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Sorry to burst your bubble

economist.com

219 pointsprostoalex182 comments

"According to two new papers, the crucial variable that separates relatively harmless frenzies from disastrous ones is debt."

Also according to, like, Irving Fisher in 1933: https://fraser.stlouisfed.org/docs/meltzer/fisdeb33.pdf

"I venture the opinion, subject to correction on submission of future evidence, that, in the great booms and depressions, each of the above-named factors has played a subordinate rôle as compared with two dominant factors, namely over-indebtedness to start with and deflation following soon after; also that where any of the other factors do become conspicuous, they are often merely effects or symptoms of these two. In short, the big bad actors are debt disturbances and price-level disturbances."

Very hard to have sustained deflation when you are using a fiat currency. The only example in history has been Japan and this only occurred because of a political decision.

We really should stop looking to the GD as a lesson for today’s problems. We don’t use the 30 Years War as means of explaining religious conflict or the Crusades to explain the state of the middle east.

Great deflation is your GD as opposed to Great depression? Since you are talking about Japan

I meant the Great Depression :)

While it is worth looking to the past to gain understanding we need to be really careful about doing so since the past really is a foreign land.

Edit. If a country wants me to cure their deflation problem just give me control of their printing press for a few months. I can guarantee that by the time I am finished Zimbabwe will be held up as a paragon of financial rectitude compared to my handy work.

I completely agree.

Even characterizations of our past financial crisis (late 2000s financial crisis) as being "the worst since the Great Depression" miss the major difference between it and previous financial crises.

The superficial similarity is that it was tangentially related to an 'asset bubble' (which is the common shared element of most financial crises), but the deeper and more troubling component (troubling in the sense of it hopefully not being an omen for later crises to occur) was the fact that it got out of control because of the omnipresence in late '08 markets of financial instruments designed to allow accredited investors to gain exposure to specific market segments, which then became extremely popular among banking houses and other financial market actors. People commonly view this as the same thing but never before had a class of specific financial products (in this case, RMBSs - residential mortgage backed securities and their related derivative instruments) become so extremely popular that their universal acceptance acted as a prelude to their total deterioration in value.

To preempt subsequent comments:

Yes, LBOs became super popular in the 80s and are kinda sorta similar but these aren't really financial products at all. They are mechanisms to finance the takeover of companies based on debt and financial products are involved but never before had downturns been so driven by the creation of market-specific financial instruments.

The increasing complexity of financial markets is super awesome and will allow the blossoming of a wide variety of financial opportunities for interested parties, but this obfuscation should not come at the cost of... submerging entire market economics lol

I always feel like the more relevant example for our current financial bubbles would be the South Seas Bubble[1]

[1]https://en.wikipedia.org/wiki/South_Sea_Company

> We really should stop looking to the GD as a lesson for today’s problems. We don’t use the 30 Years War as means of explaining religious conflict or the Crusades to explain the state of the middle east.

I don't know anything about the Thirty Years war, but I doubt that there's any major recent act of stupidity that was caused by excessive cleaving to (or knowledge of) historical experience.

I suspect we'll keep on looking back at the great depression until it ceases to seem salient.

Oh, and the Crusades explain quite a bit about the state of the middle east.

Maybe if every western country decided to shithouse ISIS for their brutalities with their younger sons. And all of Occupy Wall Street banded together behind some charismatic idiot and marched over there without warlike equipment to fight the Arab/Turk.

If you really want to see an explanation of the Middle East, look at the way France and the UK divided up the region in the wake of WW1, and then abdicated their responsibilities after WW2.

Yeah we've all watched Lawrence of Arabia.

I was thinking more about Leon Uris' Exodus.

Most of the faults of colonialism seem to come from how poorly the handoff between the imperial powers and the local population went. It's an interesting dynamic, since almost all of the traditional colonial powers were a shell of themselves by 1945, while the two ascendant powers were the USA and USSR, who really hadn't been involved in the Victorian era colonial land-grabs, at least to the extent that the UK, France, Germany, Belgium, and even Italy were.

>I don't know anything about the Thirty Years war, but I doubt that there's any major recent act of stupidity that was caused by excessive cleaving to (or knowledge of) historical experience.

Let me introduce you to Balkans war(s) of the 1990s. People who had been living side-by-side peacefully for decades decided to rehash hundreds of years of historical conflicts which to outsiders looked insane.

>I suspect we'll keep on looking back at the great depression until it ceases to seem salient.

The Great Depression is no longer relevant since we don't live in a world on the gold standard. The factors that drove the economy into the ground in the 1930s (massive deflation and bank failures) are not going to happen again. Deflation because countries can print as much cash as they like (Greece excepted), while in regards bank failures we now know banks (and bankers) are too big to fail.

>Oh, and the Crusades explain quite a bit about the state of the middle east.

Nothing about the middle east today is the result of the Crusades except some misguided people thinking the Crusades are relevant.

No, the OP is correct about the Crusades, particularly if you care about the POV of the political actors in the Middle East itself.

Some actors in the middle east like to claim that any involvement of the west is another Crusade, but no western country is interested in “freeing the Holy Land” from non-christians.

You are correct of course. Unfortunately some Western leaders have been a little unwise when speaking publicly:

"this crusade, this war on terrorism, is going to take awhile." - GW Bush[1].

"President Bush said to all of us: 'I am driven with a mission from God'. God would tell me, 'George go and fight these terrorists in Afghanistan'. And I did. And then God would tell me 'George, go and end the tyranny in Iraq'. And I did."[2]

It's pretty easy to paint a picture of attempted cultural (if not religious) domination by the West even without quotes like that. Add that stuff in and it is harder to explain how it isn't the same.

[1] http://www.csmonitor.com/2001/0919/p12s2-woeu.html

[2] http://www.theguardian.com/world/2005/oct/07/iraq.usa

Yes there has been some lose language been used in this area by people how should have known better. The problem is the word “crusade” has a meaning in English different to its original historical origins.

The word "crusade" has the same meaning it always had. It has a positive connotation, just as it always had. And the same goes for the word "jihad" in the Islamic world.

I am of the thought that it is very much a crusade, because there is no reason to believe the actual crusades were anything beyond riling up the peasants for the benefit of the rich.

This is an interesting hypothesis, but I think we should consider that the nobles actually believed in the religious aspects of the Crusades. While I am sure some were in it for the money or prestige at least the first couple of crusades appeared to have been motivated by religious zeal.

Don't mistake excuses for motivations. The law of primogeniture (inheritance to eldest son) along with large family size played a big role in the causes of the crusades.

Let's suppose you've managed, as a family, to hack and slash your way to the top of the nobility. Grandfather was a friend of the guy who became king, father inherited lands and got them productive, and now five brothers have all survived. The eldest gets the land. The next four have learned to ride horses, swing swords, and wear armor. One of them decides that the Church isn't so bad, and thus effectively goes into politics. There are still 3 armed badasses who won't be getting the power and wealth they are used to... unless they go and take it from someone else.

Their brothers in the Church have an idea: maybe you can go be violent somewhere else?

This also had a pretty big impact on South and to a lesser extent North America. All the guys who had finally driven the Moors out of Spain only knew how to fight so went off to Mexico with Hernán Cortés to carry on doing more of the same.

My father -- German Jew who escaped in 1938 (only mentioning this because this view is often conflated with anti-semitism) -- was of the view that Israel was a new crusade and would have much the same impact and outcomes. Recall that the medieval crusades also resulted in some long term occupations of the holy land, and they did not have support of an unrivaled superpower.

There's a difference between knowing history and bearing grudges. Generally folks who bear grudges have a very poor (and one-sided) view of history.

The Great Depression was not solely caused by the gold standard, although getting rid of it certainly seems to have aided recovery (worth noting since some argue for returning to it).

Iraq wasn't going to be like Vietnam either because the people loved us, and our weapons were so much awesomer. Incidentally, Bremer was reading about the occupation of Germany and Japan after WWII on his way to Baghdad. History can be instructive, but you need to use it wisely, not cherry pick the instances that support your existing view. There's plenty of Roman history (for example) that maps beautifully onto modern America, even though we are very different from the Romans.

History can be a guide, but an untrustworthy guide. Use history, but always be aware that today is not a repeat of yesterday.

In regards the Great Depression the gold standard seems to be mostly responsible. The countries that left the gold standard first were the first to recover and those that delayed suffered longer. The USA is an interesting exception since Roosevelt revalued gold by fiat in 1933 which had the effect of getting the USA effectively off the gold standard and introducing inflation into a deflationary spiral.

Replace "history" with any body of knowledge and you get an equally valid truism.

You are correct about the Crusades. And the below commentators act as though you have to somehow choose between the post-WW2 context and that time period for explanatory power, when of course Middle East history is lengthy and rich and has room for both and a lot of important additional contexts besides, including the Ottoman empire, the Persian empire, the breakup of the original Caliphate, etc. etc. "Those who cannot learn from history," and so on.

The gov't decides the policy of the central bank, so it's always political. Right now, the scheme is to drive inflation which pours newly printed money into gov't coffers as that's how new money makes it into the economy: through gov't bonds.

If the gov't created a policy of deflation (which would be against them growing their budget as much as possible) then there would be deflation.

The central bank policy is always political.

I completely disagree with your assertion that you can "cure" deflation with a printing press. And how is Japan not a relevant example?

