The Economy Got Off to a Historically Bad Start in 2014 | Hacker News Reader

The Economy Got Off to a Historically Bad Start in 2014

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I'm starting to wonder if the Federal Reserve is no longer an effective tool for job creation.

After years of propping up the economy and expanding the supply of money, we have very little to show for it on "main street." We have booming real-estate prices in some cities, a growing stock market, and lots of cheap money flowing into the hands of the wealthy -- but most regular folks have been completely shut out of this recovery.

Imagine if in 2009, instead of using the traditional means to expand monetary supply, we just started sending checks to all citizens. It seems we're still waiting for the trickle down effect to kick in from the Fed's stimulus. Why are we waiting for banks to lend and businesses to hire? If the goal is to prime the economic pump with an influx of new money, put that money in the hands of people who will actually go out and buy something.

Just sending checks to all citizens is politically difficult, because it starts conversations about “class warfare” and “socialism”, and implies that the federal government should have a policy of explicit wealth redistribution, rather than the current hodge-podge of means tested welfare programs and monetary policy tools.

But to answer your question: yes, we’d increase liquidity, reduce unemployment and dramatically improve the lives of basically everyone in the society if we taxed capital gains as income, restored inheritance taxes to historical levels, raised the top marginal income tax rates, and closed various corporate tax loopholes, and then just took the resulting pool of cash and distributed it equally among citizens.

In the long term, the great-great grandchildren of today’s billionaires would probably end up richer, too, since the whole society would be richer.

Let's put aside the Federal Government (and taxes and spending) for a moment and focus on the Federal Reserve.

The Federal Reserve printed a large amount of money in response to the crisis. (That was a silent tax on anyone holding cash.) To inject this money into the economy, they bought a bunch of securities. My question is simply: why use asset buying as a vehicle for injecting money into the economy and not cash to citizens? Cash to citizens seems more fair than picking winners and losers and propping up assets that would otherwise be worth much less. It seems the Federal Reserve's strategy of the past 5 years has done very little to reboot the economy, and has worsened wealth inequality dramatically.

That would help too (the effects are somewhat similar: inflation is sort of a flat tax on wealth, and wealth distribution is extremely unequal in this country; debtors would greatly benefit), but again, you’re going to get cries of “socialism”.

I think the 2008 events have shown that the Fed's purpose is to keep the "financial system" happy. Regular citizens don't really count anymore.

But don't you think that if the financial system gets unhappy, you'll quickly follow in that unhappiness ?

2008 was really bad for the financial system. 2009 was really, really bad for everyone else. One was the direct cause of the other.

> The Federal Reserve printed a large amount of money in response to the crisis. (That was a silent tax on anyone holding cash.) To inject this money into the economy, they bought a bunch of securities. My question is simply: why use asset buying as a vehicle for injecting money into the economy and not cash to citizens?

Because that's all that the Federal Reserve can do. If you want someone to do something else, you'll need to talk to the government, not the Fed (even if that is just talking to the government about changing the rules on what the Fed can do.)

Of course, the more you give flexibility to the Fed to do more of the things that otherwise would be within the domain of the government, the more you undercut the whole point of an independent central bank (while simultaneously undercutting democratic accountability.)

> It seems the Federal Reserve's strategy of the past 5 years has done very little to reboot the economy, and has worsened wealth inequality dramatically.

The Federal Reserve, by design, does not have a general set of tools for dealing with the economy, but a very limited set of tools for managing the money supply.

Because that's all that the Federal Reserve can do.

Yes. Pretty much.

Problem is "unemployment" is such a fake number the entire mandate of the fed has been based on flawed stats. The fed is happy to lower the "unemployment" rate by forcing people onto "disability" (permanent welfare) and un-paid leave of the workforce.

That's not reducing unemployment in any meaningful sense. Its just statistical arbitrage/3-card-monty.

Because just as the Federal Reserve can arbitrarily expand its balance sheet to purchase assets, it can also arbitrarily shrink its balance sheet when it sells those assets.

In other words, the Fed can print money to buy assets, increasing money supply, but given the large increases during the recovery, if inflation picks up the Fed might want to shrink the money supply. It can only do that by selling assets and destroying the money it receives.

Because all the Fed can do is issue/buy back treasuries (and MBS since Bernanke), as well as act as a lender of last resort. Banks are the ones who hold the vast majority of treasuries so they're the ones who are getting the cash for them. How else do you expect it to work?

When the fed buys securities, the securities go on their balance sheet. Now... granted some of the securities may be junk, but there is an entry on the balance sheet. What would go on their balance sheet if they gave away money? The fed is a bank. Not a government. It's (arguably) the governments job to redistribute income. Not the job of a private institution.

