Hacker News new | past | comments | ask | show | jobs | submit login
The world is entering a third stage of a rolling debt crisis (economist.com)
216 points by e15ctr0n on Nov 13, 2015 | hide | past | web | favorite | 120 comments



I've heard it said (and I don't know how true it is) that during the Reagan (I think) administrations, they "convinced more than half of the people that they were in the top 50%", meaning that people began to think of themselves as more well-off than they actually were, and started spending more than saving.

I have no idea if that's accurate, but it's an interesting thought. For the economy overall, it's probably best if everyone buries themselves as far into debt as they can, because it increases spending tremendously. Max out credit cards, buy as much "stuff" as possible (cars, real estate, college degrees, whatever).

The problem is that when the first real bump in the road comes along, suddenly most people are leveraged to the hilt and can't absorb the hit. And it feels like as long as I've been conscious (and maybe longer, who knows), we've been in this cycle of "easy money, spend spend spend" followed by "crap, bubble". Sure there's money to be made on the upside, but there's even more to lose on the way down.


For an apt comparison, take 9 of your friends out to dinner and agree upfront that everyone will split the bill proportionally 1/10th. Watch how people think about spending, it really changes their utility calculus, from "Is this piece of cake worth $5" to "Is this piece of cake worth my 1/10th share of $5, or 50 cents?" Problem: everyone thinks that way, leading to a lot of wasteful spending, where "Wasteful" is defined as, "Things I wouldn't buy if I was paying for it myself".

Related: China is in the late stages of a credit-driven investment bubble where tons of construction (roads, houses, trains, dams) have been built. It's an open question whether it was "worth it", it probably produced a lot of construction jobs, perhaps some good infrastructure, and spread trade knowledge throughout the economy, but at a huge cost to their taxpayers.


On the other hand, I wouldn't pay to build a road 10m long from my front door if I couldn't count on 100,000 of my neighbors to do the same so that I could get to work. And if I work for Ford, I'm not going to buy an iPad if I don't think that Apple engineer is going to turn around and buy a car.


> And if I work for Ford, I'm not going to buy an iPad if I don't think that Apple engineer is going to turn around and buy a car.

What? I don't make anything that you will buy. I can guarantee it. So why should I buy your products if you won't buy mine.

That makes no sense. The way money works, it doesn't matter who is buying from who, only that things are being bought.


But each person participating has to at least make a living, so it's circular to some extent (even if the circle is pretty long).


Yes. But my decision to buy from you is still independent (mostly) of whether you'll buy from me. The premise that cmsmith presents is absurd. I'm healthy, I don't need anything from the pharmacist. But I own a restaurant, and he wants a meal. Would he really not eat at my restaurant because I don't shop at his pharmacy? That's an absurd principle.


100% agreed. Otherwise we might as well get rid of money and go back to exchanging goods directly.


Interestingly, the way me and my friends do it is to split the bill evenly as long as there are no far-off outliers (in either direction). So the people who ate hardly anything pay their part, the people who ate a ton pay their part (there's usually a max total of one outlier), then the rest of us split what's left.


What I like to do is cover the entire total, and tell everyone to pay what they think they ought to. Maybe this varies a lot based on who you go out with, but this generally winds up with me paying less than my fair share (people round up in order to avoid being seen as stingy/nitpicky/shirking).


I agree. I do this with the caveat that I will call out somebody who shirks who can bloody well afford to pay.

Ever since grad school, we've always had a gradient of people from affording to eat out to not really being able to. As the generous folks covered me when I was poor, I'm happy to return the favor now that I'm not.

However, I'll generally make a spot check on someone who can really afford it but didn't seem to put in the right amount. If they don't pay enough for themselves, I'll give a quiet gentle reminder ("Hey, remember you did eat part of those nachos and had an extra beer. You might want to recalculate your portion.") and that generally solves the problem. Most people generally just forget as it's pretty easy to miscount in a shared context. And, if this is the first time and they drag their feet, I'll just pay it and talk to them afterwards. They may have hit a rough patch in life.

However, if the group gets to 15-20 people, I occasionally get someone who just systematically shorts things every time who is making more than enough to pay their share. If it's the third time it happens, I'm whipping out a calculator and calculating their portion exactly and publicly.

At that point, they either shape up when I'm around or they never show up again. Either solution is fine by me.


I learnt from your comment you roll in big groups. My groups usually <= 6...


That might work for small groups. I've been at multiple dinners for 8+ people where, after we'd all "put in our share", the pot was still $50 (or more!) shy of the bill + tip. It's frustrating even as the non-host, since I know I carefully put in more than what my food + tip had cost.


Interesting, my experience is the opposite. Everyone rounds up a little bit and whoever is paying ends up with an excess. This is in Japan though, so the social dynamics are different from the US.


Calculate the person who is systematically shorting you when that happens. It's probably only one person.


It's definitely the sort of thing that will vary a lot based on the group. I'm also at a place where I can afford to spend $50 or whatever to gauge the collective trustworthiness of a group of people.


Note that figuring out individual "shares" is more difficult in the US than many countries, what with tax and tip not being included in the menu prices.


See also: US military spending


Huh? We just split bills evenly and don't worry about a few bucks here or there.


Yeah, that'd definitely be the Reagan administration you're thinking of. The UK was doing something similar at roughly the same time under Thatcher, or so I've heard.

That era was famous for its very-indebted Yuppies (and the origin of the idea of "Yuppies" as we think of them.)

Some of this can't be blamed on the politicians. Easy credit and the rise of credit cards generally did a lot for this. But politicians did get to decide how credit regulations worked. It took awhile to outlaw live (not pre-approved -- you could pick them up and just use them!) credit cards arriving at people's houses, for instance. You could literally steal one out of somebody's mailbox and go rack up money in their name.

Not any more, obviously. But they lasted longer than you'd think. Credit was pushed very hard at consumers, and politicians do control the extent to which that's legal, even if they're not really to blame for it being possible.


Incorrect. Reagan's 1986 tax reform actually eliminated the tax deductibility of credit card debt. While U.S. household debt did increase in the 1980s, it grew much more rapidly during the 1990s and first half of 2000s.


Not sure which bit you're saying "incorrect" to. But okay. Are you arguing with "the era was famous for indebted Yuppies", then?


>Credit was pushed very hard at consumers, and politicians do control the extent to which that's legal, even if they're not really to blame for it being possible.

Credit must be pushed hard. Credit is the origin of money, under these systems. Credit must expand so that the periodical interest obligations can be met by those with existing credit obligations. When credit no longer expands at a sufficient rate, the systems enter contractions, which will quickly end the system, unless credit expands enough to save the system for a while longer.


If you drink too much at night, you'll get a hangover in the morning. The same is true of spending and debt.


That's usually true for personal debut. For governments, it's a dangerous misconception.

The only problem with personal debt is when it becomes systemic. The fallacy of composition is that what's good for individual is not necessarily good if we all do it at the same time. Normally lowing your price to be more competitive is a useful strategy, but not when it becomes a race to 0. We saw this in the great depression with farmers publicly throwing out their product.

As for governments, the austerity meme is class politics in disguise, and tends to lead to nasty social blowback. Governments can change monetary policy and other law, giving them a lot more options.