You can certainly raise prices of financial assets but when the long rates are low for so long (and are made lower by QE) there emerges a negative feedback loop of overproduction -> oversupply -> lower prices for goods, with a stronger concentration of this effect low on the value chain (CPI ex-housing). In fact, if you look at domestic and european CPI's ex-housing (European countries are ex-housing by default), you will see that the inflation rates has been nearly 0 since the financial crisis despite printing trillions of dollars. But stocks are expensive. Quote from Greenspan: "As the cost of capital approaches zero, so too will the return on capital."

And to pose another question to you: from what transmission mechanism will your printing press create inflation when long rates are already low?

Like another poster below, I suggest reading the material at http://www.economicprinciples.org/

I have to agree that monetary stimulus alone isn't enough. Some call this the "zero lower bound" and that fiscal policy needs to drive inflation.

https://en.wikipedia.org/wiki/Zero_lower_bound

Mind you I think 0% interest rates from a central bank and reckless gov't spending are idiotic policies.

You can have negative interest rates (Switzerland and Sweden currently have them) so the zero lower bound does not need to exist. Of course monetary stimulus only works if the banks decide to actual lend all this cheap money. If they don’t then the money just piles up on their balance sheet and has no effect on aggregate demand.

Sweden has negative rates when loaning in money, not when loaning out money. That is, they are not violating the zero lower bound - they are simply a bit closer to it.

The Swedish negative rates are for banks borrowing from the central bank, but in theory there is nothing stopping banks lending money to individuals at a negative interest rate. In a deflationary environment such loans will still have a positive real interest rate. The banks of course would only do so if the negative interest rate was less than what the central bank charged.

That assumes that alternative tools like Quantitative Easing are not available. Central banks don't like to engage in Quantitative Easing because it hasn't been done very often and central bank models of it aren't very precise but it has certainly had an effect when tried.

https://en.wikipedia.org/wiki/Quantitative_easing

>I completely disagree with your assertion that you can "cure" deflation with a printing press. And how is Japan not a relevant example?

Of course you can always “cure” deflation by printing money. If you gave me control of the printing press for a few weeks I would print up a few billion dollars for each person (or maybe just a few trillion for my friends) and give it away. You can be sure that a dollar would be worth nothing after this exercise.

To answer your second question you can’t create inflation unless you actually get the money into the hands of consumers. The central banks have not been printing and handing the money out to consumers, they have been printing and giving it to banks. If the banks don’t have anyone they want to lend to then the money just sits in the bank and has no effect on demand. If I printed off a few trillion dollars for myself and just left it in a huge vault there would be no inflation - we would only get inflation if I went out a started buying every asset under the sun.

It's important to note that they've been printing it and paying banks not to give it to consumers. Back at the start of the crisis inflation had nosedived but the most recent inflation number the Fed had still showed high inflation. They knew that they were going to have to print lots of money to support the banks so they embarked on the unprecedented Interest On Reserves program to counteract the expansionary effects. That change in the rules of the game is probably a good part of why the Fed's models were so badly off during the crisis.

I think the problem is more that most people only learn about the Great Depression in a strictly historical context and only the theories about its causes that were popularly discussed at the time make their way into high school history textbooks. I doubt there are many serious scholars of the Great Depression these days would talk about the stock market crash as causing the depression. However, all the policy makers at the time knew about the stockmarket crash because it was obvious. The monthly industrial production numbers took months to assemble and while they show a decline that started well before the crash that information wasn't available to politicians until well after information about the stock market was. And it never really made the newspapers or got into the public consciousness.

its debt cycles that one should really watch...check out Ray Dalio's "How The Economic Machine Works"...there's a video and a paper...the paper is much more informative.

The Austrians have been saying this since about the same time or earlier. Read only if you're interested in the theory of economic bubbles.

The Austrian business cycle theory (ABCT) is an economic theory developed by the Austrian School of economics about how business cycles occur. The theory views business cycles as the consequence of excessive growth in bank credit, due to artificially low interest rates set by a central bank or fractional reserve banks.

https://en.wikipedia.org/wiki/Austrian_business_cycle_theory

Also according to Kindleberger ("manias, panics, crashes"), which is slightly more accessible than Fisher. I cannot recommend this book more to people interested in having insightful things to say about market bubbles.

http://www.amazon.com/Manias-Panics-Crashes-Financial-Invest...

Even the economist has previously commented on this, but I guess the writer of this article forgot

http://www.economist.com/node/1923462

I don't know if the 1929 stock market crash was really the start of the great depression. It seems like the real issue was far more widespread and the stock market simply accurately reflected what was going on.

Even just the timing is suspect as many indicators started to fall in the 1928 while the market was still going strong. IMO, if you want to point out just one thing it was probably waves of bank failures which created and sustained a deflationary spiral.

I listened to Bernanke talk about this once. The academic view seems that things weren't that awful until 1931, when a large Austrian bank failed (Google Creditanstalt), which triggered a wave of global bank failures [1]. The resulting lack of credit was the cause that made the depression Great. When Creditanstalt went down, Dow was off ~50% from its 1929 high, which still happens every now and then. We went through a similar decline during the 2007-08 financial crisis and came out all right thanks to aggressive and globally organized central bank activity. Unfortunately such an organized response didn't happen in the 1930s so the economies kept contracting, and the Dow eventually ended up losing 90%. Check out the charts in that period, it is fascinating.

[1] https://fraser.stlouisfed.org/docs/meltzer/bermac95.pdf

I've heard other somewhat contrary things, one is the birthrate started falling well before the '29 crash indicating that working class and especially farming communities were actually not doing well economically. You can look up graphs if you want, but the birthrate drops relentlessly from 3.2 in 1920, to 2.2 by 1930. As the economy improves post 1935 the rate picks up again.

My take on recessions and debt is to consider that when an entity (family, business, etc) pays off debt they are foregoing some consumption. Key thing. Now in normal times foregoing of consumption frees up economic output that is invested in the real economy. As I pay off my mortgage, the bank reinvests that money in building more houses. A virtuous cycle, depending how much you like concrete, sprawl and freeways.

In a debt driven recession there is a problem, the economy isn't limited by available production. There is a lack of demand. Because as people frantically pay of debt they are foregoing consumption that doesn't free up more physical or labor resources for investment. It just creates a lack of demand. The money instead goes to correct balance sheets which is something that exists on paper (or in modern times le computer machine).

That's the situation many parts of the developed world are in today. The solution is for the government to step in an manually rebalance consumer and commercial balance sheets. A political problem exists when the people in charge can't let go of the 'paper wealth'. And that's the current issue.

You know it's bad when the Economist says debt is a problem :( . If Zero Hedge, Seeking Alpha, and the Economist start agreeing things start getting scary :(

I think the biggest voice to say there is a debt problem, at least in high yield and junk bonds, is Carl Icahn. It seems that the biggest problem is that the underlying debt market is very illiquid and people are using ETFs and other financial instruments to create liquidity. This is why Icahn called BlackRock a dangerous company. Icahn is not a man I'd want to bet against. Though, this so called bubble could go on for years.

I think the market will have a minor "taper tantrum" but I don't know if that will be the needle or not. As the housing market of 2001-2008 showed, this can go on for a lot longer than people expect. People were sounding the alarm in 2005, but it didn't take full fruition until late 2007.

IMO, the bubble will pop in the private market before we even see it pop in the public markets.

It's truly the case that the bubbles will pop later than sooner as there incentive and ways to delay the inevitable. But when it does pop, you have ran out of options to catch the falling knife, so to speak.

Like forest fires, recessions are natural to capitalistic market and any attempt to prevent it only adds kindling.

At this point, I think it's pretty obvious that these cycles track with a subliminal fear of U.S. Presidencies that reach their term limits.

There's this sort of instinctual dry-up, right before the eight-year mark on an incumbent president, sort of like geese flying south for the winter. No one says anything to one another, but the angle of the sun changes, the summer weather is gone, and all the birds hit the road at the same time.

Regardless of the parties and there representation in whichever offices, and under whatever titles, everyone knows that different people will be sitting in different chairs when the dust settles, for some, there will be a new-car smell, and for others there will be painful hours stepping through a debugger, converting data from one format to another. Either you'll be comfortable while the bugs shake out, or you'll be in for a cold winter in a drafty house, but since the immediate future is up in the air, everyone stocks up for a harsh winter.

Other than a few top posts, our bureaucracy is non-partisan and doesn't change with the whims of the White House.

Human behavior is not precisely rational. Take Iraq as an example. Would you have predicted such things in 1999?

Conditional on a Republican presidency and some national disaster happening? Conditional on the son of the first Gulf War's President getting elected President? Some people were certainly speculating in that direction.

As reflected in this classic Onion article of January 2001, "Bush: 'Our Long National Nightmare Of Peace And Prosperity Is Finally Over'" http://www.theonion.com/article/bush-our-long-national-night... "During the 40-minute speech, Bush also promised to bring an end to the severe war drought that plagued the nation under Clinton, assuring citizens that the U.S. will engage in at least one Gulf War-level armed conflict in the next four years."

This is demonstrably untrue.

Yes and no. You are true that the bureaucracy is non-partisan and bureaucrats are not necessarily beholden to political leaders or process.

