Fed raises rates by another 75 bps to fight inflation
cnbc.com
cnbc.com
That earlier speech was far more direct and succinct than usual. Market participants should have gotten the same message then as they are now. The Fed intents to break inflation, with all the likely consequences that brings.
Whether the Fed actually has the technical tools to do this is another question. Most of what it does is mass psychology - trying to convince the markets of its resolve one way or another. Bank reserves haven't mattered for years as money, but that's pretty much the only lever the Fed holds. It holds another - margin stock trading requirements, but that path has all but been forsaken. Treasuries are the fuel for the financial system. But to the US Treasury, they're just a mechanism to fund the deficit. The contrast has led to some things that are hard to explain otherwise, and more things like this will no doubt arise in the future.
I didn’t know this, could you explain when it’s last been used, if ever? Could they theoretically drastically raise margin requirements for some stocks and lower it for others to encourage sectors to be rebalanced?
>The recent rise in margin credit has focused attention on the Federal Reserve’s margin requirements for purchasing equities with borrowed funds, which has been at 50% since 1974. In November and December of 1999, margin credit grew very rapidly, outpacing the sizable appreciation in the overall stock market. And in January 2000, it grew further while the stock market’s valuation dropped, leaving the ratio of margin credit to market capitalization at its highest level in the past 29 years. This Economic Letter discusses the recent trend in margin credit and the merits of using margin requirements as a policy tool.
> ...
> The Securities Exchange Act of 1934 mandated federal regulation of purchasing securities on margin. The margin requirement was motivated by the concern that credit-financed securities speculation helped fuel the run-up in stock prices prior to the stock market crash of 1929. The act viewed the Federal Reserve as responsible for managing the availability of credit in the economy, so the Fed was charged with setting margin requirements for securities purchases. The Securities Exchange Commission was directed to enforce those regulations.
https://www.frbsf.org/economic-research/publications/economi...
According to Wikipedia, the rate hasn't been changed since the 1970s:
> Regulation T governs the extension of credit by securities brokers and dealers in the United States.[1] Its best-known function is the control of margin requirements for stocks bought on margin. The initial margin requirement for such margin stock purchases has been 50%[2] since 1974,[3] but Regulation T gives the Federal Reserve the authority to change this percentage. Raising the margin requirement ostensibly reduces risk in the financial system by reducing the potential leverage and total buying power of investors. Conversely, lowering the margin requirement increases systemic risk by expanding the buying power and leverage available to investors. Since 1974, the Federal Reserve has not deemed it necessary to adjust the margin requirement despite periodic extremes of price volatility in the equities markets.[4]
https://en.wikipedia.org/wiki/Regulation_T
Given the absolute neglect of the mandate it was given on this, I suspect the Fed views even mere talk of increasing margin rates as the nuclear option. But if the usual roll call of psyops fail to deliver, this thing is there in its back pocket. I imagine the mere threat would cut 20% off the S&P overnight.
The FED can make they matter again with a pen strike. It doesn't matter because they don't want it to matter.
And this is why they aren't raising it more. If they do, and that doesn't work, people will act like the train conductor broke off the handle.
Who else can buy up trillions of t-bills and mortgages at a moments notice? When they do this, it drops rates. The Fed offered up historically cheap money to borrowers to keep the economy rolling during the pandemic and housing crisis.
> But to the US Treasury, they're just a mechanism to fund the deficit.
The deficit doesn't get funded as well when the Fed is not buying. It's not merely a technicality. Someone else will have to fill the hole left behind by the Fed leaving the market, and that usually means higher rates to draw in money from elsewhere to feed the t-bill and mortgage market.
its unlikely the fed is reactive enough in the short term to have any real effect on inflation presuming its tooling is effective. the interest rate hike took six months to implement, and began with a quarter of one percent increase. this was before earnings reports for the prior christmas holiday but november itself was a sobering enough red flag that Powell should have immediately pushed for 1% or more. its taken us nearly a year to arrive at the 3% we're at now, but in my opinion this inflation wont stop for another year, and it wont stop even at clinton-era interest rates of almost 6%. Quantitative easing --and the feds decade long addiction to it-- make this thoroughly uncharted territory. the interest rate push will likely be the straw that breaks corporate real estate, no matter how hard Bloomberg pounds his fists and demands a return to cubicles in his newspaper. this will likely tumble back into another residential housing or auto lending crisis. The student loan forgiveness push and reforms on wage garnishment also send a clear signal that our nations 1.73 trillion dollar nickelodeon of perpetual youth debt is becoming a serious threat as well.
Against this backdrop California plans on distributing $9.5B to any family who makes under a certain amount of money($1k each), I expect this huge infusion of cash to make inflation even worse and I do not know where this will go except that it will not be pretty.
The evidence for supply chain issues - as you mention - and price gouging being contributory causes is much more convincing. If you are not convinced that price gouging is going on, consider profit levels in energy companies in recent months.
Please don't blame this on workers who if anything need to be paid more, and paying them more will not impact inflation, only make it easier to cope with. It may even bring inflation down if jobs in supply chains become more attractive and force profiteers to become more competitive.