"As for governments, the austerity meme is class politics in disguise, and tends to lead to nasty social blowback."

The prevailing neo-liberal (and progressive, at least in the US) notion is that smart people "understand" keynesian counter-cyclical economics and only dopes or rubes ... or bad actors (as you suggest) would advocate for austerity.

However, it really needs to be repeated: austerity is only braindead if you insist on ever-increasing aggregate demand. If you are willing to accept stagnant or even decreasing aggregate demand (for whatever reason) then austerity is perfectly reasonable and perhaps a good choice.

I'm not saying I'm in that camp, but I really don't like this false dichotomy - that austerity is braindead and only morons would advocate for it ... and leaving unsaid the almost universal assumption that aggregate demand can never, ever, be allowed to drop.

EDIT: and I also don't like the condescending, custodial tone that this always takes ... "oh how quaint that you would conflate a national economy with a household economy, here let me mansplain it to you". In fact, there are boundary conditions where they behave exactly the same (see argentina). People aren't as dumb as you think they are.


"However, it really needs to be repeated: austerity is only braindead if you insist on ever-increasing aggregate demand. If you are willing to accept stagnant or even decreasing aggregate demand (for whatever reason) then austerity is perfectly reasonable and perhaps a good choice."

I think the problem is that austerity advocates argue that that aggregate demand will increase in the face of austerity, when we know that doesn't happen. Austerity advocates then often bring up the theory that if debt is lower, then external actors will have more confidence in the country and interest rates will decline.

So while I agree with you that no one needs to be condescending, it is challenging to deal with the pro-austerity folks when they seem to be fact-challenged.


You know, government debit can grow until it's not sustainable anymore. And seems to be doing exactly that world around for the last couple of decades.

I know this disagree with mainstream economics, and almost all niche economics theories. But it's happening again and again, so fuck the theories.


> government debit can grow until it's not sustainable

Of course. That doesn't mean governments follow a simple zero-sum model. Government economics is it's own beast, with (hopefully) it's own solutions.

re: fsck the theories - you may find this[1] interesting, which is a summary of where we stand right now on many aspects of government economics by econ prof Mark Blyth that he gave at a recent q&a session. It might be one of the most succinct explanations of just how badly we're fscked.

[1] https://www.youtube.com/watch?v=iJCcoF5K0SM#t=1160


Which of these debt peaks was unsustainable, and why?

http://www.mybudget360.com/wp-content/uploads/2010/12/us-pub...


https://en.wikipedia.org/wiki/Sh%C5%8Dwa_financial_crisis

Japan (at the time, primarily a few zaibatsu) had serious financial problems when their export bubble popped in the 1920s. Unfortunately, they bought into myth that austerity lowers debts really badly, and decided it was a good idea to cut out 30% (!) of their GDP in two years. When that only made the situation worse, they doubled down and tried to cut another ~10%.

The zaibatsu and 37 banks went under in the inevitable bank-run, and quite a few financial leaders were assassinated when the military realized their budget was about the only thing left that could be cut.

Compared to that mess, the US has done a relatively good job of inflating away it's debts. Our gridlock blocked most of the austerity "fixes", so while we still have a mess of an economy, at least it isn't slashing a third of our GDP.


I don't think the US government has ever had unsutainable debit levels. At least before 2008 (maybe it is now).

You've had your quote of unsustainable private debit, but not public.


[deleted]


"Keynesian economics is fundamentally broken"

How so, other than you don't like it? The data over the past 9 years seems to have confirmed a Keynesian analysis of the global economy.

"but it allows the governments to spend as much as they want"

No, that's not how it works. Keynes' theory is about how a general glut can happen, due to the role of money and bonds as a second and third variable in markets (vs the usual supply and demand curve). There are various techniques to get out of it, the only time government should spend money is when we've basically dropped interest rates to 0% - free money! - and companies still aren't spending it.

"Furthermore, it devalues the money in our wallet everyday we don't spend"

You mean by inflation? The inflation that doesn't currently exist? http://www.usinflationcalculator.com/inflation/current-infla...

Deflation on the other hand, has always been scary, for hundreds of years.


Correct me if I'm wrong but Keynes also thought you should run a surplus during good economic times so you could run a deficit in the bad.

Now I know the necessity to do that has been dismissed by modern economists but actual Keynesian policies still have to be implemented by politicians who get elected. During recessions there tends to be a reluctance on the part of electorates to deliberately take on more debt which IMHO leads to Keynesian responses which are never quite robust enough to do the job they're intended to do.

Whereas if you did actually run a surplus during good economic times or at least during some of the good economic times then the public would likely be a lot more likely to back a real Keynesian response.


> Keynesian responses which are never quite robust enough to do the job they're intended to do

How much of "normal" GDP should you spend in a crisis in order to avert it? 5%? 10%? 20%? 50%? 100%? 500%? I've never heard a solid answer, mostly just "however much we spent wasn't enough" which seems a little tautological.

The only reason I'm picking on you is you said "never quite robust enough" as though you just plug a number into a formula and get an answer.


You don't spend in order to "avert" it, "it" has already happened, you spend afterwards to limit the duration and the depth of the recession which makes sense because during a recession interest rates are at the lowest they'll be during the economic cycle and the government can borrow more for cheaper than at any other point.

In terms of how much I would say between 5 and 10% depending on the severity of the recession and that need not all be in the form of government spending per se, it could also be a mix of tax cuts as well.


5% of US GDP (which is around $15 trillion) would be $750 billion. 10% would be 1.5 trillion. Through all of QE a total of several trillion was spent on treasury bonds, bank bonds, mortgage backed securities, etc. https://en.wikipedia.org/wiki/Quantitative_easing#US_QE1.2C_...

By your own numbers, that should have been enough, and yet you've complained it wasn't. What gives?


QE isn't the same as what I'm talking about. QE isn't spent by the government it's money printed by the FED which is then used to buy existing assets from the market, typically US treasury bonds but others as well. The purpose of QE is to push more money into the banks in the hopes that they will go out and lend some of it, but that's not much use if people aren't confident enough to borrow. So you can't finance a tax cut with QE, you can't finance an infrastructure program with QE, you can't do any of the real "Keynesian" things that would make a difference because the Central Bank should never be printing money to finance government spending.

QE is complimentary to but not a replacement for a Keynesian response.


Keynesian economics optimizes for production and growth over efficiency and sustainability.

If you want loads of shiny new gadgets every year, and want it so most people spend their entire lives working just to pay rent and only a lucky few escape with "fuck you" money, then it's the system for you.

If you want the average person to have the economic freedom to work less, and actually get time to enjoy their discretionary purchases, then debt-based slavedriving is not what you want.

It's a deliberate policy choice, but gets obscured as authoritative "science" by centralization-supporting economists who are compensated with money and stature.

Deflation isn't scary, only the transition to it is (like any change). Deflation is actually the natural tendency, as doing things cheaper is precisely what market competition is based on (see: the entire technology sector).


"Keynesian economics optimizes for production and growth over efficiency and sustainability."