However, leadership (in a company, in a country, whatever) will set the priorities and tone of any group under them. Even if that leadership is in some ways going against the current of the bureaucracy, it's certainly possible for a dynamic leader (or group of leaders) to change the direction of an organization. And if there's one thing most people in politics must be exceptionally good at, it's getting people to agree that their plan or policies is the best plan or policies.

There's also a lot of power in being able to say "These are the criteria upon which all of you will be evaluated for raises and promotions", too. I'd expect the US bureaucracy is a little more ossified than most large corporations, but not so much so that appointing leadership doesn't change the direction of the bureaucracy.

I suspect that the 2016 presidential election will come down to sanders vs trump, and Wall St will not like that choice....one of those candidates threatens their cheap labor, and the other one threatens to tax them and regulate them more....

Heh heh....seeing wall st and the corporate media sweat is gonna make 2016 the best election ever....

Trump? I'd love to see the odds on that bet. Mere name recognition alone does not a successful candidate make. In fact, he's already proven his loose lips will sink his primary ship long before it sailed. He successfully angered Latinos and veterans--two groups that any Republican candidate will need to win at the polls.

Sanders has no better chance than Trump. We're deep into decimal digit territory here.

Trump almost seems to just be trolling at this point and not seriously trying to win the Presidency (or the nomination), the McCain remarks which he keeps doubling down on are just insane.

FWIW, I wouldn't put a lot of money on Sanders either, not because I think he'd be a bad choice (IMO he is the only rational choice of the credible and currently announced candidates) but just because he's not particularly charismatic (which matters, unfortunately), he's pretty old and he's easy to label a socialist, which is still sadly about the worst thing you can be labeled as (short of being an "ISIS terrorist") in the minds of a lot of the demographics in America that actually show up to vote.

Some of the latest polling data shows Trump at or leading Bush. If anything, Republican primary voters will really respond to his rhetoric. They eat up the Only True Conservative vs RINOs narrative.

Polling data in the July before an election has close to zero predictive power. Last time around, Herman Cain and Newt Gingrich had similar periods of being the front runner before they were dismissed by voters.

Neither Sanders nor Trump will come within a mile of the nomination.

There has been a relative correlation with recessionary activity and lameduck presidencies, but I think this is largely coincidence. The world market as of now is largely trading on China and Europe's new, not the U.S.'s. Of course that could shift with a Fed rate hike in September, but 25 basis points on a move as I said would probably just cause a minor taper tantrum and not really be part of the bubbling undercurrent.

> It seems that the biggest problem is that the underlying debt market is very illiquid and people are using ETFs and other financial instruments to create liquidity. This is why Icahn called BlackRock a dangerous company.

But the ETF liquidity is real, right? Is a crisis ever going to get so deep that there won't be people willing to buy the ETF at 20.5, sell the physical at 19.5, and take a free profit?

What's the threat model here? A run of redemptions on BlackRock?

This makes perfect sense. The reason why debt/fixed income products were stable in the past is because of the lack of liquidity. But now with the advent of structured product and ETFs, a lot of bonds are behaving more like publicly traded equity and being speculated upon, thus increasing their volatility.

They're not talking about public debt here.

On a related topic, can anyone point me to articles / research related to how bubbles continue to inflate during recessionary periods? From my uninformed/simplistic viewpoint it seems like the two are opposing concepts (i.e. popped bubbles lead to recession), other then the fact that governments use low interest rates to try and dig themselves out of recessions, and cheap money tend to fuel bubbles. The reason for my interest is this seems to be what is happening in Canada right now ( see http://www.cbc.ca/news/business/canadian-house-prices-35-ove... + http://www.leaderpost.com/business/Johnstone+Canada+recessio... )

The definition of a recession is tied to changes across the entire economy, which GDP is usually taken to represent.

Housing constitutes only a part of GDP, so it's possible for bubbles to form in housing prices (or indeed any asset category) even though the entire economy might be in recession.

Furthermore, the definition of a bubble is pretty tenuous. Often, a bubble is only known in hindsight. Furthermore, during a recession, certain asset prices (safe haven assets like perhaps gold, government bonds, the strength of the USD) may increase substantially as people seek safety and cash flows into these assets. Does this constitute a "bubble" in these assets?

During a general recession, there are fewer attractive investment opportunities. However, investment funds still exist and need to be put somewhere. It's easy for a bubble to form when too much money goes into one particular sector, but the bubble then only makes it more attractive for investment.

Housing is a traditionally safe, stable investment, and (at least in the US) large funds have been buying up homes at a huge scale for investment purposes.

I'd be glad to speculate further, but that's all it is. I can't point you to any articles on the subject.

"Housing is a traditionally safe, stable investment, and (at least in the US) large funds have been buying up homes at a huge scale for investment purposes."

Personally, I look at a house-- like I do food. It's a necessity. I don't feel large entities should be able to buy up large units of housing, and dole them out when the market suits their greed. Even for personal realestate speculation, I don't think anyone should be able to own more than 5 homes.(I just picked that number out of the air). In other words, I'm not a huge fan of realestate speculation, and whenever I hear about corporations buying up huge swaths of homes, I think about Gordon Gekko, 'Greed is good!', and my blood pressure rises.

While I'm at it--what's up with letting foreigners buy our land, before they become citizens? As it stands now, it looks like pretty much anyone, from every country, can pick up the phone, and buy American realestate? We have a hell of a time buying property in other countries? What am I missing? And then letting the house sit empty? I know it's legal--it just doesn't seem right?

I don't want to argue with anyone, I'm a nobody, and no expert. I'm not financially sophisticated. I just know if I had a lot of money, I wouldn't buy up all the orange juice concentrate, and keep it frozen tell the price skyrocketed; then and only then, sell it to the peons, and make a killing. I just could morally do it. Maybe that's why I'm broke? Furthermore, I couldn't imagine being a landlord these days. "Hay Joy, I see your daughter is going 1st grade next year? That's great! Hope she's making friends? I know how tough the move, and divorce has been on her. By the way, I need to increase your rent next month by $500. Have a good day! I'm off to the gym! See ya!"

Went way of topic--sorry. Just tired of feeling so close to being homeless; I'm dusting off my camping equipment. I guess living in the Bay Area is skewing my view of the morality of realestate speculation? I now feel sick? I need to take a walk. Happy Sunday people!

>>>While I'm at it--what's up with letting foreigners buy our land, before they become citizens? As it stands now, it looks like pretty much anyone, from every country, can pick up the phone, and buy American realestate?

This happens in London a lot too. Entire blocks of flats are marketed at and sold directly to Asia. Interestingly I read that in Singapore they do not allow you to buy real estate until you have lived there several year.

You can't seriously compare the size of Singapore and the U.S.

Foreigners buy London/NYC/SF because the price was inflated in the first place( its really hard to build stuff in these regulated cities)

Question: Let's say the USA and China get in a spat and things escalate to a trade war or a shooting war (unlikely, outside of Tom Clancy (RIP) novels). What happens to the huge amounts of property owned by Chinese nationals? Is there some precedent for seizing it?

I would guess that the historical examples would be WW2. Which is problematic, because we put people of Japanese descent in concentration camps, as opposed to nothing for German/Italian immigrants...

Roosevelt seized Japanese assets and most Allies did the same.

http://www.history.com/this-day-in-history/united-states-fre...

https://en.m.wikipedia.org/wiki/Stagflation

Average house prices are going up due to Vancouver and Toronto, but house market values are set based upon a small number of sales. In other words, it's not like 30 million houses were sold this year to establish the upward trend. It's really a tiny fraction of them that are on the market and when it comes to VC/TO those sale prices are largely dictated by foreign investment. In VC there are entire neighbourhoods where 30% of condo units are empty all year round. The point is that the average market values going up does not represent a bubble forming that will someday cause bloodshed due to the Canadian economy going into a recession. The house prices in those areas are more detached or rather relative (i.e. when a foreigner invests in a property in Canada it's to protect that wealth from losing value relative to other places and even when Canada is in a recession the debt burden of the country is much less than other places).

Poloz is not lowing the rate to help out the Canadian debtors make payments on those over inflated houses, after all unemployment is 6.8 percent and even the banks decided people didn't need it so they only passed on a fraction of the lowering [1]. No, he's intentionally lowing the currency value in an attempt to kickstart a new manufacturing investment wave that would normally come back to Canada given the oil prices collapse [2].

1. http://t.thestar.com/#/article/business/2015/07/16/major-ban...

2. https://en.m.wikipedia.org/wiki/Dutch_disease

In fractional reserve systems you create money when you borrow from the bank. So governments will often deliberately (if not openly) stimulate real estate prices in an effort to inflate the money supply and stimulate the economy.

A great many people believe the 2008 US real estate crash can ultimately be traced to the government's inflationary reaction to the bursting of the dotcom bubble in 2000.

In fractional reserve systems you create money when you borrow from the bank

This isn't true. Banks can only loan out money deposited with them.

I suspect tsotha is thinking of deposit multiplication, which is often considered to be "money creation" because demand deposits are considered part of some definitions of "money supply" (particularly M1 in the United States).

It's entirely true, it's even in the name.

In a "Fractional Reserve" System banks only have to maintain a fraction of what they lend out in reserve.

When you borrow money from a bank you are literally creating new money. But don't believe me, Wikipedia is your friend.