Part of the reason for the purchase of securities was to lower the interest rate on longer term securities like the 10 year treasury note. This lowered the rate a lot of consumer loans like mortgages, car loans, etc. with the hope of stimulating the economy. Usually the Federal Reserve just changes the discount rate (overnight rate to banks) to try and stimulate the economy but lowering the discount rate through 2007 and 2008 wasn't lowering the longer term interest rates and thus consumer borrowing rates. Thus Bernanke took the unprecedented step of buying the securities to drive down the longer term interest rates as well.

In effect they printed money to do this but inflation remained quite low by standard measures. Bernanke requested Congress to help stimulate the economy in the near term, but politically it was impossible for Congress to achieve even a short term second stimulus package. History will be the final judge of the extraordinary actions taken by the Federal Reserve but to me it seemed like the best of a lot of bad options. Even as I'm glad that some agency was trying to stimulate the economy I'm concerned about the historical precedent that a small unelected group can decide to take on so much debt with no public comment.

> (That was a silent tax on anyone holding cash.)

Not really, because...

> To inject this money into the economy, they bought a bunch of securities.

Trading one financial asset for another is not the same thing as handing out cash for nothing.

Unless you want to make the case that a torrent of spending was being frustrated by being stuck in illiquid assets (and has subsequently materialized but has not been reflected in official statistics).

What I like about wealth redistribution scenarios is how they're so much easier to sell when you ignore the potential negative effects.

What potential negative effects would that be?

Depends on the type of redistribution. It's not hard to imagine inflation as an effect for a lot of them (though the inflation could have a net positive effect depending on the redistribution scheme). At the very least people may quit horrible jobs for low pay if they can feed themselves without doing them (you can at least nominally call that bad from one point of view).

Redistributing some wealth would be a positive for the economy at this point and time.

It's like playing monopoly and someone wins all the money. The game is over at that point. Now sure... some people try to keep it going by lending money. But when the winner gets all that as well and the other party eventually has mortgaged and sold everything there is no more money for the winner to get.

Getting money out of the hands of accumulators and hoarders (oh, I mean, "investors") and back into the hands of consumers would be the best thing that could happen to everyone at this point in time. It would re-energize the system. But... give that the hoarders have much more political clout this is difficult to do. Even if it is ultimately in their best interest.

> Getting money out of the hands of accumulators and hoarders (oh, I mean, "investors") and back into the hands of consumers

The banking system may be seriously flawed, but I'm not following your critique of accumulators / hoarders / investors. When people acquire excess money, they rarely put in under a mattress. They don't need it right now so they enter into a transaction with someone who does need it in return for more money later.

For example, when a "hoarder" puts money into a bank account, the bank doesn't just stare at it. It lends it to someone who needs money now. The bank gets paid back interest and some of that goes to pay interest to the "hoarder". Obviously, this is a simplification, but the idea is the bank is an intermediary that matches people who want more money later with people who want money now.

Big companies have ridiculous sums of cash on hand right now that they are not investing.

People keep wealth in other forms besides banks.

There is a lot of hoarding going on and it is one of the primary reasons the economy is not growing.

But the point is... as wealth concentrates, consumers lose the ability to purchase. So things grind to a halt. There has to be some mechanism to counter this trend.

> People keep wealth in other forms besides banks.

Where do people keep money that involves the money truly sitting inactive?

Treasury bonds?

Art. Real estate. Precious metals. Under a mattress.

There are any number of places.

Besides, just because money is in a bank doesn't mean it is actively being lent out. And even if it is, that isn't really relevant to the original point anyway.

Concentration of wealth is bad for a consumer driven economy.

> Just sending checks to all citizens is politically difficult, because it starts conversations about “class warfare” and “socialism”, and implies that the federal government should have a policy of explicit wealth redistribution, rather than the current hodge-podge of means tested welfare programs and monetary policy tools.

I seem to recall a round of stimulus checks that were sent out in 2008, before things went to hell.

Even better than a one-time stimulus, I think the permanent removal of payroll taxes would be best, possibly even replacing them with permanent (albeit small) subsidies. The idea of taxing the socially beneficial act of working and hiring workers is pretty repugnant anyway.

"The idea of taxing the socially beneficial act of working and hiring workers is pretty repugnant anyway."

HEAR! HEAR!

Payroll taxes are essentially a form of slavery. Every week you work X number of hours for the government. Almost like you were hauling pyramind blocks under a whip.

And, on this point, conservatives (who are often wrong) are exactly right. Taxing innovation and labor are hardly incentives to provide more of it. Tax something else. Tax emissions. Tax fuel. Tax aluminum. Tax land. This would encourage efficiency and conservation anyway. Encourage innovation and productivity. Discourage waste and trashing of common resources. It's more fair and would lead to much better outcomes.

Payroll taxes are nothing like slavery. You do yourself no favors with such ridiculous comparisons.

I didn't say "payroll taxes are LIKE slavery" (which would be a comparison).