This sounds made up. How is optimized production different from efficiency? How is growth unsustainable? An economy without growth is by definition zero-sum; is that what is sustainable, no more Pareto efficiency, that someone must lose for another to gain?

"If you want loads of shiny new gadgets every year, and want it so most people spend their entire lives working just to pay rent and only a lucky few escape with "fuck you" money, then it's the system for you. If you want the average person to have the economic freedom to work less, and actually get time to enjoy their discretionary purchases, then debt-based slavedriving is not what you "

Keynesianism has nothing to do with private debt or private spending habits, nor weekly work hours. You can blame many for such problems, I don't know why Keynes would have anything to do with this.

"Deflation isn't scary, only the transition to it is (like any change). Deflation is actually the natural tendency, as doing things cheaper is precisely what market competition is based on (see: the entire technology sector)."

That's not deflation.

Deflation is when the entire broad based market across products and services lowers their prices for the same products and services. It in practice causes depressions very similar (and deeper) than what we just experienced.

The tech sector lowers prices in a specfic sector by using new technology. By definition this is about classic creative destruction and reallocating of resources.

Deflation is what happens when there is not enough demand for the supply, and therefore everyone stops spending money, people lose their jobs. Interest rates fall to 0, and prices fall across the board. In other words, very close to what happened in 2008-2009.

Deflation was something that theoretically shouldn't happen by classical models until Keynes showed it does, and we saw it in earnest in Japan during the 90s.


> How is optimized production different from efficiency?

Erm, this is a well known general trade off. Driving 55mph vs 80mph on the highway - the former uses less fuel for the same distance, the latter gets you further in the same amount of time.

> How is growth unsustainable?

If something is growing, eventually it becomes constrained by some sort of limit. If the expectation is that it is continually growing, hitting a limit means that it has "failed". Both of these general juxtapositions are quite common, so your picking apart of them seems quite defensive rather than understanding.

> Keynesianism has nothing to do with private debt or private spending habits, nor weekly work hours ... I don't know why Keynes would have anything to do with this.

Which is it - are you sure Keynesianism has nothing to do with them, or do you not know?

When interest rates are low (or nonexistant, like the past 6 years), people are discouraged from saving in cash. If they have a significant surplus, they budget month to month and put the surplus into opaque long-term "investments" (retirement fund at the wall st casino, etc). They don't perceive the cash value and treat the account like a lock box, so they base their spending power on monthly income rather than savings. Their utility curve remains fixed (they need that monthly income), giving them less bargaining power with employers so their wages remain low.

> An economy without growth is by definition zero-sum ... that someone must lose for another to gain?

Zero-sum is an awfully strong term, given that we're talking about production rates. Durable goods stick around - if a person receives 1 house/yr for a single year, and then someone else receives that 1 house/yr instead, are you really going to characterize this as "zero-sum" ?

In general, it seems that you're conflating production with the integral of production. This is a general theme of Keynesianism, given that it is explicitly about maximizing output by maximizing work. Given that the major economic phenomenon of our time is robots taking over historically human work, we should probably rethink this goal.

My point regarding deflation is that what happens in the tech sector is just a more pronounced version of what should be happening everywhere. Prices may rise in the short term (eg a discontinuity from depleting a source of a natural resource), but in general market competition should cause all prices to be trending down in the long term.


"Erm, this is a well known general trade off. Driving 55mph vs 80mph on the highway - the former uses less fuel for the same distance, the latter gets you further in the same amount of time."

If you're using "production" as a synonym for "output", that's my misunderstanding of the words used. I get that it's a resource vs. output tradeoff. I had thought we were talking about productivity, i.e. lower rate of a unit of resource for the same output.

"If something is growing, eventually it becomes constrained by some sort of limit. If the expectation is that it is continually growing, hitting a limit means that it has "failed"."

Are limits fundamental and eternal? I mean, economic growth is basically the science of human achievement, the ability to accomplish more for fewer resources. And while certainly there are physical limits on Earth, which will temporarily halt growth at some point, is there a limit on innovation or on seeking out new resources? It's a big universe.

"Both of these general juxtapositions are quite common, so your picking apart of them seems quite defensive rather than understanding."

No, I genuinely find your point of view fascinatingly bizarre.

"Which is it - are you sure Keynesianism has nothing to do with them, or do you not know?"

I am quite sure about what Keynesianism thinks on this matter, and find your arguments confusing.

"In general, it seems that you're conflating production with the integral of production. This is a general theme of Keynesianism, given that it is explicitly about maximizing output by maximizing work. Given that the major economic phenomenon of our time is robots taking over historically human work, we should probably rethink this goal."

I'm not so convinced the current wave of robots taking over human work is all that different as the early industrial revolution in the late 18th century through Fordism and Taylorism in the late 19th/early 20th century.

However, I'll admit, if this time it truly is different, i.e. we're heading for an AI singularity or whatnot, we do need to rethink the goals of economic policy.

"My point regarding deflation is that what happens in the tech sector is just a more pronounced version of what should be happening everywhere. Prices may rise in the short term (eg a discontinuity from depleting a source of a natural resource), but in general market competition should cause all prices to be trending down in the long term."

I really can't agree with deflation as a desirable goal in our lifetimes, as it incentivizes doing nothing with capital.

Of course, as above, if diminishing returns to capital accumulation vanishes due to basically free automation, this may be worth considering. I think it's overly optimistic about technology to expect this, however.


Well that doesn't bode well. I've personally never learned anything from a hangover.


Nothing about your tollerance to alcohol?


Drinking too much is borrowing tomorrow's happiness

Debt is borrowing tomorrow's prosperity


Not if you can fix your debt to the back to the first guy that you find in the street. They drinked to much at night, why are we having a hangover in the morning?.


I like this, is it your quote?


The alcohol one has been around the interwebs. I added the debt part.


I really do not see the value in pretending a problem with this degree of complexity can be adequately reduced to such a simple statement.


That's true if the capital is misallocated. Spending and debt can greatly increase a country's well-being if used effectively.


If.

There's three kinds of debt. One is corporate. A company took on debt to buy some equipment. That can be mis-investment, but it's usually pretty good.

Second, there's personal debt. That counts both mortgages (usually worthwhile, unless you buy more house than you need) and stuff like credit card debt, where you're still paying for Christmas five years later. So, some is worthwhile, some not so much.

Third, there's government debt. This can be used effectively to create infrastructure. The problem is, though, that it's allocated not by a careful cost/benefit analysis. Instead, it's allocated by politicians. This kind of debt therefore has the highest propensity to be sheer waste.


Well, there's some situations where it is so obvious to use debt that you don't need a cost/benefit analysis.

For example, let's say you discover a large deposit of gold on land you own. You could use debt to buy the mining equipment to mine the gold.

Another example is if terrorists demolished all the bridges between Manhattan and Brooklyn. The government doesn't need a cost/benefit analysis to decide to use debt to rebuild some bridges.


> Well, there's some situations where it is so obvious to use debt that you don't need a cost/benefit analysis. For example, let's say you discover a large deposit of gold on land you own. You could use debt to buy the mining equipment to mine the gold.

Many leveraged miners are going bankrupt for having not done cost/benefit analysis on something so obvious...