You're thinking fractional reserve means, for a 1/4 fraction, I put $1000 in my savings account and the bank can lend you $4000. That's not true. In reality, I put $1000 in my bank account. But the bank only needs $250 cash in reserve backing that account, and can lend out the other $750. Of the bank's $1000 in assets, 1/4 must be hard cash and the rest can be debts payable to the bank. The bank charges interest to borrowers, and pays interest to depositors, and makes its profit off the margin.

It seems this is not how it really works.

http://www.economonitor.com/lrwray/2013/08/15/banks-dont-len...

This is one of these things that made me think what else of what I believe is not true.

The link you posted seems to fundamentally fail to contradict the OP. The link states "banks do not lend out their reserves" - which is true. They lend from their deposits, which is exactly what the OP was saying.

If that's not it, then someone needs to explain it more clearly.

Banks don't lean from deposits even in the "official" narrative.

A bank that needs to lend money that doesn’t have it's going to use the interbank system in order to get "reserves" from others banks.

The idea is that the causality is inverted. Banks lend and then search for reserves. If you see it this way, you realize that there is not constrains in how much money they can lend (except how expensive is to find reserves).

Try this (maybe more clear than the other): http://bilbo.economicoutlook.net/blog/?p=14620

>Banks can only loan out money deposited with them.

This is emphatically incorrect, and the slightest bit of research would have been enough for you to realize it, too.

When you take out a home loan at the bank the bank doesn't lend you anyone's money. Your promise to repay is assigned a monetary value on one side of the leger, and they cut you a check from the other side.

This video is a bit melodramitic, but it's pretty accurate:

https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&c...

It doesn't do wonders for your credibility when you're both wrong and arrogant about it: https://news.ycombinator.com/item?id=9914210

I'm not wrong. You are. Please. Do a little research.

You have no idea how the system works, and I'm not sure where the certainty is coming from. This is right from the wiki page you refuse to read:

"Because bank deposits are usually considered money in their own right, and because banks hold reserves that are less than their deposit liabilities, fractional-reserve banking permits the money supply to grow beyond the amount of the underlying reserves of base money originally created by the central bank."

That doesn't even remotely contradict my post.

The money multiplier effect you're alluding to means that if I have $1000 in the bank, the bank can lend $750 of it out to you, so between the two of us we have $1750 of liquid assets despite the $1000 of hard cash backing it. If you spend your $750 on a house, and the guy selling the house puts the $750 in his bank account, the bank lends out $562.50 which means that from my $1000 hard cash, there is now $2312.50 of liquid assets floating around. It does not mean that the bank can fiat $4000 into existence the second I deposit that $1000. If that were the case, there wouldn't be such a thing as a bank run, because the bank would still have my $1000. Bank runs are widely acknowledged to be the biggest risk of fractional reserve banking.

From the very Wikipedia article you're citing:

"Fractional-reserve banking is the practice whereby a bank accepts deposits, and holds reserves that are a fraction of the amount of its deposit liabilities"

"The relending model begins when an initial $100 deposit of central bank money is made into Bank A. Bank A takes 20 percent of it, or $20, and sets it aside as reserves, and then can theoretically loan out the remaining 80 percent, or $80. If the bank does in fact issue loan proceeds in the form of $80 in central bank money, the money supply actually totals $180, not $100, because the bank has loaned out $80 of the central bank money, kept $20 of central bank money in reserve (not part of the money supply), and substituted a newly created $100 IOU claim for the depositor that acts equivalently to and can be implicitly redeemed for central bank money (the depositor can transfer it to another account, write a check on it, demand his cash back, etc.)".

(The editors of Wikipedia are evidently fond of their run-on sentences.)

>The money multiplier effect you're alluding to means that if I have $1000 in the bank, the bank can lend $750 of it out to you, so between the two of us we have $1750 of liquid assets despite the $1000 of hard cash backing it.

Which was my entire point, that when I take out a loan the bank is creating money. I have the $750 I borrowed, the bank has $250 and also a document (my promise to repay) that's worth about $750.

If a bank starts with $1000 in assets, loans me $750 and still retains $1000 in assets, how can it be said the bank can't loan money it doesn't have?

EDIT: In the real world what happens is the banker charges you loan fees (like "points" on a mortgage), and reserve ratios are more like 10% than 25%. Theoretically, if the banker can get you to pay 10% in loan origination fees (and assuming nobody defaults), he can loan as much money as he can find people willing to borrow.

And where does the money for those fees come from? At that point they're still just a promise.

Money owed to the bank is still the bank's asset. It's simple accounting:

I deposit $1000 in the bank. The bank has an asset of $1000 cash and a liability of $1000 deposit payable to me.

The bank loans $900 to Jimmy. The bank has an asset of $100 cash and another asset of $900 of Jimmy's debt, payable to the bank. The bank has a liability of $1000 payable to me.

The bank profits from fees we pay to the bank and from interest on loans from the bank, but they have to have the money before loaning it out in the first place. They can't just loan you money out of nothing. If Jimmy shows up at the bank before I do, and Jimmy and I are the first two customers, the bank has no money to loan Jimmy and has to turn him down. They don't get to print it, which is what it sounded like you were saying. If that was a misunderstanding, I apologize; I've just run into a lot of misinformed and deluded goldbugs on HN before.

Really, what's going on is more of a double booking. Like on airlines, where they sell more tickets than they have seats based on the assumption that not everyone will show up, banks get to say my $900 belongs to me and Jimmy at the same time, and depend on having enough customers that we don't all ask for it at once, or else if there is a run on the bank, they've bought an insurance policy from the FDIC to cover that eventuality, and can borrow their own money from the FED as well.

Also, I'd be really surprised if anyone paid loan fees in the neighborhood of 10%. People these days can't be bothered to put down a 20% down payment for a house and you think they pay 10% in fees for a loan from the bank? Even if you could pull off that scheme, I'm pretty sure that's not how the reserve ratio works. The reserve ratio has to do with what percentage of a bank's deposits must be held in cash; it has nothing to do with money loaned by the bank, and it doesn't mean the bank can loan money it doesn't even have.

http://www.bankofengland.co.uk/publications/Documents/quarte...

Banks don't have to have the money before loaning it out

"the relationship between reserves and loans typically operates in the reverse way to that described in some economics textbooks. Banks first decide how much to lend depending on the profitable lending opportunities available to them ...It is these lending decisions that determine how many bank deposits are created by the banking system. The amount of bank deposits in turn influences how much central bank money banks want to hold in reserve (to meet withdrawals by the public, make payments to other banks, or meet regulatory liquidity requirements), which is then, in normal times, supplied on demand"

Link above is specific to UK but it's similar in most countries

"When an institution fails to satisfy its reserve requirements, it can make up its deficiency with reserves borrowed either from a Federal Reserve Bank"

in other words... banks lend first and account later, if there's a shortfall at the end of the day they basically get an automatic loan from the central bank

>The bank profits from fees we pay to the bank and from interest on loans from the bank, but they have to have the money before loaning it out in the first place. They can't just loan you money out of nothing.

Oh, I agree they have rules they need to follow. The way modern lending works is the bank makes you a loan and then goes looking for funds to cover its reserves by borrowing against your loan document. I'm sure they like to lend out depositors' money because it's cheaper, but they certainly don't need it.

They borrow from other banks if they can, but if not they borrow straight from the Fed at the "discount window". And when the Fed lends money it is literally created by changing a number in a computer somewhere. So ultimately that $1000 has been injected into the economy though the creation of money (which will get destroyed slowly as the loan is paid off).

The point, way back in the beginning, was that the money supply is really only constrained by the amount credit-worthy borrowers are willing to borrow at a profit to the banks. That's why the Fed discount rate has such a big effect on the money supply - by raising it they make unprofitable some portion of loans that would have been profitable at the lower rate.

I'm not sure if the central bank is technically part of the fractional reserve system. But is there fractional reserve system currency issuer without a central bank? I'm not aware of one.

Let me apologize for my tone as well.

Yes, it does sound like we're violently agreeing. Thanks for the informed discussion; I am so used to arguing with goldbugs and nutjobs, even on HN, that I was unprepared for an informed discussion.

> If a bank starts with $1000 in assets, loans me $750 and still retains $1000 in assets, how can it be said the bank can't loan money it doesn't have?

Because the bank has to transfer the money.

Let's assume a 2 bank world: Bank A and Bank B

I apply for a loan for a house of $100, ignoring future value and default probabilities.

I get given the loan and need to send the money to the house owner. The Bank A marks in its books that I have a $100 loan and transfers the money from its assets to Bank B. Bank A's assets have not changed, but its capital-asset ratio has (as it now has less assets to back its capital).

Bank A transfers $100 to Bank B but doesn't want to pay out assets, so it goes into the interbank market and borrows $100 from another bank at the same time, increasing its assets by $100 and also increasing its liabilities by $100.

The home owner that receives the money in their bank, Bank B.

Bank B's assets have increased by $100 and liabilities have increased by $100 (as it will, in the future, need to pay out the cash to the home owner). This is where the money multiplies happens.

Finding itself sitting on deposits not doing anything, it is likely Bank B will go into the interbank market and lend out some money to Bank A who seems better at finding customers.

You are confused about the economic definition of money.

Credit in your checking account is defined to be money under the usual definition. The process of depositing and loaning money at commerical banks creates additional credit that wasn't there before. If a bank accepts $1000 and loans $900, there is now $1900 of money. By definition.