I said "payroll taxes are a FORM" of slavery. (along with being a form of theft). Just because we have been doing it and you are used to it doesn't negate this.

If one WERE to compare payroll taxes and slavery, I would say the common element is involuntary appropriation of the fruits of labor. So they are not "nothing" alike. They do share at least one very strong common trait.

If you find the phrase "slavery" inflammatory or "ridiculous" as you put it... fine. I think you are wrong, but it's irrelevant to the larger point I was making anyway.

And that point is... it is better to tax resource usage than to tax labor for a number of reasons. Justice being a primary one, and conservation and improved productivity being others. I'd love to hear your opinion on the actual point being raised if you have one.

I'd point out that your definition of slavery is just as applicable to any work were the person being employed needs to work to get the basics of survival (with corresponding parallels between changing jobs and changing countries, choosing not to eat and choosing not to work for income above the tax free limit, etc).

The only reason I point this out is because while there are plenty of rational arguments for different forms of tax (including whether or not income scales to labour and whether this means a tax on income (especially a tiered one) is actually comparable to a tax on labour) however comparing it to slavery is not productive as it re-frames the conversation to an area of extremes where quite reasonable tax systemss become either no slavery or everyone's a slave. Much like calling the other person either a libertarian if you believe "any type of free market is ok" or a communist if you believe "any taxation is ok" would not be productive.

Very simply, involuntarily appropriated the results of someone's labor is a form of slavery. In this case, one is being caused to labor for the benefit of the state.

Pointing out the essence of the practice isn't extreme. And just because it is customary doesn't change the essence.

I don't think this is a productive nor a just, way to fund society. The government doesn't (or shouldn't) own us. So I disagree very strongly that this is a "reasonable" basis for taxation just as I disagree keeping some people as property is "reasonable" because it is maybe customary.

These "reasonable" and "extremist" type arguments are simply support of custom and status quo and could have just as easily been leveled at abolitionists 200 years ago (and almost certainly were).

But thanks for your feedback. I appreciate it. This topic is actually very important to me and I feel quite strongly about it and intend to write more in detail about it, so hearing people's perception helps. And for the record I am not opposed to taxation. I am opposed to taxation specifically on labor and innovation. I don't think the government (or society) has any moral claim on those. I think they have a very strong moral claim on resources and these should be the basis for taxation.

> But thanks for your feedback. I appreciate it. This topic is actually very important to me and I feel quite strongly about it and intend to write more in detail about it, so hearing people's perception helps

I can add some more color.

I find it interesting because I largely agree with your stance on taxation, but could not disagree more strongly about the comparison to slavery.

My first reaction is entirely visceral, "This is an obscene and offensive comparison."

After some less reactionary thought, it still sounds ridiculous. You can't choose to stop being a slave. At any point, you can choose to stop paying taxes (either illegally or by ceasing to earn income). If you had adequate resources, you could live off of the land entirely on your own and keep all of the fruits of your labor.

At many lower incomes, there is no income tax bill due whatsoever. So you're saying the government is enslaving the wealthy to a greater extent than the poor? And you honestly think that? The government represents the will of the people, via democratic action, we set our own tax rates. So the 'people' are enslaving themselves? I don't think that makes any logical sense whatsoever.

Call income tax 'theft' if you must (a comparison I still disagree with) but slavery doesn't hold up and distracts the conversation.

Ok. I accept and appreciate your view. After three responses in agreement apparently the rhetoric is somewhat inflammatory, and (although I do feel how I posted), maybe a different approach is better.

I agree. Cut out that line and it's a much more persuasive comment.

The best things to tax have a couple of attributes:

1) Goods that have little or no elasticity 2) Activities that have high negative externalities (and, implicitly, moderate or high elasticity) 3) Easily legible to the State, meaning things that the State can easily monitor and send people at to extract resources from.

Labor is very useful to the economy; you want to encourage it, not discourage it. Same with capital and technology. And they're both relatively tricky to track down.

Land taxes satisfy 1) and 3), so I'm all for them, though they've fallen out of favor.

But what seems best of all is carbon taxes, up the whazoo. As high as you can set them.

There are two countervailing tendencies: carbon is a deadly pollutant, and fuels that emit carbon as a side effect of use are essential to the functioning of society. A carbon tax lets you straddle that: at low levels you're taxing a negative externality to discourage it, which is pretty much creating free value (in the same way that government reducing crime creates value). But, to the extent that fossil fuels are absolutely necessary to the functioning of society, their use is inelastic: at higher levels, an increasing proportion of the tax would be passed directly on to consumers, so the tax is minimally distortionary once you hit that inelastic area.

Best of all, domestic production is very easy to hunt down and tax: a couple dozen very large corporations handle the vast majority of fossil fuel extraction, so you simply track them down and have them all write you a very large check once a week. The only real trickiness is handling rebates for domestic exports and tariffs on foreign imports--the implementation of which would make or break the scheme--but that's surmountable.