Unfortunately, under currently dominant monetary regimes, such outcomes are entirely predictable and inevitable.

Edit: Ok, I had a nice reply to someone, but then their comment was deleted, meaning my comment had nowhere to go.

I'll put it below.

---

>[Deleted Comment] Unfortunately without further information on your part is hard to know if you have deep insights, carefully thought out, or it is just a naive cynic comment like those that abound all over the internet.

It is a fair point. Unfortunately, any given text posted on the Internet is unlikely to be read much or given much credence by the few that do read it. Therefore, I try not to waste my time expositing large amounts of English text.

I don't know if I have deep insights. I do know that most seem to have no idea of the basic mechanism of the dominant monetary regimes and that such a mechanism easily explains many of the "bad things" which occur in the economy. For example, it's just a fact that debt must rise (assuming non-decreasing population and many other "standard assumptions").

>it's probably best if everyone buries themselves as far into debt as they can

This is basically the only possibility, except that the debt isn't forced to be spread uniformly. Instead, debt accumulates in regions. The steady state is basically: banks hold interest stakes in all debt, perpetually. Banks survive, while everyone else must deal with the wake forced on them by the massive amount of debt product which the banks produce.


I completely agree, and I find it an interesting contrast of the current political feelings of protecting the middle/lower classes (I don't know what the acceptable term for "lower class" is).

College cost

Problem: college needs to be more affordable for lower-class kids

Solution: give them cheap loans to go.

End result: college prices rise because there's no downward pressure, kids graduate with enormous loans, and we're having this same conversation ("how can we stimulate spending?").

Housing

Problem: the poor can't afford housing.

Solution: Legislate it such that the poor can get access to loans to buy housing, with the government (really, society at large) subsidizing the cost.

End Result: Housing prices rise because loans are cheap, people get loans they can't afford, eventually people default on loans, pushing costs of loans up, the poor can't afford to buy housing. Cycle repeats.

This is where the conservative side of me thinks that government intervention really pushes this cycle along faster and faster, and makes things worse and worse (with the best of intentions). I think it was in the 90s that suddenly it became politically smart to think that "everyone should be able to own their own home", which sounds great on the surface, but there's so much more to it than a simple quote.


The flip side of that argument is that the top xx% people and organizations have accumulated so much wealth that they really don't know how to allocate it sanely. As soon as some channel opens to receive it (government or private), money starts flooding in, eroding the integrity of that investment channel - and stupid investments inevitably get made. Meanwhile, people can't afford houses or pay for college because the price of their labor is being systematically minimized to increase shareholder value, and the world and national economy as a whole are showing a low-growth stagnation.

The question is often asked, what intrinsic reason is there to worry about income inequality? One reason is that when wealth is more evenly spread, the millions of micro-allocation decisions by many people help power a very efficient engine of capitalism. However, if the wealth is unevenly spread, then we have much fewer parties making very heavyweight allocation decisions, and many much smaller allocations being made by everyone else. Under that scenario, the engine of capitalism starts to drop in efficiency because it's choking on too high a amount of misrouted investments in some areas, and not enough in others.


This is a really good point, your second paragraph.

What you're getting at is that when wealth becomes concentrated enough, you effectively have a centrally-planned economy with all its accompanying inefficiencies.

There are some pretty smart economists who've shown that here in this U.S., this is effectively already happening.

Basically, when people say "inequality? Who cares? It's capitalism!", what they're missing is, after enough inequality, it's no longer capitalism. You end up with a centrally-planned economy, which is where we are today.


Maciej Ceglowski said much the same thing, in the particular context of venture capitalism:

"We had people like this back in Poland, except instead of venture capitalists we called them central planners. They too were in charge of allocating vast amounts of money that didn't belong to them."

(http://idlewords.com/talks/what_happens_next_will_amaze_you....)


Ah, but that's a different problem, and the inequality talk actually distracts from it.

The thing is that VCs are not that wealthy - even the wealthiest ones, like John Doerr, are not in the Forbes 100 list.

What they actually do is invest the money of others, often from not-so-wealthy people - money held in pension funds, 401ks, etc. So you could have a less unequal society in which VCs actually controlled more money - in fact, it wouldn't be surprising, since wealthy people often invest directly, instead of buying into VC funds.


But the question is, why did those few get to own so much of the capital?

If the thing we had was already capitalism, then doesn't the very fact that they have so much capital prove that they are the best at making the smartest (read: best return) investments?

And if not, then doesn't that mean the problem was that we already didn't have capitalism, and fixing inequality by itself is a fool's errand, since we should really be fixing the distortion that lead to the outcome of the bad investors owning the wealth?


That is a really compelling way of phrasing the problem with having most money concentrated in few hands.

It strikes me as a companion to a lot of "free market" talk really advocating a monopoly with no rules for the monopolist.


Of course it is, especially if you read the capitalist-controlled MSM.

As free-market academic advocates have been saying for years, the fact is that Capitalists don’t actually like capitalism[1]. Like Chomsky says, what they want - and usually get - is capitalism for the poor and socialism for the rich.

That's why honest supports of capitalism get to frustrated when other people claim they are using No True Scotsman arguments by saying that they want actual capitalism, and not the current system. Capitalists (the actual owners of capital) have co-opted their discourse for their own benefit and have poisoned it to the regular person beyond hope.

[1] http://www.adamsmith.org/blog/economics/capitalists-don-t-ac...


The top x% have been so ingrained with the idea that their money must be invested rather than spent that there is now a sort of economic Schwarzschild radius for money, and the rich have brought all their wealth inside of it. Then it does not leave.

The best investments require healthy businesses, which require supplier production and consumer spending, which are uses of money that compete with investments. If everyone who can afford a Tesla roadster would prefer to buy Tesla stock, then the investment never pays off, because Tesla can't actually sell enough roadsters. Eventually, someone has to buy something. Buying a piece of the company that makes a thing is not the sake as buying the thing it makes. One is actually beneficial economic activity, and the other is just moving money from one pocket to another in the same pair of pants.

All those loans given out for education and housing are not spending. They are just new ways to launch money out on outward trajectories such that it will inevitably return.

Once you are rich enough that you can't conceivably spend all your money via normal living expenses, you have a choice: accumulate even more money that can't be spent, or spend it on abnormal expenses. You can use your money to get more money, or you can use it to buy things that no one else can. You can buy paper from Fannie Mae and Sallie Mae, or you can build a better electric car. You can shuffle paper, or you can eradicate malaria. You can shuffle paper, or you can give a condom to every person on Earth that does not want to get HIV today. You can shuffle paper, or you can buy the swankiest, shiniest luxury yacht ever made. You can shuffle paper, or you can overthrow the government that murdered your grandparents. You can shuffle paper, or you can make sure that your local zoo can afford a new habitat for some threatened animal to whom you feel inexplicably connected.

We get bubbles when the people with money to spare only want to invest in the things that other people are spending their money on. Those people should not be investing. They should be making things to sell, or buying them, rather than trying to make the people who are doing those things indebted to them somehow.


I think we're largely in agreement. When too few people have too large a lever, then a few stupid decisions (amplified by collective crowd following in investment circles) really impedes economic growth. On top of that, in the higher levels of finance, there is an increased decoupling of investments/spending decisions from their direct outcomes - both in time, and the adverse personal impact. This hampers the quality of investment decisions.