In the mid-2000s a phrase kept getting banded around in investment management "The search for yield." As interest rates were so low, as were credit spreads, there was a big demand for anything that gave some kind of yield.

That proceeded to drive down credit spreads further.

And more and more.

Which meant basically free capital for investments which were inherently risky, with credit lenders (banks and non-banks) getting money thrown at them for yield, just some yield.

Then they get really clover and making synthetic yield.

And then we had the recent financial crisis, caused by these low rates themselves as a result of the dot-com bubble.

For reading, Shiller's Irrational Exuberance is always fresh (data-based); and stuff by Michael Lewis is good too (narrative).

Here's something I don't understand. It's probably more relevant to a country Greece's size than the US:

Why isn't consumer banking more international, like every other major industry?

In Greece, interlocking government & bank failures have brought down the country and it's causing this seized up state. People are now afraid of leaving money in a bad banking system. So banks have no deposits, and can't provide financial services. But, if Greeks had easy access to large & stable foreign banks they wouldn't need to worry about the sorry state of Greece's own banks.

I mean, if Greece's local canning industry had collapsed they would be buying foreign canned goods and everything (at least on the consumer side) could continue undisturbed.

What is the big advantage of a local banking industry anyway?

It's not about advantage/better. It's all about regulation.

I.e. You simply can't bank across a border due to all sorts of regulations and laws. And I think that applies to both sides of the fence, both on the Greece side, and on all the "foreign" countries that you think can provide a "global" service to the Greeks.

The bank and the state are intertwined due to this, and any failure on one will most likely affect the other. This will be the case until a true free-market approach is taken by banks.

Are there decent middle-grounds between regulation and free-market? Sure, things could chug along.

That's the whole point of having a single currency and a common market... I should be able to open an account in any Eurozone bank without much trouble.

> You simply can't bank across a border due to all sorts of regulations and laws

I wonder how many people told Travis Kalanick you simply can't start a taxi competitor due to all sorts of regulations and laws

>You simply can't bank across a border

In my experience that varies. I have bank accounts in the UK, US, and Spain and in terms of saving money and transferring it there's usually no problem. Where it is localised is borrowing money against property. If you want a mortgage against a Spanish flat you have to use a Spanish bank and so on. That kind of makes sense as if you run off and don't pay the mortgage then the bank is stuck with the property and it's easier to deal with one down the road where you know the laws and regulations than one in some random other country. Especially if evicting tenants and so on is involved, things get pretty complicated.

Okay, but let's assume this in the context of Greece. I understand that everything sorta "works" semi-smoothly when everything is fine. I too have managed to move money over borders, between accounts, etc.

But in the context of the Greek situation? I.e. Imagine someone wanting to come in now (or at the start of the crisis?) in order to open up a new "foreign" bank and offer it to Greek individuals? Because the regulation is so intertwined, and this mess of the loans and ECB, means that no one dare do that.

They'd have to jump through mountains of regulation, come up with some sort of initial capital to fund the bank (with no idea whether they could have legal access to it again), and on top of that all, give the new Greek depositors any sort of guarantee. A tall order, to say the least.

Another point, sorta tangential. You can also barely have an "informal" bank by virtue of transferring money to a foreign bank. Have a look at: https://en.wikipedia.org/wiki/Hawala

I haven't confirmed, but I'd bet that almost every single country in the world defines that sort of transfer as illegal. Or additionally: https://en.wikipedia.org/wiki/Foreign_exchange_controls

There isn't. You want your banking industry to be the same size as your currency area, because central banking is by far the most important tool of financial stability.

>if Greeks had easy access to large & stable foreign banks they wouldn't need to worry about the sorry state of Greece's own banks

Trouble is that's not so. If people just stopped using Greece's banks they'd go bust and then either the government would have to bail them out or savers would lose their money.

As to why have a local banking business, the bulk of useful banking is lending to local businesses and people getting houses so there's a benefit to being local so you know the people, businesses and houses. Of course it needs to be regulated so they don't take your savings and punt it on dumb stuff.

Someday I hope that we get to having a global currency, and a lot of these issues go away. It is kind of ridiculous the delays and barriers that the banking system still has in place - I have direct deposit for my paychecks, and my employer uses electronic payments to move the cash into my accounts. It still takes at least two business days for funds to clear in my account. This is all domestic, with banks that are physically 20 miles apart.

The notion that bubbles are not all equally bad, and that bubbles fueled primarily by debt tend to be the worst, seems reasonable on the surface, but it's not always so easy to separate bubbles into two camps: those fueled by exuberance and those fueled by debt.

Margin debt, for instance, has increased significantly in China[1] and in the US, stock buybacks financed by debt offerings have been a prominent feature of the current bull market[2].

Central banks have taken so much unprecedented action since 2008 that it requires a lot of faith to rely on analyses of past bubbles to predict what will happen when the current ones burst.

[1] http://www.bloomberg.com/news/articles/2015-04-13/china-walk...

[2] http://fortune.com/2015/02/11/stock-buyback-binge/

Yes we are in rather unchartered waters because of all the central bank buying. It is very hard to use build models based on past data when considering the actions of the worlds central banks over the last 8 years.

Isn't this talking about personal debt, though? When they talk about the wealth effect in a stock market crash, it's pushing down on personal assets that are made up of saved money.

In contrast, the housing crisis of 2008 (from which we are still collectively suffering) was preceded by people taking on massive personal debt well beyond their ability to actually handle, and many times larger than actual savings. The following burst has a pile-on effect, in that those already debt burdened don't simply lower spending habits, but rather fall into bankruptcy, default on mortgages and other loans, and so on, which puts a years- if not decades-long drag on economic activity.

> Margin debt, for instance, has increased significantly in China

It is even more insidious than that. Chinese companies have pledged their stocks as collateral for loans so the whole thing is a pile of circular promises, one built on top of the other.

This is the real reason why the Chinese authorities suspended so many shares from trading before they stabilized the market. If the shares had continued to go down, it would have resulted in a massive credit crisis since billions and billions in loans would go into default.

For more details see:

http://www.bloomberg.com/news/articles/2015-07-08/this-is-wh...

Correct me if I'm wrong, but it seems as though Australia is in for a disaster when the current housing bubble bursts. Median house prices in Sydney are around $1M, which is shutting out the majority of people in the 25-44 age range from buying their first home.

http://www.sbs.com.au/news/map/housing-affordability

Sydneysider here, 24 years old and pretty-decent salary. Maybe if I save for several more years, and buy with a partner, we may be able to afford a 1 bedroom apartment, with some financial help from our parents, in the outskirts of Sydney.

It's now more expensive to buy in Wollongong (Sydney outskirts) then in New York http://www.wsj.com/articles/worry-over-debt-as-australian-ho...

I know the feeling. I'm 30. My partner is 26, from the Sutherland Shire. If we are going to get a place near her family (which she wants so badly) I just don't know how we're going to afford it. Even if I make a 6 figure sum, adding her teaching salary probably won't be enough to afford the housing prices out there.

Couple this with the fact that neither of our parents have the money to help us buy a house... I'm pretty sure we're doomed for now.

I keep thinking to myself... save or invest a tonne of money and wait until the housing bubble bursts to buy a house. I'm not economically savvy really, so I don't know how good a plan that is.

Australia has the same problem Canada does. It's strapped to China on growth with a dependency on natural resources. Now that China's growth is over - they're about to become Japan due to extreme debt, bad demographics and the easy growth having filled out years ago - Australia needs to find a replacement engine for its economy.

Canada has already realistically slid into a recession. They'll have a bad ten years, due to the perpetual oversupply of oil, weak China and strong dollar. Their households have taken on vast amounts of debt in the last decade. All of those things are likely to pop their real estate bubble, either directly or after low interest rates push the prices higher.

A nice thing Australia has going for it, is that its net median wealth per adult is well over twice that of Canada (and the highest of any major nation). It can afford to lose some of its frothy real estate market without a disaster occurring. The bad part is, the household income to debt ratio is around 170%, on par with Canada, and nearly twice that of the US. As with Canada, a lot of that household debt is of course mortgage debt, and it'll continue to steal capital away from economic growth in the coming years.

I think Australia will take a hit, have 10 to 15 bumpy years of low growth and falling asset prices (which will be confused for deflation when it occurs). It'll otherwise weather the storm well. Australians seem to tighten their economic belts when they need to. The focus will be directed at paying down debt and getting out from under the fallout of the former real estate boom.

We also have a government which is steadfast in its efforts to ignore the idea that we can't just stick ourselves to Chinese exports forever.

Australia has a good reputation for coming around eventually. I expect the government will in the next few years. It'll take time for the economy to adjust of course. The upside is, Australia has built up a fair bit of wealth, and significantly boosted its GDP / output in the last ten years. Always nice to make a big economic change from a strong position than the opposite.

This hit a chord with me:

"Be it tulips, land, housing, derivatives or shares, they find that the consequences of a bursting bubble depend less on the type of asset than on how it is financed. High leverage is the telltale sign of trouble..."

I see this today not just in the Valley but elsewhere in the world too (witnessed it in India and Sub-Saharan Africa). When wealth sloths in a 1% interest rate economy, it gets restless to find better results, often with disastrous results.