I just don't see there being any more reasonable objective cause and effect to that claim than the claim made by the commenter you are replying to. On the other hand in my own industry, prices for materials like lumber and steel have shot up massively causing major follow-on effects, and nobody at the steel mills are blaming worker salary for it. They're blaming the costs of the raw materials. And the people on the job site aren't blaming the tradespeople wages for the project going over budget, they're blaming the high cost of the steel showing up on site, late.
When workers are an issue for project delivery or budget it's usually not what they're charging, it's just availability. There are simply not enough field workers out there who can drive steel rivets or manage a punchlist. In fact, I hear rising wages brought up as a potential way to attract more people to the those field roles, because right now there are not enough people entering those roles.
So you can’t distinguish it without sharing the same morals as the speaker, and you therefore should “know it when you see it”.
When price increases exceed the increases in costs/raw-goods... then it's "greedflation", not "price gouging". Increasing profit margins are also a good signal of it.
Inflation and Price Gouging - https://www.nytimes.com/2022/06/14/briefing/inflation-supply...
Are Large Corporate Profit Margins Causing Inflation? - https://www.nytimes.com/2022/06/22/opinion/inflation-corpora...
I Listened In on Big Business. It’s Profiting From Inflation, and You’re Paying for It. - https://www.nytimes.com/2022/05/05/opinion/us-companies-infl...
So pretty much doubling down on the point: it’s gouging when I say it is.
It seems a bit too on the nose for the literati on HN to have determined the definitive cause of inflation today is in-demand workers requesting fair compensation, as of the last 2 years.
Software engineer salaries have skyrocketed unbelievably over the last 20 years. What crisis is that responsible for?
notice that the real problem is the supply-demand inequality, not that real wages went up for a sector. (and to have a crisis it's almost always necessary for some other conditions to be present to make this one particular imbalance a very significant one that then drives other markets, eg. in case of housing that condition is the artificially very limited supply.)
the COVID stimulus checks were big, but not that big individually compared to the US economy, sectors, regions. people who needed it spent it, who did not put it into meme stocks, or bought something, inflating the price of luxury stuff like high end GPUs. that's most of it. (around 2020 July)
what put the whole economy into a freefall was ~1M excess dead and the rising energy prices giving a big speedup to the already falling supply-side dominos.
Couple that with actual crackdowns on immigrations, and you get actual labor supply problems for some roles and industries. This has knock on effects that raise wages.
Couple this with inflation in CPI, and you get workers in a good place to negotiate raises to cancel out inflation and then actually increase real salaries commensurate with contribution.
Net, labor price increases are a symptom of labor supply and cpi. Labor is not driving inflation.
That's why it's important to stop inflation immediately. It puts the cost of living farther and farther away from those who can't keep up today.
When poor people get even the smallest bit ahead, “they are getting scattershot handouts”.
You are talking about families earning less than 2k/month. In California. I honestly doubt that can cover transportation expenses alone in SF.
9.5bn was what Wework was “worth”. Some poor people getting slightly ahead is not the problem.
If a bank trusts a company that they can repay a loan, they'll extend the loan. But if there's a credibility problem, they won't. At the margin, when interest rates go up some companies will cease to be profitable. Banks know intimately how profitable their borrowers are. Even if they have doubts, the income statements will show. So, when the times comes to refinance the loan, the rate may be increased, or the credit line decreased, or new covenants may be put in place, or some collateral required, or various combinations of these.
Corporations (and especially those rated "high yield", or non-investment grade) will see a double-whammy: not only interest rates will have gone up significantly (by 4% early next year), but also their credit spread will go up (see [1], on average it has gone from 3% at the beginning of 2022 to 5% now, and it will keep going up).
That creates the start of a feedback loop: with the increased burden of servicing debt, companies will become less profitable, some will start cutting headcount (just look at the HN posts lately and see how often layoffs are mentioned).
Of course, there's the other feedback loop: higher interest rates means higher discounting of future corporate dividends, dividends which will be smaller anyway, so that means lower stock prices. People will see their savings taking a hit.
And then, a combination of lower savings and higher job uncertainty will lead to lower consumer spending. Or demand destruction.
Which is what the Fed wants.
Make no mistake: the Fed is still the most powerful actor in the financial markets. By far. It has all the tools needed to fight the inflation, and then some.
Inflation isn't the result of mass psychology. It's the result of too much money sloshing around in the economy, thanks to trillions in deficit spending.
BTW, you cannot imagine yourself into having more money.
There is: that is the ECON101 feedback model of deflation causing money under the mattress reducing money supply causing deflation. That doesn’t occur because modern money systems don’t have a fixed supply of printed money; also governments actively prevent deflation so it isn’t seen.
“Opposite effects occur when the supply of money falls or when its rate of growth declines. Economic activity declines and either disinflation (reduced inflation) or deflation (falling prices) results”.
Rate of growth can decline due to consumer sentiment (psychology).