People of all economic levels make smart and stupid decisions with money. If that money is spread out among many people making many decisions, then overall most people do reasonable things and we still can end up with a pretty good economy that is more resistant to bubbles.


You are making a very common mistake, the idea that investment is not spent in the broader economy. Savings/investment does push resources into the economy. An investment in Tesla, to use your example, is immediately put to work buying supplies and hiring researchers. It isn't like the investment is sitting as stacks of paper in a room at Tesla HQ. Similarly a bank uses its savings to lend to people and businesses, who in turn use those resources to buy homes or fund businesses. A student loan is very much spending, the purchase of college tuition with it in turn funds professors' salaries, campus operations, and so on.


Money spent speculating on TSLA does not get to Tesla. Except perhaps indirectly in motivating Tesla employees who hold stock.


Agreed. Ownership of the stock has become it's own separate monetary-earning "entity", especially as the companies are more interested (for some unknown to me reason) in increasing their stock-price, instead of creating income for their owners.


The money that moves from investor to business is given in exchange for an equal amount of ownership in the business. That does not, in itself, generate any beneficial economic activity.

Here is the degenerate case. Someone creates a corporation. They take $1000 from their pocket, put it in the corporate strongbox, issue 100 shares at $10 each, value the corporation at $1000, and put the shares and the key to the strongbox back in their own pocket. There is a lot of movement going on, but nothing has really changed. The corporation still doesn't do anything.

Now suppose that another investor joins in. They add $1000 to the strongbox, and take 100 shares. The value of the corporation is now $2000.

Really pile it on, now. 98 more investors each add $1000 to the strongbox and take 100 shares. The corporation is now worth a whopping $100k, with ownership split 100 ways. This is still a null entity to the larger economy.

Now let's have the corporation buy a moneymaking machine that costs $100k up front, and makes $100k per year. The investment $100k goes to the manufacturer, who now gets to spend it. The corporation hires a machine operator at $50k/year and spends $4k/year on insurance. The employee gets to spend half of what he makes with the machine. The corporation is now accumulating $46k in profit per year. The owners are sitting on ass, cashing fat checks, and the employee is dutifully sending out those checks.

That's fine. Without their pooled investment, none of them could have purchased the moneymaking machine alone. But the benefit does not come from the investment. It comes from spending money and doing actual work. Without that, you're all just building a new box to hold your money.

Now here's an alternate scenario. The person who would otherwise be the machine operator employee borrows $100k with 12 $3k quarterly coupons, and principal to be repaid after 3 years. (That's about 10.8% annual interest.) Each quarter, he makes $25k with the machine, pays a $3k coupon, spends $12k in living expenses, socks away $9k to pay off the principal, and $1k to insure the machine. After those 3 years, the operator can now spend that extra $12k/q on something other than living expenses.

Now we'll go one step further, and instead of getting that $100k from borrowing on a bond, the operator rents the machine from the manufacturer for $4k per quarter (insurance included in lease), and buys it outright after 3 years. Why would the manufacturer even consider that? Answer: he can't build the machines and operate them at the same time. The machine that builds the moneymaking machines must necessarily make more than $100k worth of machines per year, after all. If demand keeps up, the lease-to-own option could be bringing in more income than cash-and-carry sales.

So what do the investors really add, here, from the perspective of the machine operator and the manufacturer?


> the engine of capitalism starts to drop in efficiency because it's choking on too high a amount of misrouted investments in some areas, and not enough in others.

The "misrouted investments" you speak of, are only possible, on any large scale, by an ever increasing money supply provided by a central bank. To put in other words, there can be no bubbles, of any kind, without the expansion of the money supply. This expansion in the money supply is decidedly not capitalistic.


> The "misrouted investments" you speak of, are only possible, on any large scale, by an ever increasing money supply provided by a central bank.

As he pointed out, not true, it's also possible by too much centralization of wealth, i.e. inequality. Inequality happens regardless of central bank interference with the money supply.


>have accumulated so much wealth

I think the problem is here. What is the definition of wealth?

Often wealth is conflated with money or capital. When you start off with a fictional concept, you get fictional results. What does it mean to accumulate wealth? Produce a pile of gold bricks? Amass fat stacks of cash? Obtain the most 1s in the most significant bits in your values in GS's databases?

It seems to me that there are only really people's wants and needs and whether or not they are currently being met. How can you put a wealth quantity into that framework?

>that they really don't know how to allocate it sanely

In what sense does a holder of massive accumulated wealth allocate it? Do you mean handing out cash with the expectation that the recipient will perform actions on demand?


>The flip side of that argument is that the top xx% people and organizations have accumulated so much wealth that they really don't know how to allocate it sanely. As soon as some channel opens to receive it (government or private), money starts flooding in, eroding the integrity of that investment channel - and stupid investments inevitably get made.

How does this work, generally? Sure, there are people with "so much wealth they don't really know how to allocate it sanely," as you say. But ultimately what happens with it? The "super wealthy" don't have it sitting under their mattresses--it's in all kinds of investments: stocks, property, etc. I don't really get the point in your words, other than "some people have more money than others".

What counts as a valid use of money, to you? Paying for other people's college? Paying other people's mortgages? What makes one use of money/property more valuable than other uses? As seen on HN recently, mutual funds are investing in startups, some of which essentially pays our salaries. Is paying $10m for a yacht a less sane use of money than a million people paying $10 for gas?

For the 2nd time in as many days, I'll use Bill Gates as an example. He's apparently worth something like $80B. Apparently ~$15B is in Microsoft stocks, and the rest is in Cascade Investment LLC. That's all being invested in a variety of ways, certainly: some public companies, some bonds, some private company, etc. It's all being used in various ways, ultimately paying salaries, paying taxes on properties, investing in capital. If it were to be liquidated (assuming that you could do so without losing value), and given to everyone in the USA equally at $80B / 330 million people => $242/person in the US, why would that necessarily be allocated "better"? My naive guess would be that a significant chunk of it would end up at Walmart, Apple and Samsung--how is that more sanely allocated?

Or is your point that the government could better allocate that money? If the government were given $80B to use "on behalf of the people", do you think it would be better spent?


As a thought experiment, I would predict that putting $80B more in the hands of the population of people in the bottom 50% of the wealth distribution would cause more and longer lasting economic activity than the same amount injected, for example, into the stock market. Broadly how it's working is that too much money is sticking in banks and financial markets, and not enough actually circulating in the hands of people and that's causing poor economic growth in real terms.

What does that mean for suggested fiscal or monetary policy? I don't know. I believe that capitalism makes sense at a lot of levels, but I also think that the over-accumulation of wealth unbalances the whole. The traditional proposed "solutions" to this are ineffective to me. e.g. increasing the minimum wage may do some social good but it's so far on the edges of the solving the fundamental problem it's laughable. Instituting a tax on wealth seems unworkable from a political level - and on top of that, it seems to be on the other far edge of trying to fix a problem long after the problem has occurred.