Interestingly, this reminds me a lot of the view espoused by Bill Janeway in Doing Capitalism in the Innovation Economy [1], which, among many other things, studies the history of business cycles. It's a great book.

[1] http://www.amazon.com/Doing-Capitalism-Innovation-Economy-Sp...

Economics discussions are like a bunch of 1980s mechanics talking in a garage. Or nuns discussing their faith.

The fundamental technology and premises are outdated.

You can't just have one number to try to track everything while 'externalizing' all the stuff that matters, like human and environmental health. And in our high tech world, relying on lawyers and politicians rather than building automated systems is dumb.

Assuming one agrees that debt is the problem and we're on the brink of a crash, how would you protect your assets?

Funny the 2008 housing bust wasn't specifically mentioned. I'm still walking funny from that.

> Five years after the bursting of a debt-laden housing bubble, the authors find, GDP per person is nearly 8% lower than after a “normal” recession (ie, one that is not accompanied by a financial crisis).

I read that as the 2008 one specifically, but that was an assumption.

Two words: student loan.

So is the US in a bubble or not? If we are, why? If we aren't why not?

I'd say no. The US is one of the few developed nations that has been busy paying down household debt for the last five years. It's in far better shape than its peers. [1]

Most major economies have been taking on increasing amounts of household debt, or are already carrying too much. That includes: Norway, Sweden, Belgium, Denmark, Finland, Switzerland, the Netherlands, France, Canada, Australia, New Zealand, Spain, Ireland, Portugal.

Others like Italy have taken on more debt (30% more in ten years), but started from a relatively low base. Or Japan, which has a bit too much household debt but has been flat for 20 years.

The US, Germany and the UK are among the few that have been actively reducing household debt.

In the US assets are richly valued due to the former QE and low interest rates, but there isn't a bubble (yet anyway). If the US continues to reduce household debt, while boosting employment and wages (the US unemployment rate is half that of the Eurozone), that will only improve the situation. The US will very likely substantially outperform its peers over the next decade; the strong dollar has reclaimed a lot of lost purchasing power for the middle class, effectively giving Americans a 20% pay raise versus the rest of the world (and that's before interest rates climb).

[1] http://i.imgur.com/718Coeb.png

> The US is one of the few developed nations that has been busy paying down household debt for the last five years.

In the US, the people with the highest debt-to-income ratios have been briskly filing for bankruptcy over the last five years. I wish I had time to dig up another graph to match yours, volume of personal bankruptcy filings over the same period. It's correlated. It's also a much stronger effect than paying down, often someone with over 100% debt-to-income goes to 0% over a matter of months, with no change in income at all.

Yeah, but the point is, once the debt is cleared, by being paid or by bankruptcy, the private sector steadily regains its ability to plan rationally and pass information around in price signals. That's why fairly "easy" bankruptcy laws are usually considered more pro-business, while "moralizing" bankruptcy laws, as more often found in Europe, are actually considered to depress the economy (by simultaneously mobilizing vast machinery to pay out on "bad bets" and heavily penalizing business failure, thus increasing the risk-up-front of entrepreneurship and investment).

That's only partially accurate. The explosion of personal bankruptcies due to the great recession was mostly cleared by early to mid 2011. Since then, the household debt to income ratio has continued to fall. And meanwhile, wages are climbing, unemployment has dropped substantially (including on the U6), and full-time jobs have roared back in the last 3.5 years. The median household credit score has also been climbing for several years since the bankruptcy flood years.

While the household debt is lower now (still high, though), you conveniently omitted:

1. the student loan debt, which, in $ terms, recently exceeded the "regular" household debt.

2. the gross federal debt (April 2015) is $18.15 trillion. Went up from 10.63 trillion in the last 7 years (under Obama's administration)

3. reflating real-estate prices back to absurd levels

4. while not a debt indicator, an important factor: Record LOW number of people in the work force (the lowest in 30 years or so). If you don't work, it is hard to pay down your debt, no?

Student loan debt is $1.2 or so trillion. Household assets are $86 trillion. It's not an issue compared to the vast household assets. The median student loan debt, for adults with student loans, is around $13,000 - not a menacing sum, even if it has climbed a lot in the last ten years.

Gross federal debt only gets included if we're going to count gross national assets: $225 or so trillion. Not to mention, that public debt is backed by the global reserve currency, which grants immense privileges to the US economy. A 100% GDP to debt ratio, while high, is manageable (and yes, we'll see what happens in the future given entitlement costs). The US also has spare taxing capacity when it comes to the upper 25%, versus most other developed nations (the US has among the highest disposable income levels).

Most of the developed world has expensive real estate, a consequence of relatively low interest rates. In no way is it unreasonable to compare apples to apples.

Full-time employment has increased by seven million in 3.5 years. While the drop in the labor force participation rate is a drag on the economy (some of that is legitimate boomer retirement and an aging population), the US participation rate is still very healthy compared to peers (it's 10 points higher than Belgium by comparison).

Not sure which assets you are talking about:

1. Half of US households have no retirement savings:

http://www.bloomberg.com/news/articles/2015-03-12/the-retire...

2. One third of households making > $75K live paycheck-to-paycheck and are essentially one or two months of unemployment from bankruptcy:

http://www.washingtonpost.com/news/get-there/wp/2015/04/16/o...

3. Disastrous healthcare costs (roughly $20K per family per year). You may or may not be paying it directly out of pocket (your employer may be paying for you, or you my be subsidized), but that's what it costs.

Also remember that asset (mostly housing and stocks) values are on paper and may (and will) go down if the economy keeps slowing down as it has been since the dead-cat bounce of 2010-2011.

One more thing: asset ownership is heavily concentrated in the hands of the 1%.So out of 100 students, 1 can pay many times over, the next 9 too, with more pain. At least 50 students are penniless and with the job market paying what it is paying, they may never pay back their student loans - what could possibly go wrong?

Where do you have your numbers for increasing household debt from? I'm a young Norwegian looking to buy real estate around a major city. Rents are ridiculous when compared to an equivalent mortgage (rent is always higher than interest + principal on an equivalent owned property, and that's before withdrawing the interest rate expense on taxes).

But it's very unsettling to have seen real estate prices climb twice as fast as the average increase in salary, and three times faster than inflation for the last 20 years. 2012 numbers put out average household debt at 213% of net disposable income. If you're young and buying a home for the first time, you're looking at ~350%, and that's a conservative number. It's disturbing.

Norway is of course one of the few countries that can afford to carry a 200%+ household income to debt ratio and get away with it (not to say it's desirable granted). That ratio hasn't increased much the last couple of years, so it may have stabilized. I know there is still broad concern about it:

http://www.thelocal.no/20141104/high-household-debt-in-norwa...

http://www.reuters.com/article/2014/02/04/norway-debt-idUSO9...

The sort of bright spot to that, is debt levels can't climb perpetually. The most likely trajectory for Norway's housing market is a reduction in real housing costs. Oil is going to be relatively cheap (in my opinion) for the next ten years. That will reduce Norway's growth, remove some of the froth in assets caused by the oil boom the prior ten years; and the government is already on top of managing the consequences of that: financial belt tightening will be the longer term outcome.

Unless Norway does something stupid, it seems most likely that the housing market, and household debt levels, are close to peaking. Norway's situation is quite similar to Canada and Australia's natural resource driven real estate bubbles.

If I were a young professional in Norway, I'd rent, build up wealth, and wait to see how the oil industry gets hit (not to mention what the total fallout of Scandinavia's debt binge is over time, with local knock-on effects from surrounding countries). A house is mostly an expense, a place to live, unless you're starting a family. I'd wait to see how this shakes out. The odds strongly favor that very large gains in assets backed by a commodity boom, will have a down swing once that boom has ended. Worst case scenario, unless oil goes back up, housing in Norway is unlikely to move a lot higher. In the meantime you can work on building up your own balance sheet, and not overpay for a place to sleep at night. When it comes to buying assets, I've always liked Warren Buffett's adage: be fearful when others are greedy, and be greedy when others are fearful, aka don't chase bubbles, time is on your side, be patient and buy when assets are on the cheaper side - for now, put your capital to more productive use.

Thanks for the insights. I definitely understand your thoughts on waiting things out. It's a difficult call since the immediate expenses are higher when renting and hence it's harder to build up savings, but OTOH is's very possible to get "wiped out" (go underwater) in a downturn. And that's certainly not a way to save money.

Out of curiosity, is economics a hobby of yours or is it part of your profession?

They might need to focus a lot more on public debt that has been growing steadily for the past decade everywhere in the world. This might be the next bubble and it might be way worse than 2008...

Yeah, so what happens if a country like the US defaults?

They won't default, they will just print more USD. Anyway, that will be still bad for everyone.

Why? As we produce more stuff, we also need to spend more to keep prices stable. Printing money and throwing it at the economy is one way to make that happen. As long as our rate of spending remains in line with our level of production, we shouldn't see inflation or deflation.

Why do we need a balanced budget?

If you're Greece and you can't issue your own currency, your national debt matters. But the U.S. can always issue new currency to cover its liabilities.

I guess I have a hard time understanding why we should care about the amount of the U.S. national debt.

Yes! If more people understood this, the world would be a better place. Reminds me of this post on "fiscal conservatives": http://itsthepeoplesmoney.blogspot.com/2014/11/confessions-o...

Interesting. I like what he says about debt-to-GDP, but I'm not sure I understand his leap to the conclusion that we should be striving for full employment.

