
Interest Rates: When Zero Is Way Too High - soundsop
http://www.businessweek.com/bwdaily/dnflash/content/jan2009/db20090119_561565.htm?chan=top+news_top+news+index+-+temp_news+%2B+analysis
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giardini
Instead of inflating the dollar, the Fed should force banks, savings & loans,
credit unions and other lending institutions to mark to market the assets
they're holding. Kick out people who can't pay for their homes and put those
homes on the market. Until this source of the problem is corrected, all other
moves will be futile.

Many will lose homes but consider that, without that "bad" loan, they would
have been renting instead. Now suppose we consider all payments they have made
as a form of rent - then their situation doesn't look so bleak. Instead of
paying off interest on a big loan, they were instead paying rent for a place
more luxurious than they could otherwise afford. Not a bad deal really, but
one whose time has ended.

The honest bunch of us must tolerate this crappy economic environment simply
because politicians fear the phrase "losing their homes". Maybe Lakoff is
correct - the secret to control is framing the debate.

~~~
anamax
> Instead of inflating the dollar, the Fed should force banks, savings &
> loans, credit unions and other lending institutions to mark to market the
> assets they're holding.

Mark to market is why the institutions that went under already went under.
They were cash positive, but couldn't meet their reserve requirements when the
markets for their assets disappeared.

Mark to market is absurd for illiquid assets. The fact that I can't sell my
house today doesn't mean that it's worth $0.

For illiquid assets, honest valuation involves time averaging. (This cuts both
ways - the value doesn't jump just because a fool overpaid for a comparable
asset.) And yes, some penalty for illiquidity.

~~~
giardini
>Mark to market is why the institutions that went under already went under.
They were cash positive, but couldn't meet their reserve requirements when the
markets for their assets disappeared.

Yes, and more will have to disappear to resolve this situation. The sooner the
better.

>Mark to market is absurd for illiquid assets. The fact that I can't sell my
house today doesn't mean that it's worth $0.

Unfortunately it means precisely that. The home is worth $0 (or less) when
offered for sale on the market.

Don't confuse the market's valuation with some other personal valuation of
"worth".

Long-term investors holding cash may justify their purchases by using time-
averaging, but they are very rare and getting their attention is difficult
unless you have 100s if not 1000s of homes to sell in blocks.

------
ars
Inflation would also help with national debt, and considering how high it is,
I think it's inevitable.

Inflation, and a weaker dollar would also help import/export imbalances. A
weaker currency would help the US, and hurt outside investors.

I think it's all but inevitable.

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lionhearted
So, America clearly doesn't want to enter recession and let markets bottom
out. The government appears to be solidly against this.

Now, you can fight off the short term effects of recession, and it's typically
popular politically. But there's some real ramifications. Here's how it
probably goes:

Causing inflation is extremely likely to weaken the dollar, which hits first
and foremost the people making the lowest real wages. The people making the
lowest real wages have little power to strike or collectively bargain that
organized or semi-skilled labor has, little to no control over pricing like
professionals have, and no places to invest money in real assets to shelter
money from inflation. The poor get screwed the hardest in this whole
inflationary gig, on the money supply of things.

When quality of life drops in America, especially for the most poor of people,
then the government needs to decide to try to counteract that. They do this by
increasing subsidies and welfare. If these programs are large enough to
counteract the heavy inflation, they're quite expensive. Ironically, this
further increases inflation, and leads to either (1) a weaker U.S. dollar, or
(2) higher taxes, or (3) both.

In the case of a weaker dollar, you've now changed currency trading and
interaction across the entire global economy. China and Japan are both looking
at much stronger currencies vis-a-vis the dollar than in recent years, which
sets off all sorts of unplanned chains of events.

As for taxes - most people dislike being taxed simply by virtue of having less
money and things. As far as I can tell, most people don't like paying taxes
and instead prefer to keep their money. However, raising taxes while
simultaneously intentionally raising inflation has a particularly interesting
outcome: Money and capital flow out of your country really fast.

Why? Due to inflation, people don't want to carry your currency or bonds. The
value of the currency/bonds is going to be worth less next year than today, so
you need to move it to an asset that you expect to increase in value or hold
its value - a commodity, equity, or real estate perhaps.

Now, due to higher taxes, people have less risk tolerance. This is because
typically (unless you're a bank, or in good with Washington) government
doesn't pay you if your business fails, and does tax you if you succeed. That
means that people invest less. Which normally might mean people holding cash
reserves while looking for a change, but during inflation - people need to put
the money _somewhere_ , or else it'd get inflated away and you'd have less at
the end of the year.