> BTW, you cannot imagine yourself into having more money.
Strawman.
Consumer sentiment (psychology) can become more positive, people borrow more (increase mortgages or buy a “better” house) and spend more (increasing the money supply).
Or it's because of oil suddenly getting expensive:
Short term interest rates being higher means that loans which roll over and refi on a scheduled basis (ARMs being one example) will have their interest payments move much higher. That will create delinquencies and stress in the financial markets eventually, but it will take some time for those loans to wind up getting refinanced at higher rates and for the loans to go delinquent. Watch for CMBS delinquencies to start climbing.
When the Fed says that they need to hold rates through 2023 and not cut people should also believe them. That's how they force the weak hands to capitulate and be liquidated. Everyone will naturally try to kick their cans down the road as long as they can, so it won't happen overnight.
The used auto market has been hot the last couple years, so it’s hard to predict what happens. But since most consumers buy based on the monthly payment, higher rates mean smaller, less luxurious car, which has implications for the profitability of auto manufacturers.
Also, some consumers have been using their homes as piggy banks, refinancing each time the value increases. When happens to consumer spending when they can’t do that?
Calling "inflation" for 10 years in a row is basically boy-who-cried wolf. No one believes you, and when you're finally "correct" about it, its not because you had any analysis, its because inflation inevitably occurs in a boom/bust cycle.
Broken clock correct twice a day + Boy who cried wolf syndrome. I still won't be listening to the permabears / runaway inflation guys even with today's market conditions.
When they say inflation will occur in QE2 in 2010, and those permabears think crazy hyperinflation will occur immediately, then yes, we ignore them.
When they say inflation will occur in QE3 in 2012, and those permabears think crazy hyperinflation will occur immediately, then yes, we ignore them.
When they say inflation will occur in QE4 in 2020, and those permabears think crazy hyperinflation will occur immediately, then yes, we ignore them.
Now its 2022, the Fed has been Quantitative Tightening for a year to deal with the inflation signals we're finally seeing. Hundreds of billions of dollars are being effectively destroyed by these policies.
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So yes, the Fed is finally acting on the inflation issue. But only because the data shows it is finally a problem. We don't just take the permabear crowd word immediately, we move when the data shows an issue. Not before.
There's some people who are just noise and are irrelevant to the discussion, unfortunately. You figure these things out over the years.
Following the data means you're inevitably running after the facts. Running after the facts inevitably causes feedback loops. I'm sure those feedback loops were tuned correctly to not blow the whole thing up, right. Right? RIGHT??
Say ... what happened last time? Oh ... right.
No?
2008 through 2014 had signs of deflation, so the Fed lowered rates and went into QE.
2022 has signs of inflation, so the Fed increased interest rates.
Where is the feedback loop here?
You need protein for cells to work, and you want to grow and grow strong. But most protein has some potential cancer or heart disease correlation.
The fed ¡wanted! 2% inflation since 2008; even with covid fed policy, it took until spring 2022 to catch inflation up to the missed targets.
[1] https://economics.stackexchange.com/questions/15558/producti...
This will make you less likely to want the new expensive Iphone, especially if you were going to finance the purchase, so as Iphone sales plumit, there will be less of a chip shortage since supply now meets demand.
Why would they start QE? Fed rate is at 4% right now, there's more than enough room to drop rates if an issue occurs.
Given the data however, its unlikely to happen. We're currently at record employment levels. The expectation is for the rate to keep going up to maybe 4.5% next year, and finally that's when inflation is quelled, and we taper off rates sometime next year.
Of course, we need to keep up with economic data and see if these rate hikes have the desired effects.
Right but that will also increase demand and induce more inflation, no? So Fed will be perpetually stuck, in theory at least, to find a balance in their dual mandates.
The big guns is Congress, not the Fed. Possibly the President if you consider things like averting the big Railroad Union strike last week (which would have certainly caused more inflation as shipping costs could have gone up).
Lots of little fires happening around the country. The fed has one lever: interest rates. Congress / President has the other levers.
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Still though: we watch the Fed because the prime rate has a large effect on the value of investments, especially in the question of stocks vs bonds. Its important for the individual investor to follow.
A recession will occur if they overshoot, however.
When you choose to get a loan you're pumping a few hundred thousand that was leveraged into existence into multiple industries that gets distributed into the economy, that gets distributed to hundreds of people working.
When you choose just to just buy an iphone, that's $1000ish your spending of your own money.
This reminds me a lot of the 2008 crisis when Bernanke told us that everything was just fine until banks started collapsing. Personally I think the Fed has turned into a political institution that keeps inflating bubbles until there is no way out. I can't see much wisdom or foresight in their moves. They seem constantly behind the curve and instead of smoothing out business cycles they make them more extreme.
Please someone tell me why this is incorrect.
Why do they have to care about the consequences? Corporations have the market. Persons have their families, lives etc... Why do elected government officials need to care; especially in this polarized, 2 party, ~~world~~ country.
