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Comment by pfisherman | Hacker News Reader

Disclaimer: this is all personal opinion and I have no expertise in this area.

The fed has been pumping cheap money into the system since 2008 to prop up the values of the housing market and the stock market, which is where the majority of Americans have parked their wealth. Now the chickens have come home to roost.

The massive spike in the value of bitcoin should have set off alarm bells as it was a clear sign of excess money sloshing around in the system chasing returns.

The sad part is that while things like stimulus and other programs that pumped money into the system were well intentioned, they mostly ended up exacerbating income and wealth inequality as those closest to the banks - who were able to tell a credible investment thesis - got all the money.

The perverse part is that this (re)capitalization with cheap ended up creating a multiple of bad debt and asset valuations that we are going to have to pay the price for.

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I agree with everything you wrote, except I don't think the programs to pump money into the system were well-intentioned. The Fed knew exactly who they were giving money to and actively chose to prop up their friends. IMHO they should have let the biggest banks crash and relied on the FDIC to protect Joe Schmoe's bank accounts. Financial regulations were designed to keep a wall between investment banks and regular banking activities to wall smaller fish from risk. But there is precious little money based on deposits in the system anymore, it's all debt now, and it's all spiraling out of control.

> MHO they should have let the biggest banks crash and relied on the FDIC to protect Joe Schmoe's bank accounts.

The problem have never been bank accounts. The problem have been pension accounts, all the time.

Instead of the old European way of a public, universally funded rolling pension scheme (aka current workers pay for the pensions of the current pensioners in exchange for credits), the US went for almost pure stock and other IOU-based (e.g. bonds) pension funds - a decision that has been biting the US in the butt for the last fifteen years. The FED literally can't do anything that even has the potential of sending the stock market into a major decline because even small corrections wipe out the pension security of the people.

Of course, Big Finance has been exploiting that forced abundance of money ever since. When 35 trillion dollars (!) [1] are available in the market solely due to pension funds, even extremely tiny management fees of a tenth of a percent add to a massive payout for the industry!

The US is in for a really, really wild ride: The pension system obviously needs reform when large amounts of "pensioners" have to work at age 75 and above because their pensions are too low [2], the pension system is unsustainable because it effectively requires endless printing of money and introduces extremely bad side effects (such as enormous amounts of capital being wasted on bullshit in the vain hope it might evolve into a "unicorn"), and at the same time the political deciders can be very well said to be bought off by Big Finance which will do everything it can to avoid being cut off of the money heroin spigot that is pension funds. Not to mention that voters are not going to vote for any politician that the opposition (aka either primary competitors or the actual opposition) can smear as "it will endanger pensions".

The effective way out would be a nationalization of all pension fund assets and a complete turnover of the entire system, but we all know that that is not going to happen.

[1] https://www.statista.com/statistics/421729/pension-funds-ass...

[2] https://www.theguardian.com/money/2021/dec/13/americans-reti...

I agree with this too. Savings accounts became a thing of the past 20 years ago or more; the Fed wiped out returns on them with permanently low interest rates. It was deliberate to get that cash into the stock market.

The whole shebang was absolutely engineered to make the stock market the center of all fiscal policy, centralizing all risk and driving all decision-making towards keeping that Jenga tower piling up.

Makes me think all the articles and advice to invest in index funds were all part of this plan too.

The idea of investing into an index fund is pretty solid in any case. The money from savings accounts ends up on the stock market just the same, only with the bank pocketing the profits between the savings account interest and the rise of the usual indices.

Don't US banks have financial regulations that they can't just take savings deposits and buy stocks? I thought they have narrow leeway with risk and deposits are mostly used for loans.

Yeah that's true. Although I guess the bank guarantees your savings will still be the same amount if their investments go down?

But Europeans park their pensions to markets now as well, the times when new workers paid for old ones are long gone. People don't reproduce enough to keep the system stable.

TBH I don't know if any economic system is stable in the long term. It's something that neither pops out of the mathematics of the universe nor has been selected for and tuned by evolution. We're far, far out on a branch that this planet has likely never seen before.

With long life spans and high standard of living, caring for the elderly in societies is a really tough problem. Throughout most of human history, people haven't lived this long, and if they did, they were either of the few tribal elders or taken care of in multi-generation households. The modern individualism and independence assumed today doesn't have a lot of good solutions.

It's not only that life spans are longer with higher care, it's that society has also hamstrung fertility rates and removed the pyramid-shaped scheme that population levels and society have grown accustomed to supporting for centuries. We're in uncharted territory with an upside-down pyramid. Without immense automation, young labor will be priced very high and deflation will naturally occur without constant inflationary monetary intervention which has other nasty side effects. Imagine society always had 2 young people helping out 1 elderly and just within the last two generations we've flipped to needing 1 young person to help out 2 elderly. That's 4 times the burden.