I understand why we'd want to scale production to meet the increased demand induced by consumers having more money. But if it would be efficient for us to scale up production without creating jobs, why should we create jobs?

What is the value of full employment?

traditionally there have been exactly two options available: employment and unemployment, the former being considered preferable.

Because the rate of production never stays in line with the rate of spending; you can't force it to stay inline. If you debase a currency, consumers will typically seek to spend it before it loses more purchasing power, which automatically unbalances your economy because you can't control exports or production in a way that you can match the consumption. We saw this disastrous effect during the 2000s, when the dollar lost a large amount of value due to budget deficits, and the middle class lost a lot of ground as wages failed to outpace the currency devaluation.

Why should you care about the US national debt? Because at just ~3.5% interest on that debt, it'll eat up a share of the Federal budget larger than either Social Security or Medicare/Medicaid, at a time in which the US already can't afford its entitlements. Each year that goes by, the US can only afford to pay a lower and lower interest rate on its national debt, and it has to 'print' to cover the deficits today - tomorrow when the red ink on entitlements is greater and the interest costs are greater, the deficit will be greater (projected to explode higher in the near future). That will lead to further devaluation of the dollar, which will further wreck the middle class as it did last decade with the weakened dollar. Exports didn't come even remotely close to making up for the weaker dollar hit last decade, and they won't next time either. The US runs a massive trade deficits, it takes a far worse hit on a weaker currency than it benefits from such.

The only large buyer left for US debt, is the Federal Reserve. The US Government is insolvent without monetizing its own debt via the central bank. Once a nation hits that point, it never recovers.

Hmm. I wouldn't characterize what happened in the 2000s as a debasement of the dollar. Real wages have decreased, but shouldn't we want to spend less money on labor as we develop labor-saving technologies and take advantage of cheap foreign labor that substitutes for domestic labor?

Why is a trade deficit a bad thing? It means we're sending dollars overseas and other countries are sending us real stuff in return. Sounds like a pretty good deal to me.

What's wrong with the fed being the only large buyer for U.S. debt? If the fed holds all our treasury securities, then the interest payments don't really matter, right?

Is there any reason why it's bad for this to be a permanent arrangement?

I still don't see why an ever-growing deficit is a problem. Do you think it will necessarily lead to inflation? If so, why?

When you say that the U.S. can't afford its entitlements, what do you mean by that?

"If you're Greece and you can't issue your own currency, your national debt matters. But the U.S. can always issue new currency to cover its liabilities."

Hence the antipathy to joining Euro in UK. See the European Exchange Rate Mechanism and Black Wednesday.

https://en.wikipedia.org/wiki/Black_Wednesday

>Why do we need a balanced budget?

Because if you spend more than you make, you are essentially borrowing from the future (with compound interest). Eventually the quickly-compounding interest and principal overwhelm you and you have to spend most of what you produced to service/repay the debt for many years (exactly the situation Greece is in).

Printing money without the accompanying increase in goods/services produced is _stealing_ from everyone who has savings using the currency. The unit of currency loses its value, impoverishing the saver.

The only sustainable way to prosperity/affluence is through increased productivity, not financial shenanigans.

> Because if you spend more than you make, you are essentially borrowing from the future (with compound interest).

Not if you never pay it back.

> Eventually the quickly-compounding interest and principal overwhelm you and you have to spend most of what you produced to service/repay the debt for many years

If the fed holds the treasury securities, the treasury just pays the interest to the fed. By law, any profits the fed makes go right back to the treasury again. Why would the interest payments be a problem?

> (exactly the situation Greece is in)

Greece can't issue their own currency.

> Printing money without the accompanying increase in goods/services produced is _stealing_ from everyone who has savings using the currency.

Right. But I was asking about a scenario in which there would be an accompanying increase in production.

> The only sustainable way to prosperity/affluence is through increased productivity, not financial shenanigans.

Agreed. But financial shenanigans do have the potential to hurt our prosperity/affluence. Wouldn't preventing the supply of money from growing in line with our productive capacity count as such a shenanigan?

We tend to expand credit/debt to keep the economy running and then it all comes crashing down when we start calling our debts back in. THAT is not sustainable.

Instead of expanding the amount of credit, why shouldn't we just expand the amount of actual money?

>Instead of expanding the amount of credit, why shouldn't we just expand the amount of actual money?

So just print more money? I just tried to explain to you that printing money without producing more goods/services just dilutes your purchasing power. The pain caused by _moderate_ inflation is easier to hoist on unsuspecting public, so inflation is typically chosen over bankruptcy (if you control the money printer - Greece is out of luck).

>there would be an accompanying increase in production.

Easier said than done. The US GDP has been bumping barely above 0 over the past several years, which means we are not producing more. A lot of reasons for it, but one of them is lack of consumption caused by excessive debt of consumers, who are flat out broke (and heavily in debt).

> So just print more money?

Right. And hand it directly to consumers.

> I just tried to explain to you that printing money without producing more goods/services just dilutes your purchasing power.

Yes. But then you went on to say:

> The US GDP has been bumping barely above 0 over the past several years, which means we are not producing more. A lot of reasons for it, but one of them is lack of consumption caused by excessive debt of consumers, who are flat out broke (and heavily in debt).

If we hand real money to consumers instead of handing them credit and plunging them into debt, why wouldn't that address the lack of consumption problem?

> The pain caused by _moderate_ inflation is easier to hoist on unsuspecting public, so inflation is typically chosen over bankruptcy

I'm skeptical that printing money and handing it to consumers would cause any amount of inflation. If we assume a downward-sloping long-term aggregate supply curve -- and the long term gets shorter the more scalable our businesses are -- then the more stuff we produce, the cheaper that stuff gets. Right?

Besides, if we do see inflation rates that are higher than what we want, the government has other levers it can use to address that.

1. Open market operations. The fed sells treasury securities back to the open market thereby removing dollars from the supply.

2. Increase bank reserve requirements to discourage bank lending. This reduces the amount of credit (and therefore debt) and can help reduce future credit crises.

3. Tax consumption/spending. Taxation is fine as a means to reduce the money supply and influence consumer behavior. But I'm not sure how useful it is to view taxation as a way to fund the government. Why not spend as needed and tax as needed without worrying about balancing the two?

> Greece is out of luck

Yup.

>I'm skeptical that printing money and handing it to >consumers would cause any amount of inflation.

Printing money and giving it to consumers IS inflation (it is the very definition of inflation).

Example: if you have two oranges and $10 in money supply, they will each cost $5. If you print additional $10, you will have $20 sloshing around and the price of an orange will automatically jump to $10 each. The consumer will still be able to only buy the same amount of oranges as before.

Okay. Let's say we have two oranges and $10 in the money supply. Let's also say that one guy has all of the $10 and he's only ever going to want one orange. What's the price of an orange? $10. One orange gets sold and the other gets wasted.

If you print an additional $10 and hand it to a different guy, what's the price of oranges? Still $10, but both oranges get bought.

Your scenario is too simplistic to use. The premise that "if you print additional $10 and hand it to a different guy, the price is still $10" is false.

A better example of your idea is - college education. By giving out free money to people, the government increases supply of buyers (students) - and the sellers (colleges) keep rising prices (cost of college is through the roof - quadrupled/quintupled over 20 years). Because they have a stream of buyers they otherwise would not have.

Yes, I said "giving free money to people", because even though they are formally student loans, many of them will never be repaid. It is really a transfer of wealth from US taxpayers to the higher education complex, who can charge tuition multiple times what it was years ago (accounting for inflation included).

> Your scenario is too simplistic to use.

Yes. Both of our scenarios were simplistic. You came up with a simplistic scenario in which adding money to the supply did cause price inflation and I came up with a simplistic scenario in which adding money to the supply did not cause price inflation.

Printing money and handing it to consumers is not "the very definition of inflation." There's more to it than that. Price inflation happens when the rate of spending outstrips the rate at which real value is being traded. Money supply is a factor, to be sure, but so is monetary velocity, and productive capacity.

> A better example of your idea is - college education. By giving out free money to people, the government increases supply of buyers (students) - and the sellers (colleges) keep rising prices (cost of college is through the roof - quadrupled/quintupled over 20 years). Because they have a stream of buyers they otherwise would not have.

Agreed. It's free money in the sense that much of it won't be paid back. But it's not free in the sense that those students have to spend it on college, which leads to market distortions. People will pay whatever it takes to get the best college education possible even if they have to spend money they don't have, especially if the only way to access that money is to spend it on college.

> Yes, I said "giving free money to people", because even though they are formally student loans, many of them will never be repaid.

Yes.

> It is really a transfer of wealth from US taxpayers to the higher education complex, who can charge tuition multiple times what it was years ago (accounting for inflation included).

Yes.

Traditional college doesn't scale well. The market is saturated and we're flooding it with consumers who have access to more and more money.

But education can scale. MOOCs scale. You can get a really good education without paying very much. Such an education might not lead to a job, but is that necessarily a problem?

In my mind, it's a waste of money for the government to pay for students to go to school (either through loans or grants).

Technically, printing your way out of a debt crisis is still considered a partial default. From the investor's standpoint it's no different than an official markdown.