I'm pretty sure the closest thing we have to accountability in government are blue checkmarks twitter dunking on politicians from the opposite party and then being ignored by all the followers of that party.
I am not actually disagreeing with your point. I am just saying 10 out of your 10 most recent comments lack any external links or analysis, and 5 out of 10 comments are low value (IMHO) one-liners...
Disclaimer: I admit I am completely ignorant of macro-economics (even though I helped create and develop a sizeable business that mostly depended on macro-economics!)
[1] https://harrison.totty.dev/p/a-lang-design-analysis-of-holyc — I wished he had called it VitaminC - and some of his comments: https://news.ycombinator.com/threads?id=TerryADavis
Why are you trying to put words in our mouths?
Why are you diverting from the original point I made?
Why does it look to me like you are trolling?
Edit: trying to be on topic, and trying to follow your diversión: By definition, a fiat currency like the USD is not a free market. In fact a “free market” is an oxymoron - it needs strict rules to be free (the inherent contradiction). Cryptocurrency is the closest we have to a “free market” currency at present. Context: I am a capitalist hippy. Let them eat Tether. I would summarise rjbwork’s comment as (void)WalterBright; | is not a pipe. Free market for pres (meme that)!
I mostly post about free markets, and you had a general complaint about me, which is what I responded to.
> Why does it look to me like you are trolling?
I would be trolling if I didn't believe what I was posting. But I do, so there. If you look at my post history, I'm completely consistent in what I see as true. I don't berate others, call them names, call them stupid. For me, it's friendly conversation. I also like the sport of debate, like others enjoy a friendly pickup game of football. If you don't like it, please ignore me.
As I said, your comment did not come across as a response.
I certainly haven’t noticed that you majority post about free market. A quick sample of your last 20 comments shows 1 low value comment about the free market.
~Half of your Your last ten comments are one-liner comments. Also plenty of opinion, some of which are stated as “facts” by you and could really do with some reference to supporting information. Your last ten comments are: 2x one-liner “facts” on inflation, a one-liner joke, 2 opinions on James Webb, a one-liner on ebooks, a two liner against magazine apps, a comment against government subsidies (with low-value political overtones IMHO), an opinion on Rocky & Android TV, one-liner “The telegraph network was the true origin of the internet”, one-liner “I'm sad that free markets are viewed as an ‘extreme’ position” (you derailed the article topic here).
> I'm curious why you believe free markets are absolute drivel.
rjbwork did NOT say that. You said that. I think that captures a perfect example of a one-liner comment of negative value to the HN community.
“absolute drivel” is inflammatory, but it is only their opinion on the quality of your comments, and I suspect the intention wasn’t to be a personal attack.
> I don't berate others, call them names, call them stupid.
Why introduce that? An implication that we do? I don’t think either of us are suggesting you do those things. I don’t think either of us have done that. We could both choose to be politer, but the risk is a tone of passive-aggressive condescension. Personally I think we are positively engaging with you because we have enough respect for you to do so. My time, your time, and the time of others is extremely valuable (and difficult to own).
> I also like the sport of debate
Let’s imagine there are two forms of debate:
1) the political/lawyer form where the game is to win, any tactic that works is valid, facts are often irrelevant, and competitive behaviours are everything.
2) the scientific/engineering form where the game is a search for answers, discovering one is wrong is fantastic (learning), and cooperation is critical.
I think you say you do (2). However you come across to me as doing (1). I have given you plenty of reasons in this thread backing up why your comments come across as disingenuous.
Sorry that this is a meta-discussion. I really do want to encourage conversation on HN to be curious and positive, and not snarky. I am not a mod (ugggh). I sincerely try to write high quality comments and improve my commenting, not that I am necessarily succeeding ;p. My original comment got 10 upvotes (in a slow thread), so I am not alone with my opinion about your commenting style.
Your comment “I'm completely consistent in what I see as true” is a possible signal that you are dogmatically sticking to your beliefs, and not allowing your beliefs to be changed by learning from others. To quote Jim Keller talking about himself: "Imagine 99% of your thought process is protecting your self-conception, and 98% of that is wrong.” — context @1:23:00 of https://www.youtube.com/watch?v=Nb2tebYAaOA
That is the end of this thread for me. I hope you have gained something from our comments.
Much as we do not have a theory of everything in physics because, despite our incredible talent as a species for constructing models and deriving principals, we have yet to come to a coherent model that directly maps to reality fully, we do not yet have some kind of economic theory of everything. Your repeated assertions of "belief in the free market" read to me much as a a religious belief, in that they are assertions of the mechanisms by which things work, despite repeatedly clashing with ground state reality. In my view they are, at best, simplistic representations of some other mechanism.
I am actually quite a big fan of markets, and am interested in finance, trading, business, etc. But I am not a market ideologue, nor am I naive enough to think that someone has come up with a perfect economic system - especially when it is claimed to somehow harness for good and neutralize humanity's near infinite capacity for greed and evil.
It's not religion, it's borne out by history. Countries that move towards free markets grow more prosperous, those that move away, less. The ones that do the worst are full on communism.