Set a sky high carbon tax. Make it revenue neutral by setting the tax's revenues equal to the costs of abolishing capital gains and corporate taxation, which are not as economically efficient as a carbon tax and double as a sweetener to Republicans and the Chamber of Commerce. The USA and world end up a whole lot richer.

OK but France has crazy high taxes: capital gain taxes, income tax of more than 50% for not that well paying jobs and up to 75% income tax for rich people, a yearly tax on your belongings if you're "rich", 21% VAT, up to 70% inheritance taxes, etc.

The private sector is suffocating and closing SMEs left and right, leading to more and more unemployment.

So it is not working for France. Unemployment is as crazy high as their taxes are and the situation is overall very, very bad (it's a non-democratic party who won the recent european election in France).

I'm not saying I know which level of taxation is correct but once you start hammering people so much that they leave the country or that they simply decide to live of wellfare instead of trying to be entrepreneurs, then it's reasonably safe to ask the question as to whether or not you're too far right on the Laffer curve.

Now I'm not saying there aren't country which are socialists and which do better than France: what I'm saying it's that it's not as easy as "tax everything" (which is what you suggest: capital gain taxes, inheritance taxes, more income taxes, etc.).

On my own anecdoctical level: my brother left France to go work in Switzerland and I'm personally considering throwing the towel in and moving to a country which doesn't hate his entrepreneurs as much as the country I'm in...

> OK but France has crazy high taxes: capital gain taxes, income tax of more than 50% for not that well paying jobs and up to 75% income tax for rich people, a yearly tax on your belongings if you're "rich", 21% VAT, up to 70% inheritance taxes, etc.

Comparing France [44.6% of GDP in tax revenue] vs. US [26.9% of GDP in tax revenue] is a bit disingenuous.

The historic norm for the US [c. 1950] taxes he is talking is about 3 to 3.5% of our total GDP higher. France would still be a good 15% GDP ahead in taxes. Ideally, the US would shift burdens and lower destructive spending. France, on the other hand, should be lowering taxes and restructuring its spending.

http://www.outsidethebeltway.com/federal-taxes-at-lowest-rat...

> I'm starting to wonder if the Federal Reserve is no longer an effective tool for job creation.

The principle purpose of independent central banking is to put government debt on a secure footing by minimizing the risk of the government acting to monetize the debt by separating direct, day-to-day control of the money supply from the government organs responsible for borrowing and repaying debt, setting spending, etc.; it also seeks to avoid harming the economy through policies that inhibit economic activity, but actually actively promoting job growth is more about fiscal (and specific program) policy of government than monetary policy of the central bank.

The Federal Reserve has, according to them, three objectives for monetary policy: "maximum employment, stable prices, and moderate long-term interest rates". [1] So actively promoting job growth is indeed part of their remit.

[1] http://www.federalreserve.gov/faqs/money_12848.htm

Actively promoting job growth is part of the goal of their monetary policy. The tools they have at their disposal are limited, however, to very narrow monetary policy tools chosen based on the idea of the purpose of having a central bank.

While they are intended to seek those objectives in setting monetary policy, monetary policy isn't the principal, or most effective, method available for acheiving those objectives -- fiscal/program policy, which remains in the hands of the government and can't be combined with monetary policy in the same actor without defeating the fundamental purpose of independent central banking -- remains the principal tool there.

The fact that the government -- and mostly this means Congress -- pursues no coherent policy leaves the Fed as the main actor, but they are by design not equipped to do more than extremely limited action in this domain (notwithstanding that they are tasked with prioritizing it in the actions they do take.)

Wouldn't your proposal cause massive inflation? My understanding is the fed are somewhat obsessed with keeping inflation down, possibly to a fault.

Feds are obsessed with keeping inflation at a certain level, not at zero. I think the target is 3%, while current inflation is around ~2%.

Government stated inflation based on chained CPI and other new measures to reduce inflation may be at around 2%, but previous formulas used in the past to calculate inflation would show a much higher rate (6-10%)[1]. For those actually buying or consuming anything, that official number is a farce.

[1] http://www.shadowstats.com/alternate_data/inflation-charts

Shadow stats isn't credible in any way. They can't even be bothered to take the raw data and apply the 'old' weights to them, so they just arbitrarily add a few percentage points to the CPI. The BLS has dedicated far too much effort into showing why they are an asinine source for 'data':

http://www.bls.gov/opub/mlr/2008/08/art1full.pdf

Consider this:

If "real" inflation was 7%/year, in 10 years, the price of everything would be 100% higher than it was previously. How many things in your life are twice as expensive as they were in 2004? Now how many things aren't twice as expensive?

Food? Gas?

I don't have hard numbers, but it sure feels like they're twice as expensive.