The traditional way a state defaults is when their debts are in a currency they have to exchange with their own currency on the open market. Vs their own which they can create via central bank actions. In the former a self-sustaining collapse in exchange rates makes it impossible for the state to buy enough foreign currency to make their debt payments. In the former case, default happens, see Argentina in 2001 or so. In the latter this doesn't happen, see Japan 1989-present.

In the US, all of Federal and state governments debt is denominated in dollars. Varying exchange rates don't effect the ability of the government to pay debt. And the government can borrow money from the Fed, because it can.

Does anyone see an author attribution to this article? I can't find one anywhere.

Standard practice for The Economist. Really hurts accountability...

Also prevents ad hominem attacks and can allow informed authors to speak without fear of retribution.

The Economist has a pretty decent track record and clearly wants the company to take on the accountability of what's published.

The idea is that the accountability is at the level of the magazine, not the individual author. It's not the norm today (outside of many newspaper editorials) but doesn't mean there's an inherent problem with it. I'd also observe that, in many/most cases, when organizations like analyst firms put out reports they're widely viewed as the opinion of the firm even if they're bylined. Which isn't unreasonable given that they're presumably peer-reviewed.

In general, bylines have become standard practice because writers, etc. want it. Not because publications and other content producers prefer it that way.

It's The Economist. Most authors are anonymous.

http://www.economist.com/blogs/economist-explains/2013/09/ec...

Guess I'll never know why...

http://i.imgur.com/fkcBjSa.png

Editor’s note: This week, to mark the 170th anniversary of the appearance of the first issue of The Economist on September 2nd 1843, this blog will answer some of the more frequently asked questions about The Economist itself.

MOST newspapers and magazines use bylines to identify the journalists who write their articles. The Economist, however, does not. Its articles lack bylines and its journalists remain anonymous. Why?

Part of the answer is that The Economist is maintaining a historical tradition that other publications have abandoned. Leaders are often unsigned in newspapers, but everywhere else there has been rampant byline inflation (to the extent that some papers run picture bylines on ordinary news stories). Historically, many publications printed articles without bylines or under pseudonyms—a subject worthy of a forthcoming explainer of its own—to give individual writers the freedom to assume different voices and to enable early newspapers to give the impression that their editorial teams were larger than they really were. The first few issues of The Economist were, in fact, written almost entirely by James Wilson, the founding editor, though he wrote in the first-person plural.

But having started off as a way for one person to give the impression of being many, anonymity has since come to serve the opposite function at The Economist: it allows many writers to speak with a collective voice. Leaders are discussed and debated each week in meetings that are open to all members of the editorial staff. Journalists often co-operate on articles. And some articles are heavily edited. Accordingly, articles are often the work of The Economist's hive mind, rather than of a single author. The main reason for anonymity, however, is a belief that what is written is more important than who writes it. In the words of Geoffrey Crowther, our editor from 1938 to 1956, anonymity keeps the editor "not the master but the servant of something far greater than himself…it gives to the paper an astonishing momentum of thought and principle." The notable exception to The Economist’s no-byline rule, at least in the weekly issue, is special reports, the collections of articles on a single topic that appear in the newspaper every month or so. These are almost always written by a single author whose name appears once, in the rubric of the opening article. By tradition, retiring editors write a valedictory editorial which is also signed. But print articles are otherwise anonymous.

Different rules apply on our website, however. A few years ago we decided to start using initials as bylines on our blog posts, to avoid confusion on our multi-author blogs (such as Democracy in America, which covers American politics). Our journalists can and do disagree with each other on our blogs, so we use initials to enable readers to distinguish between different writers. This approach is not without its faults (we have four staff members with the initials "J.P.", for example) but is the best compromise between total anonymity and full bylines, in our view. We also identify our journalists when they appear in our audio and video output. And many of them tweet under their own names. The internet has caused our no-byline policy to fray a little around the edges, then, but the lack of bylines remains central to our identity and a distinctive part of our brand.

It's interesting that an FAQ is behind paywall.

It's not really an FAQ, just another article.

Well which answers a Frequently Asked Question.

If you can emulate you are coming from google search result - the paywall disappears. Link : https://umur.io/paywall-bypass-bookmarklet-come-from-google/

I think that this article is basically right, but would add that bubbles are generally dangerous based on what they represent, financially and culturally. If Bitcoin hits $1,000 again, it's not innately dangerous (unlike housing, no one needs Bitcoins to live). It might represent a bad thing, like the collapse of a currency.

We're still in a housing bubble (although not as much as one, and one with a sharper geographic profile) but what's propping it up now is industrial decline and extremely lopsided job availability. Much of the country is starved of economic activity while a few metropolitan areas (e.g. New York and the Bay Area) have healthy job markets but extreme real estate costs.

All of that said, I have no way of predicting how that bubble will resolve or when it will crash. We could see it happen in 2 years or in 25, and it will probably vary with geography (just as Vegas and Florida got hit hard in the last one, but the Bay Area and Manhattan remained unscathed). Housing bubbles are weird because there's so much corruption (foreign money, NIMBY regulations) involved that makes them political and therefore unpredictable.

The 2001 tech crash didn't do a lot of damage to the rest of the world (9/11 did far more). The 2008 crash is still being felt in Southern Europe. I can't predict how much of an effect the ~2017 VC-land crash will have. To be honest, the numbers don't look that bad; when Silicon Valley drops a turd like ZNGA on Wall Street, the Street usually reacts with proper skepticism. So I think that this one's going to be relatively limited in terms of its impact on the rest of the world. I don't like what it represents about our society, and what it may continue to represent, because that is corrosive. The truth about VC-funded startups in the Bay Area is that 98% of that stuff has nothing to do with creating new value, but with devising ways to profit from widespread organizational decline.

Good comment.

What is ~2017 VC-land crash in your opinion? Specifically, who loses money? How would it effect common-man who is not involved in stock market directly?

People whose pensions are invested in VC funds would lose money. Don't forget that VC money comes in a large part from pension funds.

But do pension funds actually have that much invested in that asset class? Around $48 billion went into VC in 2014 but in the US alone there is $18 trillion in pension assets.

Good point. But, a crash will lower the historical experience thus lowering future expectations for market yields. For pensions that need to hit a defined amount in the future, this means that have to come up with more capital in the present to hit the future target.

I think that it will be local in its impact. We're probably not going to see it hurt the wider market. Bankers will have a laugh at Sand Hill's expense. The few pension funds that got substantially invested in VC will be hurt, but I think most Vanguard accounts will be fine.

Sand Hill Road will lose money. The leading VCs will still be rich, just less so. Very high-end California real estate will crash. Unfortunately, it probably won't do much for SF apartments; what we see in real estate is that people hoard (even at significant financial loss) rather than selling when real estate demand drops, because of emotional attachment.

What made Silicon Valley great in the 1970s-90s will reconstitute itself somewhere else in the 2020s: possibly the Pacific Northwest, possibly the North (Midwest and New England) again, and possibly another country.

2017 is a very approximate date. That could easily be off by five years, or even more.

Mind expanding on what exactly you mean by "widespread organizational decline."?

What I mean is that the accelerated birth-and-death cycle of American organizations isn't entirely the result of technology or widespread access to capital. We've also lost much of our ability to form organizations worth caring about. Google is not even 20 years old and it already has stack ranking, which is a telling sign that an organization has ceased to be a genuine institution and is now just a pile of resources and a crowd of people fighting over them.

I have flagged this because it's paywalled.

edit. unflagged, apparently that's against the rules (that I disgree with but will follow)

Its not though...

It is for me: http://i.imgur.com/Zq1gvgw.png

But even there you can just sign up with a fake email and see 3 free. It's a minor inconvenience, sure, but not that much of one.

That's not an ok reason to flag something on HN.

https://news.ycombinator.com/item?id=9717733

Paywalls are not banned on HN, especially when there are standard workarounds.

I wasn't aware of that rule and I've been on here for many years, it should perhaps be made more prominent. I also genuinely think it's wrong, people should be able to flag things which are inaccessible for them.

To expand on that, what's the point in sharing a link where you have to pay or sign up to get access on a public link sharing site? As you can see from my other reply all I get is a sales pitch from the Economist. If someone shares an article I will read it and maybe upvote it. If someone shares what seems to be an article which isn't, it's actually a sales pitch for the Economist under another headline, then it's worse than blogspam, in my book at least.

I run a news aggregator and I know for a fact there are a great many free alternatives to "NYT, New Yorker, Economist, WSJ" for both news and opinion, and that's just for the USA let alone the huge number of non-US sources. I don't particularly see why they should get a free pass when a smaller site would get blasted for having a paywall.

I also have university access to academic journals that aren't public. They frequently contain very interesting things but I wouldn't post anything from them here because a large number of people would just get a paywall asking them for $30 to download the pdf. Thankfully more and more academic publications are going open, but a great many remain closed and they wouldn't be appropriate to share.

But, if that doesn't persuade you, I will not flag paywalled sites now I've been informed of the rules (rules published in a comment 34 days ago).

Oh, we agree about journal articles that aren't readable without paying an exorbitant fee. But the Economist, NYT, WSJ, New Yorker, etc. are accessible with minor inconvenience—not the same thing at all.

And if the content is inaccessible because of censorship within their country?

I think most people know if they're linking to paywalled content. Knowing what the Great Firewall is blocking today is not nearly as simple.

I, for one, have no clue if The Economist is blocked in China or not.

Incognito window

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