> despite repeatedly clashing with ground state reality
I've replied to all those claims of it clashing with reality. Most of them are based on the notion that free markets do not proscribe the use of fraud and force against others. The rest are often claims that free markets tend directly to monopolies, although the proponents are never able to identify any free market monopolies.
Want a cite? Here's one. The US, in its first century, excluding the slave south. Was it an ideal free market? Nope. It's hard to argue with its resounding success. Compare it to the South American countries, which had no such success.
Want another? The German Miracle, 1946 or so to 1970. Japan, post war to around 1990. Hong Kong in the 1960s turned to free markets, look at the results - GDP grew 18,000% from 1961-1987 https://en.wikipedia.org/wiki/Economy_of_Hong_Kong
If free markets are a religion, they certainly are a religion that delivers results whether or not the participants believe in it.
> especially when it is claimed to somehow harness for good and neutralize humanity's near infinite capacity for greed and evil.
It harnesses the selfishness in all of us. As for "somehow", the how is straightforward. To make money (a selfish motive) one has to provide a good or service that others find worth their money. If one tries to make money by stealing, cheating, defrauding, enslaving, extortion, blackmail, or murdering, one goes to jail.
https://www.amazon.com/Monetary-History-United-States-1867-1...
Unfortunately, it's a bit of a tough slog, it's not written for the popular press. But it's worth it if you're really interested in understanding what's really going on.
For example, the inflation in the US gold currency during the California and Yukon gold rushes.
"Because precious metals were at the base of the monetary system, rushes increased the money supply which resulted in inflation. Soaring gold output from the California and Australia gold rushes is linked with a thirty percent increase in wholesale prices between 1850 and 1855."
https://eh.net/encyclopedia/california-gold-rush/
How about the inflation in Spain due to the influx of gold from the New World:
"These immediate consequences include the price inflation caused by more gold and silver"
https://theclassicjournal.uga.edu/index.php/2020/05/07/spain...
None of this stuff is hard to find. There's no difference in inflation from a flood of gold entering circulation from a flood of fiat money helicoptered into the economy.
You know after consideration I'll only borrow $50,000.00.
Off to tell the wife I've saved us $50,000.00.
The USA is in recession: https://tradingeconomics.com/united-states/gdp-growth
Inflation is getting better? Relatively speaking? https://tradingeconomics.com/united-states/inflation-cpi
Probably about 1.5-2 years before inflation is controlled again.
Debt to GDP is getting worse and is beyond the limit: https://tradingeconomics.com/united-states/government-debt-t...
They did stop the unfunded deficit spending, obviously still deficit spending: https://tradingeconomics.com/united-states/money-supply-m2
Incidentally it looks like they have decided not to reduce and simply flatten. So it'll likely push closer to 4 years of inflation? Well no, an election will arrive before that.
Private debt climbing: https://tradingeconomics.com/united-states/private-debt-to-g...
So yes, pretty much we know what will happen for the next few years.
In a way it kind of looks to me like we have reached peak population, at least in the US. Every generation hereafter will have a workforce equal or less than the current in size. That is, unless birth rates change or immigration is allowed on a larger scale.
I’ll link when I do but basically for the past 8 months he’s been explicitly saying he wants to get unemployment up, that he doesn’t mind risking the labor market in his efforts of “demand destruction”, never seen an appointed official say this before so he’s going hard
Here is him being a little tame to Congress https://www.cnn.com/2022/06/23/economy/fed-jerome-powell-hou...
but he has some speeches where he’s basically like “we’re going to raise unemployment” not “could”, not a “maybe a soft landing is possible but here are the risks”, just pain
https://www.bloomberg.com/news/articles/2022-08-26/read-fed-...
"Restoring price stability will take some time and requires using our tools forcefully to bring demand and supply into better balance. Reducing inflation is likely to require a sustained period of below-trend growth. Moreover, there will very likely be some softening of labor market conditions. While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses."
"The labor market is particularly strong, but it is clearly out of balance, with demand for workers substantially exceeding the supply of available workers."
He is deliberately engineering a recession to reduce aggregate demand. With luck, the recession will be soft. The goals are reducing labour cost inflation via reduced hiring and increased layoffs, which then leads to reduced consumer price inflation via reduced consumer spending due to budget constraints and negative sentiment. Standard macro 102.
I'm sure if he could increase labour supply via monetary policy, he would. But he can't, so reducing labour demand is the plan.
Source, I lived through high/hyper inflation and was educated on this topic by rich people there.
Inflation is considered bad because it affects everyone, though the poorer you are the more it affects you.
Job losses affect those who lose their jobs and indirectly the economy due to less spending. Inflation affects everyone and run away inflation is one of the worst thing a country can experience.
Job losses affect the entire economy: the rich don't care since they do not rely employment and wages.
In contrast the wealthy are hit enormously by inflation as they start losing in real terms.
The fed prioritizing inflation over unemployment is a massive hit to the working classes. Doesn't matter if eggs only increased by 2% if you lost your home because there are no more jobs.