Both are driven largely by Supply & Demand rather than inflationary pressures -- hence why economists rely on Core CPI to make decisions -- but there is good data for both;

Gas is ~90% more expensive (http://research.stlouisfed.org/fred2/graph/fredgraph.png?g=E...).

Food is ~30% more expensive (http://research.stlouisfed.org/fred2/graph/fredgraph.png?g=E...).

Think about the rest of your life though, especially if you're outside the SFBay area. Are rents twice as expensive? Did an equivalent Camry cost $11k in 2004 vs. the $22k it costs today?

Apropos of nothing, and since you mentioned it, a surprising number of things are at least twice as expensive now as they were in 2004.

Nearly all produce products, gas, houses, rents, cars, and clothes. Beer, wine, and soda seem a bit less impacted.

If you want you can play this game yourself by looking at archived newspapers in Google's newspaper archive (http://news.google.com/newspapers) from 2004 and them comparing them to present day newspapers.

Houses / rents are twice as expensive from 2009? Maybe in the Bay Area, but the rest of the country strongly disagrees;

The 20-City Case Shiller is up 4.5% total since June 2004 (http://research.stlouisfed.org/fred2/graph/fredgraph.png?g=E...).

Clothing is up 5% total since June 2004 (http://research.stlouisfed.org/fred2/graph/fredgraph.png?g=E...).

We don't need Google's newspapers since this stuff is meticulously tracked and organized by the BEA and BLS.

That would be a much more interesting set of graphs if the Fed would let you in on how they compute the index.

That is why looking at newspaper advertisements are actually pretty cool. They don't use, Detroit for example, when computing the cost of suburban housing.

Here is an example, I don't know if will work for you. Marysville Washington, a quiet little town, the paper has a 2004 edition online [1] and on page 21 of 26 are the rental listings. 2 Bedroom, 1.5 bath apartments are about $500. If you look at 'forrent'[2] a rental search service for Marysville, two bedroom 1.5 bath apartments today are closer to $1,000 a month. It may not be exactly 100% and its hard to pin it to an exact unit (would be interesting if you found the same unit in a newspaper and online) but not taking the Fed's word for it, and actually looking at papers that were published back then which is key in my opinion, shows a much higher increase in costs than the Fed reports as having occurred. That is why I wonder how they compute their indexes (but the last time I dug into it they claimed secrecy so that people wouldn't try to 'game' them.)

Not trying to argue, just getting a different result when I go to the primary sources.

[1] http://news.google.com/newspapers?nid=ovGv7akYl-cC&dat=20040...

[2] http://www.forrent.com/results.php?page_type_id=refine&searc...

You're essentially arguing that anecdotal data is more useful than aggregate data. I don't share that belief.

> That would be a much more interesting set of graphs if the Fed would let you in on how they compute the index.

The Fed doesn't collect either of the data series I linked either, FRED is just a useful tool for displaying various different indices.

Here's a 40-page PDF detailing the Case-Shiller Methodology:

http://us.spindices.com/documents/methodologies/methodology-...

Here's a 110-page PDF detailing the BLS's full CPI methodology:

http://stats.bls.gov/opub/hom/pdf/homch17.pdf

With a 20-page PDF addendum specifically detailing the Hedonic adjustment methodology for apparel:

http://www.unece.org/fileadmin/DAM/stats/documents/ces/ac.49...

Thanks for the links, what I was actually trying to argue were two things, one was that the larger the data set the more homogenized and useless the data becomes, and two that looking at data for a given city returns different results.

There are lots of ways to come up with insights into what is happening, one way is to take the prices experienced by an individual in a single location over time, then to take the population of each set of locations and compute p(I|L) where I is your experienced inflation rate, give L your location. Then you can ask questions like "What is the likelyhood that a given individual has experienced an inflation rate that differs significantly from the reported rate? (either positively or negatively)"

Charts like http://www.city-data.com/ which can show you housing pricing changes by city for example you can see the wide disparity in changes between coastal vs more central states. Some states would have experienced very little change, others quite a bit. Now overlay that on population. Then you start to get to the answer of "What do 'most' people' experience in terms of inflation." The newspaper archive is a great way to check the numbers.

Thanks again for the links, one of the criticisms for the CPI scale has always been this : "The CPI follows the prices of a sample of items in various categories of consumer spending—such as food, clothing, shelter, and medical services—that people buy for day-to-day living."

Which historically did not include changes in quantity. So a 'can of soup' which went from $1.00 -> $1.25 over 10 years seems like it has a 25% increase in cost, but it went from 16 -> 10 ounces. Which means its actual cost went from $1.00 -> $2.00 when computing the per ounce price. This is another great thing you can see/check with newspaper archives as grocery prices are exceptionally well documented.