To me the fundamental problem isn't that individuals get wealth, it's that our financial system systematically approaches wages to be optimized down as a cost, and that companies are applauded for squeezing labor cost as equally as any other cost. So instead of investing in better training, or capital equipment, or better processes, a viable way to operate is to squeeze your employees as hard as possible. This is a process that's causing broad flow towards inequality and single worst misapplication of money flow in the economy, giving rise to the problem in the parent above. This is also a process that squeezes out the benefits of capitalism to people broadly in society.

I don't have a pat answer to solve that problem. Sometimes I wonder about a salary tax credit that looks something like an x% credit for the amount of money an employer pays in wages. It would have to be some fairly out-of-the-box proposal that shifts enough wages as a proportion of gross profits that would have an effect without fundamentally breaking down the way that capitalism does lead to benefits.


> How does this work, generally? Sure, there are people with "so much wealth they don't really know how to allocate it sanely," as you say. But ultimately what happens with it? The "super wealthy" don't have it sitting under their mattresses--it's in all kinds of investments: stocks, property, etc.

Yes, that's the point, if you're really rich, you don't spend most of your money, you invest it. And that's all very well and good, but there's a problem. In this world there are are all kinds of investments: excellent investments, merely good ones, poor investments, catastrophic ones. And the problem is, currently there is far more money in the hands of the wealthy than there are excellent investments for them to invest in. That means they're constantly on the prowl for new areas to invest in but even so, a lot of investments turn out to be catastrophic, meaning they don't generate wealth, they destroy it. And so, under these specific conditions, that there is far more liquidity than worthwhile places to invest, then yes, I would consider it better for some of that money to be taxed and spent than on just melting away in bad land deals, risky schemes and fraud.


>How does this work, generally? Sure, there are people with "so much wealth they don't really know how to allocate it sanely," as you say. But ultimately what happens with it? The "super wealthy" don't have it sitting under their mattresses--it's in all kinds of investments: stocks, property, etc. I don't really get the point in your words, other than "some people have more money than others".

Well, those "investments" need to have a rate of return/profit, and the more money is chasing the same amount of investments, the lower that rate drops. Eventually, you get the holders of concentrated wealth investing cheaply in bad ideas because, well, all the good ideas at good prices have been bought.


"The question is often asked, what intrinsic reason is there to worry about income inequality?"

A stable society - when income inequality goes to far, it leads to first a destabilized society and then, occasionally, a revolution. As someone once said to me in answer to the question of why we pay taxes (a similar but different question) the answer was "To keep the pitchforks off your lawn."


But does it? In the past, inequality was usually tied to pretty bad living conditions for much of the rest of society. I wonder if most people were able to have a "reasonable" standard of living (say, of the average working class person in the West in the 90s) and be reasonable secure that life would not get worse for them or for their kids, if society would actually become destabilized by huge levels of inequality.


That's a pretty reasonable "amount" of income inequality - the question is how it can be achieved. Income inequality has a tendency to increase because the people at the top of the system rig it to their advantage, which tends to further increase their advantages.


I very much believe that housing and education are necessities, and that builders and colleges, if the screws were turned to them more, would find ways to cut costs and make things more broadly affordable. I don't think throwing tons of debt at the problem fixes anything long-term.

Right or not, you'll get killed expressing that thought (no matter how well-intentioned) as a politician.


Who is going to hold the screws to them? As it's set up currently, costs have been rising for 30 years at insane rates. I know I'm biased because I've been in Boston for quite some time (it's probably different elsewhere), but all of the colleges in the area have been spending money on completely non-academic things. Building elaborate new dorms & cafeterias, immaculate landscaping, bringing in various pop stars for campus events. None of it moves the needle on "education", but it for damn sure enriches the colleges.

Speaking for my own alma mater, they spent $8m/year to lure the president away from a California school, because he's apparently very good at luring in sponsorships/donations from alumni (I never really understood WTF that meant). Then the college paid ~$10m for him to have a house in the "hip" part of the city. On top of that, the university spent many millions building new dorms with sushi bars and excellent views.

The costs rose a steady 4-5% a year while I was there, and I believe it's been at that clip for decades now. Sure, you can make the argument that it's to pay for their investments, but remember that the university also received in the neighborhood of $100m to rename an existing building on campus. And of course don't forget the monthly phone calls to solicit donations "for the students of tomorrow".

Unfortunately I think that the idea of everyone feeling that they are "above average" feeds into this--kids who can't afford it really, really want to go to this school. And subsidized loans make it very possible for people to borrow $65k a year to do it. It's a vicious cycle, because as prices rise, the more it seems that politicians want to make it easier for kids to go to any college they want to. Unfortunately I don't really know of a good way to stop people from making dumb decisions. There aren't many careers that can pay off $150-$200k in loans in any reasonable amount of time, and I'm not sure that it would work out well for the government to step in and say that you can't borrow more than $X for college from any source.


Building a new university is difficult. Buying investment paper from Sallie Mae is easier.

Building a traditional bricks-and-mortarboards university with actual tenured professors and students seeking valuable skills and knowledge is difficult. Making a half-assed university that gets all its revenue from government grant and loan programs while its graduates can't find jobs decent enough to pay off their loans is easier.

As long as there are ways for people to invest and reap the benefits rather than spend money and do the actual work, there will be investment bubbles, because there will never be any shortage of humans who would prefer to sit on ass and cash fat checks than to sweat all day for little visible return.

You alma mater pisses me off. It could have hired 80 non-adjunct employees, and built a new building with 40 classrooms and 100 offices in it. Instead, it hired one guy, whose job is apparently to beg people to give the school more of their money. And specifically, beg from alumni, many of whom will now be debt-encumbered and underemployed because they spent too much in tuition, learning things that don't help them to create beneficial economic activity, from people who are essentially underpaid temps with no future career path within the school.

The availability of the loans just makes it easier for schools to raise tuition without providing better service.

If you take away the loans, it's true that people who want degrees will have fewer opportunities, but one of those opportunities will likely be to attend school in a strip mall cubicle, learning from robot-assisted professors, for $500 a semester, plus $50 per credit-hour. That dude is going to learn just as much as the guy in the swanky dorm with theater-quality lecture halls and famous professors, but it'll cost him $10k instead of $200k.

Throwing money at a problem does not help, unless you are throwing it specifically at those people who are capable of fixing it.


In each of these cases, you are pushing at the demand side.

Try increasing supply, instead.

College needs to be more affordable? Build more colleges. Results: more kids go to college, more professors have middle-class jobs, more construction companies build buildings...

Don't increase the costs by enabling people to pay more; increase the supply relative to demand so that the prices fall.


AFAIK the solution to make it easier to get access to credit was the one favored by the conservatives, leaving the market to settle pricing and allocation of resources, and thus (hopefully) remove the need to have public universities and social housing.


Credit cards? That may have been on conservatives. Housing? That was largely liberals.


I agree with you on both examples. Education and housing.

But I wouldn't conclude it is government intervention that causes the problem. It is the wrong type of intervention. IMHO.


Well, that's the general problem with intervention. The law of unintended consequences is a real thing, but politicians think they're smarter than that. They aren't, but they think they are. So their interventions often are the "wrong type".