We could, as a society, also get rid of bullshit jobs and provide better, meaningful education. Not to mention we could also cut down on waste (fast fashion and similar trends).

Both of that will be inevitable (either due to capitalist forces aka costs or because of actual natural disasters), the key question is if politicians will act early enough to be able to influence and guide society through the transformation or if it will be a chaotic, the-strongest-survive transformation.

> Instead of the old European way of a public, universally funded rolling pension scheme (aka current workers pay for the pensions of the current pensioners in exchange for credits), the US went for almost pure stock and other IOU-based (e.g. bonds) pension funds

What? The US absolutely has a public, universally funded pension plan: Social Security. Its the one of the largest government expenses.

The Fed has been riding a tiger for 70+ years and each year it gets harder to dismount.

Huh?

There have multiple structural changes in the fundamentals of the economy over the last seventy years.

The problems the Fed faced from 1945-1975 - with explosive growth, the services share of employment relatively low, wages following productivity - were entirely different from those faced subsequently.

1948 and 1956 is when the 30 year fixed mortgage came into existence in the USA, and arguably the point at which the purpose of the Fed became propping up house prices.

For the last 30 years people have been predicting that government spending and quantitative easing were going to cause massive inflation. And for 29 of those years they've been wrong.

If they were right, then Japan would have had massive inflation over the last 30 years. Instead, they've had deflation.

So when looking for the source of inflation, one should look at what's different about 2021/22 rather than what's the same about 2021/22.

AKA, the massive supply shock caused by Chinese shutdowns and the war in Ukraine.

This is definitely worth looking at deeper. I don't have the answers just questions about what made Japan different. Did they keep printing money/borrowing when they entered the death spiral (debt/GDP ratio >120%)? Did they have massive welfare programs? Did they have other massive spending by the government (military or number of government employees for example)? Did they have really high taxes? What makes Japan's circumstances different than our own, or in the past Argentina, or Greece, or <insert any nation that has had over 120% debt/GDP ratio in recent times here>.

I also think saying 29 of those years they were wrong is not accurate. The inflation hasn't been there BECAUSE the Fed kept it from happening. They've simply been letting the water build up behind the damn (while all tat printed money went to major companies and industries as the IOU was written in the taxpayer's name), and we're now at a point where there's no more road to kick the can down. We're at the end of the road. The debt/GDP ratio has been over 130% since 2020. That by definition means we're in an economic death spiral. That doesn't mean it's not reversible as other nations have demonstrated. Our death spiral becomes irreversible by 2028 and the nation insolvent by 2040 unless something out of the norm happens, like a balanced budget amendment, austerity, reduced spending, an increase in the GDP, the forgiving of our debt by China, all of the above. I'm pretty sure that's where The Great Reset was supposed to come in. I'm also pretty sure the banks aka the Market Makers were well aware of this timeline as stocks started ramping up for the biggest bubble ever a year before the debt was scheduled to breach 120% (the timeline has been public record since at least 2014 which is when I first saw it on CSPAN during the 2015 budget review meeting).

> The fed has been pumping cheap money into the system since 2008 to prop up the values of the housing market and the stock market, which is where the majority of Americans have parked their wealth. Now the chickens have come home to roost

I doubt the Fed can follow through here to their mandate of keeping inflation under check. In response to a 8.5% inflation, they are raising rates by how much? 2%? Based on 10Y/2Y yields, the market seems to have priced in rates rise to 2-3% and then come back down either because of Fed starting back again QE or recession and subsequent QE. Either way a recession is impending and this time with Fed actively seeking the landing (soft or hard doesn’t matter, the economy is too much into debt to handle the shock) and with that goes their maximum unemployment mandate.

My thesis is after this episode of Fed Won’t have any validity to their existence. Inflation keeps chugging along, and with the rate raises they actively cause a recession. And those are the two mandates they have - price stability and unemployment.

> The massive spike in the value of bitcoin should have set off alarm bells as it was a clear sign of excess money sloshing around in the system chasing returns.

Alternative view as someone who's been following crypto forums over the past few years (and have a _small_ amount of money in various crypto-currencies): The crypto craze during the COVID era has a major undercurrent of pure pessimism / cynicism about the financial prospects for the Millennial+ generations. A very common theme of the interest can be described as effectively a financial YOLO. Many of the posters pretty clearly do not believe that they can prosper in the modern economy if they follow the standard rules. Wages aren't keeping up with inflation of the major assets people require (especially housing, childcare, etc). They see the economy as rigged by the financial elites and crypto as a untapped reserve of economic growth which they can leverage to allow them to have a middle to upper middle class lifestyle they believe that they should have.

For these people, the money they invest in crypto isn't extra money. It's money they _aren't_ investing in savings, in the stock market, etc.

In the current paradigm, the opposing choices are the rates of employment and interest.

Are you saying high unemployment and low interest would be better?

There's a cliché to the effect: higher prices will make you mad, being unemployed will take away your hope.

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