The data provided in my link shows 4-6% average, I was referring to the most recent spike in real inflation that is not showing up in the BLS data. At the lower end, you'd have 48% price growth compounded annually over that 10 year period, at the higher end is 79%, so not sure why you extrapolated that at 7% over ten years.

I'll admit, I didn't even click on your link, but rather went by your claimed range:

> Government stated inflation based on chained CPI and other new measures to reduce inflation may be at around 2%, but previous formulas used in the past to calculate inflation would show a much higher rate (6-10%)

I'm not here to quibble about inflation ranges, but to point out how idiotic their 'methodology' is. Don't take my word for it;

James Hamilton (CV: http://econweb.ucsd.edu/~jhamilton/) - http://econbrowser.com/archives/2008/09/shadowstats_deb

Greenlees and McClelland (Who actually designed the CPI methodology) - http://www.bls.gov/opub/mlr/2008/08/art1full.pdf

Or my favorite, via the libertarian blogger James Parsons. If you actually use Shadowstat's inflation ranges, you can 'back-calculate' the price of assets to show how insane they actually are:

* If shadow stats inflation assertions are correct, the 'real' value of housing has dropped 60% since 1980!

[1] - http://blog.jparsons.net/2011/03/shadow-stats-debunked-part-...

Why would the Feds want inflation and not a flat line?

to give investors a more significant incentive to invest rather than save

money in savings accounts may as well be dead money as far as the economy is concerned

That makes sense. I guess deflation is a huge no-go since that means a savings account is a risk-free profiting investment where stocks etc are not risk-free.

Because 2/3 of our GDP is made up of consumer spending. By making your cash worth less tomorrow than it's worth today it incentivizes us to spend. If we don't spend our money the economy grinds to a halt in a hurry.

Monetary policy has very limited effect when you are up against the zero lower bound of interest rates as the US has been for quite some time.

http://krugman.blogs.nytimes.com/2013/10/15/five-on-the-floo...

Exactly. They have a limited supply of tools in their arsenal. And short of negative rates they can't drop the rate any lower. The economy is complex. Entities can influence it, but not even the Fed controls everything.

However, they were instrumental in the last economic crisis by fueling the housing bubble. It seems fueling bubble after bubble is something they do well. Maybe they have to to prevent the music from stopping. Or... who knows....

Count me among those who is inherently suspicious of bankers. But that could be as much bias and ignorance as anything else and I am well aware of it.

The US has huge structural problems and the Fed is just a useful band-aid. It's value is stabilizing the banking system not the economy.

Systemic Corruption, Terrible primary education system, Ridiculous Military Spending, Unsustainable Debt Levels, Minimal Infrastructure Spending, Huge undocumented Immigrant population, Ridicules Sentencing Laws, Anti Middle Class / Start-up Tax Code, Legislation Requiring Middle Men (Cars, Healthcare, etc), Pro Lawyer legal system, etc. We even get basic things wrong like promoting home ownership and heavily subsidizing farming.

What people forget is the US's primary advantage was simply abundant natural resources and getting though WWII without loss of infrastructure.

> Unsustainable Debt Levels

There's no such thing as unsustainable debt levels in the thing you are the monopoly issuer of.

Sure there is if those debt levels devalue the thing that you use to trade for the goods and resources your country depends on.

_Deficit_ levels can reduce the exchange rate; but that's not something the U.S. is having problems with at the moment.

It's not? You mean to say debt is not growing any longer? (deficit is growth of debt is it not?) (genuinely curious, I'm only on page 30 of piketty :P)

In nominal terms, yes. The point is that it never becomes unsustainable because the interest rates paid are determined by the issuer, and inflation is a product of net spending (deficit). (not really Piketty, more Fullweiler)

Look up hyper inflation and say that again.

I have; it usually is characterized by a collapse in real output (or loss of a war), accompanied by madly buying foreign currency at increasingly poor rates to pay off foreign debt.

Large amounts of Foreign debt is a result of an inability to sell bonds in your currency.

The US has a long history of loan repayment but we still dealt with high levels of inflation fairly recently. As in There where US treasury bonds issued at 17%. Which was vary close to runaway hyperinflation. At current interst rates our debt is sustainable but bump that to 10+% for to long and it would distroy our economy.

> As in There where US treasury bonds issued at 17%

That has much more to do with large-scale experimentation than exogenous factors.

> At current interst rates our debt is sustainable but bump that to 10+% for to long and it would distroy our economy.

Without a peg/convertibility the central bank will always have the last say on bond rates[1].

[1] http://www.cfeps.org/pubs/wp-pdf/WP53-Fullwiler.pdf

>We even get basic things wrong like promoting home ownership and heavily subsidizing farming.

Could you expand on what exactly is wrong with those things?

Nothing is wrong with those things intrinsically but it is a market distortion. Taking a purely external view, it means that we end up building houses we don't really need and farming crops that we don't really want.