I agree with you that intervention could be done well. But it very often isn't. I think we need to become more skeptical of politics as a source of solutions, because much too often, the solutions sound good but don't work out very well.


What do you predict?


Total debt will increase on reasonable timelines; defaults and bankruptcies will occur at all periods.


You think the Federal Reserve is to blame for this, and not the relative scarcity of global investment opportunities compared to the cumulative stock of global savings? "Blame the Fed" is a common refrain, but I'm not convinced that their policy choices have had quite the magnitude of effect that people attribute to them.

Though I don't disagree that Fed policy (along with the US government's "too big to fail" mentality) has exacerbated perverse incentives in the American banking sector.


I haven't said anything about the Federal Reserve. Nor have I laid blame to any particular institution.

I'm saying that when you look at how the dominant monetary systems work, the inevitable outcome is increasing amounts of debt as that is the only way to expand the supply of money. In fact, in current systems, money and debt share an almost 1:1 relationship. Any given dollar represents some one else's debt.

>and not the relative scarcity of global investment opportunities compared to the cumulative stock of global savings

There may be trivial relationships that affect local environments to some extent, but I think almost all effects are probably overshadowed by the more fundamental reality: debt as money.

Savings don't really exist. Savings is isolated money that debtors can't access (making it more likely that they default [as there is simply no more physical cash to meet the next payment obligation]).


Sorry for putting words in your mouth.

Serious question: Why must the money supply must expand?


I have not worked out the full equation, though someone may have.

But, essentially, each dollar that is created also creates a secondary obligation (interest), for which no corresponding "money" is created. The interest obligation must be met with money created from a primary obligation (principal).

Such a system could perhaps be default free, if the interest receipts were uniformly distributed back to all participants in a timely fashion.

Typically, however, the interest proceeds are locked up, at least for a time, by those who are able to receive them (central banks and their dependents). In aggregate, if the interest proceeds become unavailable to the economy for a long enough period of time, it is guaranteed that at least some participant in the economy will not be able to meet an upcoming interest payment. Solutions: no interest; distribute interest to everyone (still requires some kind of trade solution); or, expand the supply of money.


> Serious question: Why must the money supply must expand?

Wealth isn't fixed in supply, nor can the money supply be that we use to trade it without bad effects on the economy. If wealth expands and money doesn't, price deflation hits; if wealth shrinks and money doesn't, price inflation hits. For stable pricing, money supply must fluctuate.


> ...we've been in this cycle of "easy money, spend spend spend" followed by "crap, bubble". Sure there's money to be made on the upside, but there's even more to lose on the way down.

I'm sure this comment will be downvoted, but there's just as much if not more money to make on the way down. When people, companies and governments take on too much debt, and capital is misallocated, incredible opportunities to profit are created.


Yes, should probably be downvoted. The fact that a small minority can profit greatly in a downturn has virtually nothing to do with the question of how best to grow the economy.


I can assure you that you don't have to be a member of the the 0.1% to profit in a downturn. If you can buy shares of stock and call options, you can short shares of stock and purchase puts.

Of course, you'll never win much sympathy profiting from sanity. If you want sympathy, help "grow the economy" by leveraging yourself to the hilt and blaming evil bankers when your debt catches up to you. But please recognize that you're not really growing the economy; you're just mortgaging your future.


The one parent comment here addresses consumer credit/debt in the US.

The article is about unsustainable debt building up in emerging markets due to attractive interest rates on risky bonds in an environment where safe, conventional returns of 5-9% are extremely hard to come by:

A dollar-denominated government bond issued in 2012 by Zambia, a copper-rich country with an average GDP per person of $1,700 a year, offered just 5.4% interest; even so, it was 24 times oversubscribed as rich-world investors clamoured to buy. The following year a state-backed tuna-fishing venture in Mozambique, a country even poorer than Zambia, was able to raise $850m at an interest rate of 8.5%.

Now data from the IMF is showing that corporations and governments were probably not investing these loans into profitable activities:

Growing debt in emerging markets is not of itself something to worry about. It may be that savings are getting into local capital markets more effectively or that there are more, better investment opportunities. Sadly, those happy possibilities do not seem to account for what is now going on. While corporate leverage in emerging markets has been going up, corporate profitability there has fallen, says the IMF. There is plenty of evidence to suggest that rapid debt build-ups are the hallmarks of periods of indiscriminate lending that eventually end in tears.

So this article has little to do with the average American consumer. It's about banks looking for higher rates of returns in riskier markets and doing dumb things with their money. If they have not sufficiently calculated and priced out these risks, which is what happened in 2007 (purposefully), then a lot of this debt might start defaulting, which could lead to another financial contraction as banks find themselves yet again with risky, misvalued assets on their balance sheets, eating up an unsustainable portion of their portfolios and limiting their ability to lend.

The difference is that screwing up corporate lending might not be as damaging as fudging consumer lending, such as mispriced and unsecured mortgages. The author draws this conclusion from the findings of one OECD paper, so take that with a grain of salt.

Does anyone want to discuss the actual contents of the article, rather than what they think the title implies?


Data from the IMF must be taken with a grain of salt given that their agenda is to provide loans with impossible terms and then repossess national resources when a country defaults.

"America has put [the debt crisis] behind it" isn't quite true either. A large part of the cash withdrawn from ZIRP and quantitative easing has gone straight into record-setting stock buybacks over the last three years, propping up the market and increasing income inequality without creating any real value or skilled jobs.


Yeah so actually the IMF puts out some great economic research that is pretty highly regarded across the econ community, further, your pet theory for what happened is really only accepted in maybe some media outlets, but not really the academic community. "A large part of the cash withdrawn from Zero Interest Rate Policy"? Like what? That doesn't even make sense. Are you talking about how low interest rates and a dearth of profitable investment projects causes CFO's to see that the best immediate use for their cash is to return money to shareholders and shore up their balance sheets, after this huge balance sheet recession we had?

The generally accepted theory is that there has been a worldwide demographic slowdown combined with a large number of countries accumulating huge current account surpluses, leading to "the world being awash in savings." This oversupply of capital causes the natural rate of interest to drop, and that is the rate that the Fed needs to follow (it really doesn't so much decide on a proper rate as much as it estimates it mathematically), as it will cause stagnating growth or deflation if too high compared to the natural rate (!!!!!), but will cause inflation if it's actually "too low." So there's no evidence ZIRP has been "too low," in fact all the evidence points to the fact that interest rates actually haven't been low enough.


The IMF's research arm is actually remarkably objective (even left wing sometimes) which is odd given what their bosses get up to.

They've pretty consistently released research saying that austerity is a self destructive policy, for instance, much to the chagrin of their bosses.


The IMF isn't the most effective org, but it's a bit hyperbolic to compare it to a predatory loan shark. Sure, it follows the agenda of the largest contributors (US, Germany, France) but I think it's a bit of a stretch to say that its ultimate goal is to transfer meager resources from Burkina Faso and Yemen to more developed nations. In fact, it's a good thing that they are as strict as they are with loan terms. The IMF's biggest existential threat is to be seen as a weak creditor by setting bad precedents and losing a lot on loans. See the Fed for an example of setting a terrible bailout precedent.

