Comment by tsjackson | Hacker News Reader

Comment by tsjackson | Hacker News Reader

Lots of smoke in the comments here. The Fed is doing what needs to create relative stability. Uncomfortable, but real. Demand is outstripping supply and prices are going up. The least painful option is raising interest rates. Alternatives are hyperinflation, (very bad), or various price fixing schemes (which have literally never worked despite many attempts and are even worse in the ultimate outcomes). There are lots of reasons why this is happening, and none of them are related to a "fake economy:"

People and businesses came out of lockdown with saved money and basically free loans burning holes in their pocket which caused a spike in demand (Least important, probably no longer an issue)

Businesses came out of lockdown with a diminished staff and a ton of new uncertainty (much more important, takes a while to recover for some businesses that are planning production multiple YEARS in advance).

Deglobalization/ U.S. national re-industrialization, started by Trump, continued with Biden, which will increase prices on pretty much everything. This is both a reasonable response to the issue, and makes the issue worse in the short term.

There's a hot war with a major energy producer, Russia, which will increase prices for every product where energy is an input (almost every product).

The biggest manufacturer in the world, China, has randomly been shutting down factories and whole metropolises for weeks at a time for the last several years. We just got a correction in this regard, but it will take time for the supply side of the equation to ramp back up, especially given all of the moving parts and uncertainty outlined above.

Bottom line - lean supply chains function well when everything is stable for a longish period of time and it looks like it will continue to be for a longish period of time. In unstable/uncertain environments, supply chains break down, and supply can't keep up with demand, and the government can't keep handing out free money without causing prices to hyperinflate.

The least bad option would be to raise taxes. If the problem is too much money, directly removing the money from the system is the solution. Taxes can be precisely targeted and work quickly. Call it a "windfall tax" for political cover, but given that it would have to be large to be effective, it would be more than that. The Inflation Reduction Act was a good start, but it only raised taxes by $700B.

The next least bad option would be to reduce spending. It'd be slower to act, can't be targeted as easily as increased taxes and there's no possible way to reduce spending by the trillions necessary to have an effect on inflation.

I agree, raising taxes would definitely help AND would help the US govt with their currently fiscally idiotic ways.

Unfortunately, that would imply Congress has their act together. Since they currently can't even manage to keep from defaulting the US govt on their current debt, I'm not hopeful they will stop being fiscal idiots anytime soon. I mean this to imply both political parties are fiscal idiots as far as I can tell.

It's worse. Let's say Congress raises taxes, as some here advocate. All right, what's Congress going to do with the money? Have less of a deficit? Or are they going to find new things to spend it on? Congress being Congress, they're going to spend it. And that won't help with inflation, because it reroutes the money rather than removing it.

Agreed, hence Congress is full of fiscal idiots. It's not new, Congress has been full of fiscal idiots for well over a decade.

> Congress has been full of fiscal idiots for well over a decade.

For well over 200 years. Compared to how Andrew Jackson destroyed the US economy, the current Congress is doing fairly well.

I'm sure reasonable people could debate the timeframe ad-nauseum, but I think most people can agree, Congress in general has never been all that fiscally responsible.

> Let's say Congress raises taxes, as some here advocate. All right, what's Congress going to do with the money? Have less of a deficit? Or are they going to find new things to spend it on?

Probably the former; if they found new things to spend it on, they’d spend it independent of whether or not they raised taxes.

Congress understands, even if they pretend not to when it provides a public excuse for opposing popular spending that they choose to avoid (while not bothering with that pretense when they want to spend) that there is no necessary, non-self-imposed, relationship between revenue and spending when operating in your own fiat.

The inflation reduction act couples 2.4 trillion of spending with 740 billion of taxes.

2.4 trillion of spending over 10 years with 740 billion of taxes annually.

Too slow. While I fully agree that taxes have gotten out of whack and should be raised, raising taxes would have an impact a year from now (way too slow of timeframe to manage inflation). Additionally, practically speaking, the government would have one shot and no realistic way to quickly correct if they raised taxes too much or too little. Finally, there's so much uncertainty in the market when major political decisions like that are afoot, that you risk doing harm just from the perception.

The fed has the power to act quickly. They raised rates a little on almost a monthly basis last year. Each was a little experiment. If they raised them too much, they could reduce them the next month. If they raised them too little to fully counter inflation, they could continue raising them.

Finally, the issue isn't getting "money" out of the system - it's getting purchasing power out of the system - reducing demand. And most people are buying 5-20% of houses, banks are buying the rest. Most large businesses aren't paying cash reserves to pay employees, they're using debt to pay those salaries.

Also, reducing spending is even slower than reducing taxes.

The vast majority of government spending is on Medicare, Social Security, Medicaid, and defense spending. Politically those are untouchable, mostly for good reasons - reducing any of them will result in people literally dying.

The vast majority of what's left is hugely impactful high ROI activities like scientific research, infrastructure projects, and other basic good governance activities.

> The least bad option would be to raise taxes

Taxes also reduce productivity/supply, which is that opposite of what you want.