My guess for food is his means this:

http://www.motherjones.com/tom-philpott/2014/01/are-agricult...

http://www.scientificamerican.com/article/fresh-fruit-hold-t...

We basically subsidize 50 billion worth of exports to other countries. These subsidies also raise our healthcare costs.

The other part, I can't really speak for.

I'm not GP, but I probably agree with his entire list. I think the home ownership incentives over the past decade may have been well-intentioned from an emotional standpoint, but they were the siren song of Lorelei for many people. "The spirit of America is expressed through owning a piece of property." That sounds awesome.

Who wouldn't want to help our food producers <cue a rugged farmer wiping the sweat off his brow>? I worked for years with farmers who got subsidies for completely spurious reasons. Even then, some were so bad at managing their operations they failed. Working your butt off during spring and fall should qualify you for that $100k combine (with corn and bean heads), right?

I think we may have gotten lucky because we were the only WWII country without a destroyed everything. So, we took advantage of our strategic position, played the odds in our favor, and didn't think 75 years into the future.

Alternate view : the economy has collapsed for most people simply because we no longer have any (economically) reasonable thing to do for most people.

In the US 30-40% of people are economically useless. In Europe 40-50% (not counting government employees who arguably have a net-negative economic contribution. Note I'm not saying they're useless, but they're not producing stuff). In the middle east 95%+, In Africa 80% or so, In most of Asia it's also 30-40%.

The problem is simply that the economy no longer requires large amounts of human input, yet that is what keeps it going :

1) people work

2) which produces "stuff"

3) then you buy, which enables big firms' existence and profits

4) which provides jobs

repeat

3->4 has broken down a little bit. Only a little bit.

The big puzzle of the 20th century was how to get to 1) to get the cycle started, printing money was the answer : we had lots of things we wanted to do (like highways, hoover dam, the military, fix Europe during WWII, fix what we blew up in Europe after WWII, ...). The big puzzle of the 21th century will be the same. What can we do with people that is economically useful.

There have been periods of history where the same puzzle played : the end of the Roman Empire. Their answer is plain to see in pretty much every European city today : churches. Lots of them. Bigger and huger and heavier and prettyer and bigger still. To the point where the ground could not hold them (a problem for a lot of Cathedrals). Then wars started that would last a millenia and the answer to the question : what are we going to do with this massive population became a very easy one, and then quickly became "how do we get this population more massive ?". But I doubt you'd like the methods, especially the methods of these newfangled "believers" (7th century, and if that doesn't make clear what party I'm referring to, nothing will).

Long run, the fed is just a way to transfer wealth from the poor and lower middle class to everyone else.

The concept if "the fed creating jobs" is rather hard to swallow.

But I do dort of agree that it looks like consumption is more important than investment at this juncture (always?).

The Fed doesn't control money quantity, it controls price.

Well they might be effective if not for an over sized Federal Government which is consuming so much of the economy through taxation and borrowing. The US has one of the least business friendly tax systems in the world, so blind Washington is to their own actions they want to fine companies for leaving instead of getting the hint.

The Fed is too prop up people who support Washington, K-Street, and Wall Street, not Main Street.

The Fed is a tool for managing inflation and monetary supply and it does its best with that tool to sustain job creation and the economy in general.

The real problem is the US's structural problems have become a systemic cancer that is choking off growth:

1) We have a tax code that incentives capital when capital isn't an economic constraint. We are demand constrained as far as I can tell, which means more people need to have an income to spend it.

2) We have a fundamentally broken political system that incentives things like invading other countries, the war on drugs, and a bunch of destructive spending over constructive spending on things like infrastructure that would act as an economic multiplier.

The net result is we basically need to equalize taxes on Labor v. Capital and shift the income into reducing taxes on the poorest people in the country who also pay taxes + infrastructure spending. It really is the only solution I can see that is truly going to fix anything.

Tbh, I'd settle for the taxation equalization with all of the gain on the Capital side going to the poorest income earners. That might be politically viable without the Republicans fighting it [after all, they are reducing taxes for everyone and only raising them on capital]. [e.g. Raise capital gains, raise the standard deduction for everyone]

I don't really see this happening while the US still frequently has good years. It is going to happen when we get hit with another great recession or other calamity.

In principle, this is what the Fed should be. But, in 1977 the Fed became tasked with managing "maximum employment, stable prices and moderate long-term interest rates." This is one of the fundamental problems with the Fed's dual mandate -- its conceivable that those levers may be at odds with one-another.

Fair enough, I was focusing more on the fact the problem with the Fed isn't the Fed. The Fed is doing its job as best as any human can really expect it to function.

The problem is Congress+Presidents repeatedly passing the buck and pandering, rather than being productive.