End result? Because people will seek to invest their capital (due to
inflation), but be less inclined to do it in the USA (due to taxes), you get
less long term investment in American industry. That means less long term
employment created, less machinery bought, less real estate developed. Money
that would get invested in Nebraska gets invested in Chengdu, or Goa, or
Sophia.

Now, I'm a global sort of guy, and I happen to quite like Chinese people, and
Bulgarians seem quite cool to me, and I hear Goa's a great place. So it's not
a net loss for the world. But it does seem like a curious policy for the U.S.
government to pursue.

It's especially ugly for for the poorest people who have the least control
over their wages. And in a brutal double-edged fashion, Chinese, Indian, and
Bulgarian industries become more efficient and cheaper which further causes
less demand for American-made goods. The result? Greater unemployment. Which
further depresses wages.

Messing with the money supply right now might suit some special interests
(maybe like a bank with lots of bad debt on their books, that's holding assets
that have crashed from an artificial high, that needs to liquidate those
assets in order to pay obligations while nearing insolvency... hmm...). But it
doesn't seem to serve the poor, the middle class, or the wealthy Americans
very well.

~~~
cchooper
To be clear, the Fed is not trying to create inflation. It's trying to prevent
deflation. The extreme measures it will have to take (such as the 'helicopter
drop') _might_ produce future inflation (it's not certain, as it depends on
future demand for liquidity and the rate at which the Fed can recover the
money it has injected), but in the choice between certain deflation and
possible inflation, possible inflation will always be the right choice. In the
choice between certain deflation and certain inflation, inflation would
_still_ be the right choice.

Historically, inflation has not hit the lowest paid the hardest. That's
because inflation causes a reasonably uniform increase in prices, which
includes the price of labour. It may be that the weakening of unions means
that this effect will not occur this time, but a fall in the value of the
currency suggests that prices should rise across the board, so this should be
our working assumption. Usually, inflation is a transfer of wealth from those
with savings to those with debts. It could conceivably help the worst off. In
comparison, deflation will certainly lead to mass unemployment and will hurt
the poor very badly, especailly those with debts.

You say that inflation will lead to higher welfare costs, but deflation will
lead to far higher welfare costs due to mass bankruptcy and unemployment.

Furthermore, deflation increases the real value of government debt, and the
depression caused by it will destroy tax revenues. This results in a higher
risk of soverign default, which potentially causes a run on the currency.

In fact, almost all of the problems caused by inflation will also occur with
deflation, only they will be far more severe. So that's why it makes sense for
the Fed to pursue this policy. It has bad consequences, but they are minute in
comparison to the deadly consequences of deflation and mass institutional
failure.

~~~
nuclear_eclipse
Why does deflation cause unemployment and bankruptcy? It would make logical
sense (to me at least) that if the dollar increases in value, then that would
be better than the dollar losing value?

~~~
cchooper
An increase in the value of the dollar is not an increase in total wealth (and
similarly, a fall is not a loss of total wealth). A change in the value of
assets is always a transfer of potential wealth from one person to another.
This change may stimulate wealth-creating opportunities in the economy (e.g.
increasing bond values will encourage the creation of more bonds, which means
more investment in productive business) or it may thwart them (e.g. the loss
of value of sub-prime securities has frightened people away from lending) but
the price change itself doesn't create or destroy real wealth (goods and
services).

If dollars were to rise in value, it would constitute a transfer of wealth
away from people with debts and towards people with cash savings. The first
effect is that people will no longer be able to service the increasing real
value of the interest on their debts, leading to default.

But the more serious secondary effect is that a rising dollar encourages
people to hoard money rather than spending it, as dollars tomorrow will be
worth more than dollars today. The result is a liquidity crisis, where
everyone refuses to consume or invest. The liquidity squeeze makes dollars
even more valuable, and so the effect is self-perpetuating, until eventually
the economy grinds to a halt.

The worst historical example of deflation is the Great Depression, where local
communities were having to invent their own currencies to make up for the
extreme dollar shortage. The Great Depression is the reason central banks have
positive inflation targets. Although inflation is bad, a small amount of
inflation is a fair price if it reduces the risk of self-perpetuating
deflation.

~~~
mindslight
"People with debt", by definition, don't have wealth to transfer. Debts are
_supposed_ to go up over time, which is the point of _interest_. The only
reason I should borrow money is if I can invest it to make a better return.

The situation should not be such that most people are in debt. People with
wealth are free; those in debt, not so much.

> a rising dollar encourages people to hoard money rather than spending it

This is also referred to as conservation, frugality, delayed gratification,
and saving for a rainy day. Placing value on the future is generally regarded
as a good thing.