Umm, the poor are hit far harder by inflation than the rich. And it hits everyone in a way unemployment does not, that's why its far more important to fight inflation.
Ask your self this question. If inflation keeps going and interest rates go up to 10%. Who will buy the houses that come available on the market that people can no longer afford?
The rich or the poor?
And who will be the main sellers of those homes?
The rich or the poor?
https://www.brookings.edu/blog/future-development/2022/03/18...
https://www.deccanherald.com/opinion/comment/does-inflation-...
https://goldcountrymedia.com/news/135064/how-inflation-makes....
It matters very little if eggs go up by 10% each year if wages go up by 10% each year.
Of course what we have is stagflation: wage growth is not keeping up with inflation. Even then, raising interest rates to cause a recession is a really awful way to hack down a metric. Again: lose a job or lose 3% in real income a year?
In contrast the billionaire losing 10% a year in real terms looks at inflation as a catastrophic outcome and would gladly sacrifice everyone else's well being to keep his numbers up.
Best case scenario we end up in late 2008 with 10% unemployment but with a 10% rate. Place your bets on which drug problem will destroy the working class: opioids again?
Also bankruptcy laws if someone is going to mention black friday
We only saw high inflation after a year of worldwide Covid insanity, driven by cheap and abundant liquidity coupled with peak globalism (that is now in decline on an absolute basis, exacerbated by the Russia sanctions) coupled with global supply chain & labor shortages (some of which is generational demographics catching up to us)
Someday, maybe we, as a society, will realize that debt, credit, and lending is the way bankers scam money out of everyone else, and we collectively won't put up with it anymore. Banks often have some of the biggest and shiniest towers in downtowns all around the world. How did they get them? Interest, fees, and charges. I can't count how many times people (even on this very site!) have said something like "don't buy things with cash, invest it and get a loan for it instead because interest." It's no mystery as to why you don't have a tower, because you're paying for someone else's.
Normal people figured this out such a long time ago, that a verse in the Bible says that the borrower is slave to the lender. I'm no slave.
And don't be fooled by the cash and airline miles that your credit card throws at you. You're paying for those "rewards" by fees that the banks and networks charge merchants, and they're ultimately built into increased prices that everyone pays. No one got rich from those crumbs, except the bankers.
I don't like debt, and it has truly gotten crazy, but I don't know a way around debt.
It's no utopia, but it works well enough.
Taking on debt to pay your daily living expenses is a recipe for disaster - and that is what the US govt. has been doing (and many individuals as well)
Even that isn't necessarily true - if one is broke but one needs a car for a better job they need to take on debt for the car. The debt definitely isn't an appreciating or incoming earning asset, but it is a good choice.
Unpopular opinion, and maybe I'm wrong here and I've just been lucky, but I've stopped seeing debt as a bad thing. You have to use it smartly of course, but I don't think there's a one-size-fits-all answer for what that means. Use it for daily living expenses? Sure, as long as you can pay it off every month. Never take out a loan and spend years saving for a car? Nah, or at least not when that interest rate was 2-3%. And I suppose that's where increasing interest rates come in: Get the 99% to stop buying.
Now with immediate injection of cash, assets are at prices which require money that an ordinary person will never have. They have to jump on the debt treadmill to acquire necessities.
Taking on unsecured debt is a bad idea. But if you are going to spend $100,000 on living this year and have $100,000 in the bank, you have two choices. Spend the $100,000 and have nothing. Or use the $100,000 to buy bonds or another income producing asset, then take a loan using that as collateral. As long as the interest you earn from your collateral is more than the rate you pay, you come out ahead.
Instead of having a bank account with $0, you have an investment account with $100,000, debt of $100,000, and you're earning interest on the investment account each month that hopefully covers the interest on the debt plus provides some extra income.
The 'asset' that the government is taking dept on to pay for its living expense is YOU. On the averaged timeline YOU are an income earning asset. The government takes some expenses (roads, education, water, safety) and out comes a taxpayer that has an average income earning lifespan.
You as an individual don't get to play the averages game quite as well. If you are borrowing money today to pay for your daily expenses it is highly likely that will be true tomorrow. You as an individual have risks like getting fired and not getting a new job, or getting smooshed in a car accident. These are risks your lenders take on when figuring out the rate your loans will have, if you even get a loan at all.
this is a good rule of thumb, but there are exceptions. say I want to buy something that costs much less than my net worth, but more than I typically keep in my checking account. I have the choice between a) selling investments, b) taking out a loan, or c) deferring new investments until I've accumulated enough cash.
there are pros and cons to each. with a), I'm paying capital gains tax that I could otherwise defer. with b), I'm taking the risk that my cash flow dries up and I need to sell assets anyway on top of paying interest. and with c), I'm taking the risk that my cash inflates away while I'm saving up.
you can't know with certainty which is best, but b) is usually optimal with a sufficiently low rate.