> If the goal is to prime the economic pump with an influx of new money, put that money in the hands of people who will actually go out and buy something. ... [from nostromo's grandchild comment] My question is simply: why use asset buying as a vehicle for injecting money into the economy and not cash to citizens?

Because when the Fed buys bonds, it temporarily puts cash into the economy, but sending people checks would permanently increase the money supply.

If inflation gets too high, the Fed can sell off its bonds, destroying the money it created to buy them. And even if it doesn't sell its bonds before they mature, the income on those bonds—the payments of interest and principal—is a cash flow that represents a slow, steady destruction of the money the Fed created to buy them. In this passive way, the Fed is already gradually undoing its quantitative easing, and has been doing since it scaled back its bond purchases.

(The Fed's profits—i.e., money beyond what it created to buy the bonds—go to shareholders and the federal treasury, so exactly as much money is destroyed as is created by the time the bond reaches maturity, by the way.)

A permanent increase in the money supply, on the other hand, would almost certainly show up as inflation at some point.

Australia did this back in 2011 or so. last time i looked, i think it was still there and chugging along...

The chart in the articles below paints the picture. I've never really been overly involved in economics up until last year. When I started reading and exploring I was shocked at what I found. I kept struggling, because I knew something wasn't right, I just couldn't put my finger on it. I still can't.

All indicators that I can find show the economy slipping into another recession (or simply continuing the previously interrupted "Great Recession")

http://www.zerohedge.com/news/2014-06-25/unforgettable-winte...

http://www.zerohedge.com/news/2014-06-25/gdp-disaster-final-...

I sincerely hope Zerohedge isn't your source for economics information, they are desperately alarmist and wrong nearly constantly. The source of your unease might just be your source of news. The world isn't falling apart, there is no 'great lie', poor homebuyers in Topeka aren't to blame for the GFC, and you shouldn't be stockpiling bullets and gold.

The world entered a debt-driven recession and we're still climbing out of the aftermath. Everyone tried to deleverage at once, which left nobody to drive the economy toward previous growth levels. Monetary policy is ineffective since the Western World is bouncing off the Zero Lower Bound, and fiscal policy is ineffective since politicians don't have the will to take on new debt to stimulate their respective economies. The historically low interest rates combined with new capital requirements are preventing financial institutions from lending money. Inflation will eventually return but not before many Western countries see several quarters of strong (4%+) growth.

Hopefully the following will help brighten your outlook;

* There are more Americans working today than at any point in US history: http://research.stlouisfed.org/fred2/graph/fredgraph.png?g=E...

* There are 9 million more Americans working today than at the bottom of the recession -- even with nearly 800k fewer government employees: http://research.stlouisfed.org/fred2/graph/fredgraph.png?g=E...

* Americans are now spending the lowest percentage of their disposable income on debt payments in the 40-year history of the data series: http://research.stlouisfed.org/fred2/graph/fredgraph.png?g=D...

* US government debt interest payments as a percentage of federal outlays are as low as they've ever been: http://www.pewresearch.org/files/2013/10/debt_interest2.png

Can we go back to the ' Chicken Little sky is Falling ' meme of Zero Hedge ,it helps me when I feel like externalizing my pain and insecurities .

Those numbers do brighten my outlook, but while our economy has added 9 million more workers our population has grown by almost 12 million.

Isn't it appropriate to be looking at the employment-population ratios instead of the number of workers? This chart (of the employment-population ratio) doesn't paint such a rosy picture:

http://data.bls.gov/timeseries/LNS12300000

Of course population matters, but as more people are attending college (https://www.nacs.org/research/industrystatistics/higheredfac...) and as the baby boomers retire (http://www.ssa.gov/oact/progdata/icpGraph.html), the employment ratio would naturally decrease.

I like U4 as a good measure of unemployment since it also includes discouraged workers who gave up looking for jobs:

http://research.stlouisfed.org/fred2/graph/?g=Ehe

Obviously not a completely healthy economy, but a rate that's dropped 40% from the peak of the recession, and is back to levels comparable to 2003/2004 is a good start.

No, Zerohedge is not my only source. No, I don't think "the world is falling apart", but I DO think it's heading down a dark and ugly road. I read a wide range of news sites. We can debate who is right and who is wrong, but keep in mind that you're quoting government statistics. Those are never wrong or manipulated, are they?

Regarding the work force, look a little deeper. It's widely known that that number is highly inflated by new, low wage jobs.

If you want a more "reliable" source, here's something to consider: http://www.treasurydirect.gov/NP/debt/current

I don't want this to turn into a flame war, so this will be may last reply. However, take a deeper look at the numbers you posted.

Two of my consulting clients have seen this show up in their Q2 sales to date; one is missing their Q2 revenue goal by a whopping 50%. Admittedly, they are a small business, but they have a great B2B recurring revenue model. The goal miss is driven completely by customers who had missed their own goals in Q1, and tightened their belts as a reaction.

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