Raising interest rates also reduces productivity and supply. Raising taxes is more efficient so reduces productivity less than raising interest rates does.

> Raising taxes is more efficient

I'm not sure if that's true. And even if it is the effect is much slower compared to the near immediate impact raising interest rates has had.

Also, I consider inflation as a tax on it's own. So adding a tax on top of a tax is pouring salt on the wound if you ask me.

I'm satisfied that cash is paying 5%, at least that takes a bite out of inflation. For the last several years savers have been penalized and borrowers have been spoon fed money so I'm glad that's reversing. And I'm glad that rising mortgage rates are putting a ceiling on the housing market.

No I don't want to pay more in taxes to cover the recent insanity that I had nothing to do with.

Maybe when you advocated for raising taxes you mean somebody else's taxes, not yours? I suppose that's usually what people mean when they say that.

Raising rates is a very poor instrument for fixing supply-driven inflation. Even if it forces suppliers to temporarily lower their prices, as soon as rates are lowered again and economic activity picks back up and demand returns, inflation will return with a vengeance too. Destroying demand does nothing to fix the supply chain problems behind current inflation (which you already mentioned: war, energy, deglobalisation, china lockdowns etc). It’s a pointless, painful exercise and it’s probably being done by the fed only to maintain the appearance of fulfilling their expected role. The truth is the fed is powerless and cannot fix the problem.

I actually 100% agree with this comment, except the "only being done to maintain appearances" part. A blunt instrument is better than no instrument. By raising interest rates, the fed is reducing average inflation by cooling the market across the board (though unfortunately with very little direct effect on the primary driver of energy consumption, which is very inelastic). Without cooling the economy a bit, normal inflation plus the supply side drivers could lead to hyperinflation, and/or stagflation.

Supply chain issues won't sort themselves out for 3-4 years, possibly more - it can take at least that long to get a new domestic semiconductor chip fab or solar panel factory from the idea stage to full capacity. And if you are a business, the level of uncertainty as to what 4 years from now will look like makes a huge investment like that less than desirable. (Source: I work for businesses in these spaces).

Businesses just aren't as nimble as we were led to believe, and it's going to be a bumpy few decades in all likelihood, assuming China stays on the path of no-dissent nationalism and the U.S. stays on the path of re-industrialization.

In the long run, we need to transition the energy grid to electric/renewables/storage as fast as possible to get off of the fossil fuel roller coaster that has caused every major inflationary event. In the medium-term, we need to reduce impediments to building physical things in our country, so that businesses can respond more quickly to increases in prices by increasing supply.

> The least painful option is raising interest rates. Alternatives are hyperinflation

Why is this taken as a fact everywhere. Surely, interest rates is a zero sum game?

I honestly don't understand.

Interest rates affect debt. The higher the interest rate(s) the less debt people are willing to take on. Debt is the lube that keeps the economic wheels spinning.

If you can borrow for 5% but can make 20% return on that money, then you obviously are heavily incentivized to borrow at 5%. If you can borrow at 5% but can only make 6%, you are not really incentivized to borrow. This means less purchasing will happen, slowing down the economy.

To think about it another way, which might help: borrowing is moving money from the future to today. To do that costs you something. The more it costs, the less likely you are to do it.

Credit Cards move money from 30 days in the future to today without much cost(and in the US often incentivized with rewards/cash back, etc). As soon as 31 days happen, the cost to move that money forward in time is suddenly 20+%, making it ridiculous for anyone with a clue to borrow money on credit cards past 30 days.

Mortgages move up your house purchase by up to 30 years. If it costs you a lot more to borrow today than it did a few years ago, you are much less likely to move up that purchase.

The same is true for companies and everyone else. The more it costs to borrow, the less likely you are to borrow, decreasing spending today.

Let's take an extreme example. If banks offered everyone 0% interest mortgages with 100 year terms and no credit checks, how many more people would want to buy a house? A lot! It would take decades for builders to build enough houses to meet that demand. In the meantime, house prices would go up by a factor of 10, along with wood and other building materials. Meanwhile everyone who already owns a house is cash out refinancing their now multi-million dollar home, and suddenly everyone you know who was a homeowner at the beginning of 2023 is now a million dollars richer and spending it quickly.

The same with businesses. Let's say you're a growing business. Things are good and you've been investing your 10% profits each year into hiring. Now banks decide that all decently profitable businesses can have that same 0% interest mortgage with 100 year term. Why not double, triple, quadruple your team? You could achieve your goals so much faster! But then the banks are offering all of your competitors the same deal. But there's not enough talent to go around. Suddenly you're in a bidding war for decent sales guys and the starting price is a million dollar salary. And those million dollar sales guys are spending their salary, competing with other million dollar sales guys for shit they don't need - the price of everything goes up.

This is an extreme example to illustrate WHAT JUST HAPPENED with record low interest rates. The economy was being heated up by very very cheap money. Inflation started getting out of control.

Now, if you were in the above hypothetical scenario, you might say "Hey maybe we shouldn't give out all those crazy loans, people are going crazy with all of this money, and it's kind of fucking everything up." And you would be right.

And so is the Federal Reserve.

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