All economies are run on debt [0]
[0] https://en.wikipedia.org/wiki/Debt:_The_First_5000_Years
Without debt, economic growth nearly zero sum. Waiting for the money to exist and then spending it is just slow and inefficient most of the time. Show me a country that is under-banked and has little access to loans and I will show you a poor country.
If, and when the system collapses, who cares? Advancements gained through technology will be with us.
Islamic finance is the solution to a balanced and fair economy.
1. It prohibit interest to outlaw debt based exploitation and instead replaces it with loans of generosity (pay back exact amount, no interest ) or fund raising through investment. Whereby the risk of the person receiving investment is shared with the lender. This is in contrast with a conventional loan where if your property or business burns down, you still have to pay off the loan to the bank.
2. Zakat - a wealth tax on every Muslim. The value of 2.5% of cash, stocks, investment each year is given to the most needy of society.
Implement these systems and you will have a just economy that prevents hoarding and exploitation. Literally money is forced to move down societal class and acquiring more wealth is with increased risk. Islamic finance is the solution.
The thing with interest, there is very little in terms of going back. As mentioned in this thread the entire modern global economy is built on usurious financial instruments. This was not really the case a few hundred years ago where the level and extent of debt was not to the extremes of today.
Abu Huraira reported: The Messenger of Allah, peace and blessings be upon him, said, “A time will come upon people in which they will consume usury.” It was said, “All of the people?” The Prophet said, “Whoever does not consume it will be affected by its dust.”
Source: Musnad Aḥmad 10191
Grade: Sahih (authentic) according to Ahmad Shaki
Maybe we would not be in this mess in the first place if we sustained insights of the past.
When this system was made 2500 years ago it worked, because it was new and adapted to the conditions then. Then guess what, the world changed and those systems stopped working because the assumptions they are built on no longer exist.
If you brought a lifeform from 2500 years ago to the world today it would get sick and die. It's defense system would not be adapted to the threats it would experience. Yet this is the first thing people try to do with the complex systems we create and they will suffer the same fate.
Is this not already the case?
> This is in contrast with a conventional loan where if your property or business burns down, you still have to pay off the loan to the bank.
Isn’t this what insurance is for?
Interest seems like it can be both good and bad. Condemning it completely seems a bit harsh
Amusingly enough, California mortgages for purchase are non-usurious and compatible with this definition, because the lender can only go after the property in case of default, not the borrower.
They pay thousands on monthly mortgage, if they are late, they are charged a penalty (more interest). If they fail to pay all together, then the property is gone. All the money the borrower dedicated to paying off the mortgage gives them nothing in return. Essentially robbery.
This is exaggerated to the point of nonsense. I.e. it's literally not clear whether you are hyperbolising for effect, or have no idea what you're talking about.
You pay the bank for the use of the money. After 1 fully-paid year of your 30 year mortgage, you own 1.2% of the property. Or more precisely, your debt obligation is reduced by 1.2%.
After 15 years, you own 32%. After 20 years, 50%. After 30 years, 100%. It's not linear, which upsets people, but it makes perfect sense if you do the math.
In the mean time, if the property appreciates in value, all of that extra value belongs to you.
If you stop paying the mortgage at any time, yes the bank will repossess the house to get the money you still owe them. Not all of your future payments, just the remaining debt. If the sale price is in excess of your remaining debt, they send you a check.
Moral of the story: Do not mortgage short-term housing, except in rapidly increasing markets. And even/especially then, beware.
Corollary: Rental property is a necessary thing, and landpeople provide an essential service.
Reality: Some landthings suck.
With a conventional loan, if your borrower sinks, they still owe you the money. Lender would have collateral to possess. There is still an outstanding amount of debt that needs to be paid.
Insurance is not permitted under Islamic finance as it falls under transactions that have excessive uncertainty. There is no guarantee what the outcome is for an insurance transaction. It is like gambling, you make a bet with the insurance company such that you pay $xxx a month. If the contracted event happens (or never occurs), there is a financial winner and a loser. If in total I pay less premiums than the cost of the event, I "win". If I pay more in total for an event, I stand to make a loss and the insurance company benefits.
Interest seeks to empower people who have money by making them more and more richer. It exacerbates price of essentials such that the only way to acquire is through a usurious loan. House price are in the hundreds of thousands because people have been "temporarily" handed have hundreds of thousands. If interest loans didn't exist, then houses would be at prices which people can afford through their salary.
Isn’t this how a mortgage works? Put some money down, and allocate a portion of your monthly salary to pay the remainder.
> Interest seeks to empower people who have money by making them more and more richer.
The largest and most profitable companies in the world are oil/gas and technology. Wealth inequality would definitely still exist
Without a mortgage system, at most a few years of saving to fully buy a house.
I understand what you are saying when you think it is a similar thing, just the scale of numbers is different. Debt is a responsibility, and a really serious one. At all costs avoid it because there is no guarantee you will have the capabilities to pay it back + interest . If we can champion a system whereby buying assets does not involve an individual taking on a life destroying risk and instead they can use their normal income to save up in a reasonable amount of time, then this would be the best way.
