompetence. Do we want to protect Taiwan or our access to the Persian Gulf? We may only be able to keep one of them.

First off, oil is a global commodity, so it's not true that you can just isolate yourself from global price movements.

Second, how many soldiers in the Chinese PLA or PLAN have ever fired a weapon against a hostile force? The US has spent the better part of two decades in an active war environment. For better or worse, there's value to having actual experience with large-scale invasions. It's not being "ground into dusty incompetence", it's being battle-tested.

Third, the US military doctrine since WWII has been about fighting two wars at once. We can certainly protect Taiwan and the Persian Gulf at the same time. If we couldn't, then any intervention wouldn't be credible because the second we invade a nation, all other strategic objectives would be at risk.

What we had in the 90s wasn't that high - check out the early 80s. 15-16%+ mortgage rates iirc, think about those payments on a $1 million dollar 3 bedroom.

It's very sad to consider young men dying for their country while old men are too afraid to risk four years off their political career for it.

A significant number of our elected representatives are women.

The parent was referring to US presidents which have all been males.

The Federal Reserve Board Chairman is appointed by the President of the United States, not Congress.

https://www.federalreserve.gov/aboutthefed/bios/board/defaul...

Democrats are the Charlie Brown’s of politics. And Republicans are Lucy.

I guess getting downvoted on this means there is no chance of a third party....

Not with first past the post voting and the electoral college. It was a fine voting system in the 18th century, but has not scaled well in the modern world and caused problems basically from day one.

This is so accurate. Fed is addicted to low rates and doesn’t have the will to ever raise them.

It's not about "will", it's about ability.

The fed funds rate is technically disconnected from, but highly correlated to, the TSY yield curve, particularly at the short end.

Our current sovereign debt-to-GDP ratio does not really permit a 10y TSY yield above about 4.5% without calling into question our ability to service the debt.

Powell is painted into a corner - he simply can't hike significantly. He faces the short term prospect of a market tantrum (which the Fed is very sensitive to), but more importantly a long term sovereign servicing crisis.

The good news is that the average maturity on the debt at 65 months means that the FRB can, if they choose, find the cajones to hike rates and then "retire for personal reasons" before the real pain hits, at which point it will be someone else's problem.

Not to be that guy, but it is cojones (cajones means drawers)

I agree. Plus if you look at 90 day credit card delinquency’s and credit card balances they’re going in the opposite direction. Delinquency’s are going down right now, but inflation can change this quickly. It’s been said that the lower delinquency rate is solely due to stimulus payments.

They were going up a couple of years ago.

https://fred.stlouisfed.org/series/FEDFUNDS

What happened in 2019?

Politics. Rates had to go down for the re-election effort.

I think that is probably naive, they can't raise rates for many reasons including the fact that it would basically immediately blow up significant parts of the economy that are only enabled/possible due to rock bottom rates

"immediately blow up" - if such fragility exists, is it a good thing? I mean, even raising rates a few basis points causes such collapse...

No I think it's an awful situation, but lawmakers and governments have made the bed for us by stepping in over and over to rescue and backstop failing entities and sectors time and time again which has allowed what would otherwise be insolvent and long ago bankrupted entities and business models to flourish

Rates went down because the underlying economy was seeing slowing growth; particularly due to impacts of the trade war.

Trump on the one side of his mouth was trumping up "record economic growth!" but on the other side of his mouth was complaining "the economy will crash if they raise rates!"

It is crazy that the Democrats are the fiscal conservatives these days while the Republicans are much more irresponsible (though Obama and Biden are definitely nowhere near Clinton in terms of responsibility, they are way more responsible than Bush/Trump).

Corporate debt. Fed raised rates and then when it came time to roll over their debt, a lot of major corporations said "Uh, if interest rates keep going up, we are going to go bankrupt because of the higher costs of debt service." The markets had a taper tantrum (the S&P 500 dropped by about 18% in the second half of 2018), and then the Fed reconsidered and started dropping rates again.

Situation is worse now, because it's highly likely that the U.S. Government would go bankrupt if they had to roll over their debt at higher rates, given that the U.S. debt-to-GDP ratio skyrocketed from 105% in 2020 to 130% now.

> Situation is worse now, because it's highly likely that the U.S. Government would go bankrupt if they had to roll over their debt at higher rates

Is it even possible for a sovereign nation to go bankrupt in its own fiat currency?

Sort of. Bankruptcy means you "cannot" pay your debts. The US can get itself into a situation in which for structural reasons it "cannot" pay back its debtors because the political/social costs of the money printing or taxation required are infeasible, e.g. nobody who will do it can get elected. In that case even though it would be technically possible, it wouldn't happen and the US would refuse to pay.

There is literally no point in raising rates and slowing the economy simply so that you can then lower rates and reinvigorate the economy again. That doesn't accomplish anything.

And rates can always go lower from where they are now. It's not like the Fed is out of room if they wanted to lower rates further.

Reply on news.ycombinator.com