The effects of deflation really are terrible. Look at the tech sector where
Moore's law assures that prices on computers are always dropping. I don't
think I know anybody who owns a computer - everybody is waiting for them to
get cheaper before buying.

~~~
cchooper
People with debt have an income with which they service their debt. If the
real value of the debt increases, the real value of the money they pay to
service it also increases. Thus their future wealth is decreased.

If one person hoards dollars, they are being frugal. If everyone increases
their liquidity preference, real wealth is destroyed. The gratification is not
delayed, but lost forever. You are committing the fallacy of composition.

Moore's law is not deflation. Deflation is a persistent rise in the general
price level, as measured using a representative basket of goods.

Have you never delayed buying a new console because you knew the price would
drop soon? I have.

~~~
gravitycop
_Moore's law is not deflation._

Actually, it is. Moore's law implies a continuous decline in the prices of
computers.

 _Deflation is a persistent rise_

Decline.

 _in the general price level as measured using a representative basket of
goods_

The defined goods area can be broad or specific, and in any direction. There
has been consistent deflation, for the past several decades, in the area of
computer products. Individuals and groups (companies, etc.) that tend to value
computer products highly also tend to delay their purchases of those computer
products in anticipation of price declines, i.e. deflationary action.

~~~
cchooper
Sorry, I meant rise in the value of money.

If you're going to define deflation as a fall in the price of any basket of
goods, then you're just using it to mean 'the price of something went down'.
You can do that if you want, but it's hardly helping the conversation.

~~~
gravitycop
_If you're going to define deflation as a fall in the price of any basket of
goods, then you're just using it to mean 'the price of something went down'._

That would be the same thing as a rise in the value of money.

 _You can [flexibly define things narrowly or broadly] if you want, but it's
hardly helping the conversation._

Do you use a different word for "temperature" for the temperature in your
home, because some other parties use the word "temperature" to mean "gobal
temperature"?

Different economic actors will value different things at different rates.
Economic actors that happen to value computers highly will indeed perceive a
rise in the value of money when computer prices drop.

~~~
cchooper
But deflation is _not_ defined that way. It's defined as a decline of the
_general_ price level, and this is measured using a basket of goods that is
intended to reflect general prices. You can pick holes in the problem of
measuring 'general' prices if you want, but that is nevertheless the
definition.

~~~
gravitycop
_deflation is_ not _defined that way. It's defined as a decline of the_
general _price level_

And the term "general" is also defined. It can mean general within a nation.
It can mean general worldwide. It can mean general on a continent. It can mean
general in a state. It can mean general in an economic sector (food,
computers, cars, clothes, houses, etc.). Etc.

So, we have to use a different word to describe non-general price declines? If
so, what word would you suggest?
<http://www.google.com/search?q=deflation+prices+computers>

Why would it be OK to use the word "temperature" in different contexts, but
not the word "deflation"? What about the word "pressure"? Should we use a
different word for _tire pressure_ , because of the fact that "pressure" is
also used in other contexts?

~~~
cchooper
If temperature meant 'global temperature' then it would indeed be wrong to use
it to describe your room temperature. But it doesn't mean that, so it isn't.

 _> what word would you suggest?_

How about 'falling prices'?

 _> And the term "general" is also defined._

Now you're just trolling.

~~~
gravitycop
There is a general temperature in my refrigerator. There are also more-
specific temperatures in my refrigerator. Each of those specific temperature
areas can also be described as general, because within-them are yet more
temperatuire areas and of even-greater specificity.

There is also a general temperature of my home. The general temperature of my
fridge contributes to that. In turn, the general temperature of the top shelf
of my fridge contributes to the general temperature of my fridge.

~~~
cchooper
Oh dear, IHBT.

------
mindslight
In related news, "hair of the dog" is not a sustainable hangover cure.

------
mixmax
the solution to the financial problems is quite simple: production must be
larger than consumption.

For the last years it has been the other way around, especially in the US.

If you don't adress this you will only postpone the problem.

~~~
eru
> production must be larger than consumption.

What would you do with the excess?

~~~
mixmax
Pay off all the debt that has accumulated over the last ten years.

~~~
eru
OK. I guess your advise was US-centric then.

~~~
mixmax
he he, yes a bit ;-)

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joe_the_user
This summarizes the dilemma of the current market.

The problem is that directly inflating our way out has other ramifications.

One idea would be for the Federal Government is to directly subsidize risk in
certain well-defined areas by paying some of the interest on certain loans
through the Small Business Administration.