Yes there will always be people and entities that are richer than the rest. The aim is not to squash every class into the same income bracket, rather stop the propogation of abuse that rich companies inflict by extracting wealth from the poor.
Stoping usurious interest loans means the economic interaction of rich with the poor. If they want to make money from their hoard, then they have to engage with the lower class on a level playing field (in terms of risk) with investing. In stark contrast to sitting on a throne and receiving guaranteed wealth from poor people who have no choice but to take on soul crushing debt.
An endless treadmill of debt which failing to pay substantially speeds it up until an individual can not sustain themselves.
Perhaps the solution to such a complex problem isn’t as simple as a “do this and don’t do that”. Perhaps a complex problem should be looked at more multi-dimensionally.
Like most things, loans can be good and loans can be bad. Context matters. The rule of law is meant to protect people and keep the economy healthy. The law is ever-evolving. Sometimes it comes up short but in a healthy nation it can adapt itself to the times.
Regarding mortgage, most people in the west use their home as their retirement fund. After 10-15 years of ownership, the house is often worth twice as much as their total mortgage. The difference between what the outstanding debt and the value of the asset is called equity, and this can be quite substantial.
Bizarre statement.
You should look at the cost to build a house. And the cost of maintenance.
Builders don't make obscene profits. You can cherry pick good years, but you need to average over 10-20 years.
You can buy an older/used house for significantly less than its replacement cost.
Are you arguing that without the mortgage system, skilled trades would work for lower wages? Labor is 70% of the cost of building a house. Materials are 25%, Paperwork is 5%.
Would lower wages for skilled trades be a good thing? For whom?
Land cost varies from almost 0% to more than 100% of the build cost, depending on location.
Its much worse than that. Without a 'gold standard' or really any standard. Money = debt.
For anyone to have any money, others have to have debt. For 50 million retirees to have millions of $ means there is more than that of people in debt.
For a politician to 'forgive debt' means the value must come from someone else, primarily retirees.
>Someday, maybe we, as a society, will realize that debt, credit, and lending is the way bankers scam money out of everyone else, and we collectively won't put up with it anymore.
That's kind of the problem. Lets say we won't put up with it anymore. It ends. No more debt akin to many other empires in antiquity. How do we go about it? Mainly you want to adjust the fractional bank ratio and reserves. Currently 13% or so depending on lots of factors.
So has anyone tried this? Moldova post-USSR has been trying this. It basically destroyed their economy. They never got there, they were close to 2:1 which is crazy good but it ended up just stagnating and wrecking them. Yes lots of confounders here but imagine you can't take on debt. You never have a mortgage. You must buy cash. Guess you're starting to work very early to save enough money to move out of your parents home? homes wont be a good bet neither, without mortgages. Safe investments in retirement funds have to be attracted elsewhere. House prices will be constantly pressured downward but suppliers and construction people want to get paid.
>How did they get them? Interest, fees, and charges. I can't count how many times people (even on this very site!) have said something like "don't buy things with cash, invest it and get a loan for it instead because interest." It's no mystery as to why you don't have a tower, because you're paying for someone else's.
They take their cut of the transaction and take no risks or liabilities on. Smart business.
>Normal people figured this out such a long time ago, that a verse in the Bible says that the borrower is slave to the lender. I'm no slave.
Without debt though, how do you live in a house? You rent? Rent is about the same price as the mortgage. You're paying someone else tower as it were. You should virtually never rent.
It's interesting how the whole system is designed around debt and yet there's only 1 proposed system that might fix this.
Social credit. https://en.wikipedia.org/wiki/Social_credit
Things were "mostly" priced in yesterday, or really last Tuesday when CPI / inflation numbers came out. They basically confirmed .75% because if core-inflation was still a problem, then rates have to go up to fix that.
People have been increasingly concerned about the impacts of quantitate easing long before 2020. The only people that thought things looked okay in 2021 are people who didn't want to pay attention to the Everything bubble [0] we were (and still very much are) in because they were too busy making money.
Then lets look further at how people that have mortgages and build home equity make money: they need 5-30 years of zero disruption in their income, whatever employs the majority of them needs to feel cash strapped and unoptomistic so then the people with mortgages get blown tf out too, within a year
We’re inching up
Overleveraged investments go bye bye
Here's the thing though - none of those ways works. The way that works isn't politically tricky it's politically toxic. Raising interest rates works. It will ultimately piss off just about everyone but if you really want to cut inflation it's the only way to do it everything else is just politicians doing politics.
People aren't really "employed" (in a gainful sense) if the money printer keeps printing. Achieving the lowest possible unemployment results in rising inflation because the necessary availability of surplus capital to allow such a thing to happen.
At any rate, 0.75% won't work. The rate changes need to be more aggressive if the goal is to actually avoid a 2023/2024 catastrophe. It takes upwards of 10 years for inflation to cool off after the process of reducing it begins. We're in for a long ride.
He could've avoided some of this by just intelligently working the market. It is, in my eyes, entirely his fault.
The financial definition predates the networking definition by centuries.
We're the newcomers here. Literally.