I agree that America has not put the debt crisis behind it. QE liquidity continues to prop up the stock and housing markets. Good news is that there won't be a crash because there's enough money out there to justify high paper valuations, and the Fed will provide more if necessary.


I want to discuss the second to last paragraph or what the end game is going to be: Inflation or deflation?

Here is the paragraph:

"...More quantitative easing in Europe while America tightens monetary policy is a recipe for a stronger dollar. If the greenback rises far enough, that will hurt export earnings in America, which will eventually feed through to weaker investment and softer GDP growth. The Fed may thus find that even a gradual increase in interest rates will have to be cut short. ..."

AFAIK, The FED is so far removed from the consumer that banks, credit card companies, and PayDay Loan store-fronts determine interest rates rather than the FED. With that in mind what are the consequences if the FED does one or the other? What is next, asset inflation or asset deflation?

Thank you.


> AFAIK, The FED is so far removed from the consumer that banks, credit card companies, and PayDay Loan store-fronts determine interest rates rather than the FED

Fed sets short term interest rates in the entire market (including what the consumer sees) through FFR. That's why everyone is having such a fun time speculating when it will raise the FFR, thereby raising short-term interest rates for the entire economy.

In a traditional economic model, raising the short-term interest rate deters spending in the real economy and encourages saving as it allows a return on low-risk activities - savings accounts and bonds.

Clearly, having the interest rate at 0% has not spurred spending/consumption as the Fed had hoped post 2007. So they embarked on QE to push money into banks with the hope that these institutional gatekeepers would find good things to do with the trillions of newly minted dollars. Now banks are sitting on lots of money and have inflated the stock market and have most likely made an outsized number of dumb bets in the emerging country debt market, as well as the Chinese real estate market.

In my opinion it makes no sense for the Fed to either raise or lower the interest rates. While this would spur the banks into action (lowering would make them take riskier bets, raising would allow them to put more into bonds) it would not fix the underlying deficit of aggregate demand. The Fed keeps pushing on the supply side. We need the government to push tax dollars efficiently into sectors that will spur aggregate demand. R&D, infrastructure, education, and war are all examples of long-term investments that will grow demand over decades rather than a few years before another bubble (as we're finding out now).

I doubt we'll see either hyperinflation or hyperdeflation because the supply of money in the real economy is efficiently limited by the banks. Unless the Fed was to conduct a helicopter drop and start a round of QE that fed directly to the consumers, we won't see a meaningful change in the currency in circulation, which is what causes hyperinflation/deflation.


It seems to me we're in a period of low inflation with occasional deflation. I'm not sure we're going to swing to extremes in either direction. Neither serious inflation or serious deflation seems likely, instead just... sitting around neutral.


So, observationally? I totally agree. this is what has happened - but for the last few years, both sides have been shouting scare-stories about either hyper-inflation or serious deflation,

(and personally, I'd argue that the right, screaming about hyper-inflation has been more wrong than the left, talking in a much lower voice, and in a more academic way about deflation, but both sides have been saying that scary things will happen if we don't act... it's just that the left's worry is that we'd turn out "like Japan" - which seems fundamentally realistic, while the right talked about Zimbabwe, which doesn't.)

But, the point is that what "seems likely" for the last few years, if you were to listen to the pundits, was movement in one direction or the other, not idling along in neutral like we've actually been doing. It's only been very recently, I think, that the right has given up on the idea that we're going to get massive inflation our of our borrowing and money-printing.


So a steady state economy?


>The author draws this conclusion from the findings of one OECD paper, so take that with a grain of salt.

Actually he cites two papers on that difference, but I wonder whether the outsized weight of China for the global economy and in all these statistics makes any conclusions drawn from past episodes even relevant.

Much of the corporate debt in many parts of the world was used for building production capacity meant to supply China. If all of that has to be written down, things could get pretty ugly.

I recently read somewhere (I believe on Bloomberg) that 90% of the value of all mergers and acquisitions in the resource sector since 2007 were already written down. That is a terrible testament to management quality in my view.


Can you expand on this to me a layman? What does it mean, written down? And why does it say whatever it does about management?


Let's say I take my entire net worth, $500k in cash, and buy a house straight up for $500k, thinking it will be worth $600k a year from now.

If someone were to come along and audit me right now, we would see -$500k in cash, and +500k in assets (my new house).

A week after I buy my house, the housing market crashes. Now, the highest anyone is willing to pay for my house is $250k. If an auditor were to come along and examine my personal wealth balance sheet, they would see that I reported assets of $500k a week ago, but that my house is only worth $250k now.

Now I have to "write that purchase down" by $250k on my personal balance sheet so that it matches its true value on the market. I lost half my paper net worth in a week due to a poor investment decision. (Individuals are generally not required to do this type of accounting, but public firms are so that investors can make informed decisions about which companies to fund.)

If you make risky bets, you're usually going to have to "write down" or "write off" (take a 100% loss) what you were once counting as valuable assets. Some write offs are inevitable, but if you let them get out of hand its definitely a sign of shoddy investing methodology and poor risk management.


I guess the question becomes, should more regulation be put into place to prevent lending to economies at risk or does that become impossible as many of these countries won't take kindly to being locked out of the markets?

Who pays when they decide not to? Greece is one helluva mess but without real dollar numbers attached to the various countries in real danger what is our exposure?


It's about banks looking for higher rates of returns in riskier markets and doing dumb things with their money.

It's not their money, it's our money. That's what this is all about: moral hazard[0].

[0] https://en.wikipedia.org/wiki/Moral_hazard


> The difference is that screwing up corporate lending might not be as damaging as fudging consumer lending

How? On of the reasons that GM was in trouble (after 2007/2008) was that they couldn't secure enough capital to keep their operations running. How would this not have averse effects on the economy?


I wish that articles like this were not confined to the international finance ghettos of The Economist and The Financial Times, but that were also discoverable in local daily American and European newspapers. Because when we talk about the professional investors chasing yield and ending up with bad outcomes, we are also talking about the pension funds and American school teachers, bus drivers, municipal workers, etc.


Why aren't first world governments issuing bonds with good interest rates anymore?


Federal Reserve sets short term interest rates throughout most of the market through the Federal Funds Rate (FFR). It dropped the FFR to ~0% after the financial crisis, but instituted a brand new policy: 0.25% interest on reserves held at the bank in order to get banks to be less risky and loan against more safe assets that they keep with the treasury.

Conventional economic thinking is that low interest rates spur economic activity, as individuals and institutions that would have once parked the money in safe government bonds and earned a return on the interest would instead be forced to lend out into the real economy to find a decent rate of return.

The problem is that the money supply is too large due to QE and there is not enough demand for viable, long-term projects such as infrastructure, R&D, education.

Plus the government continues to run into the debt ceiling. If it were to raise interest rates on its bonds, it would be paying out more on its already enormous debt.


Because there is a glut of idle money right now as the first world continues to unwind its debt positions from the financial crisis.

Investors are parking their cash in safe assets in droves (government bonds and real estate), so there's basically no safe assets left that will earn a return (perhaps other than real estate speculation) - investors then go on to hunt for riskier investments in emerging markets that will at least gain something, at risk of losing the principal if the government defaults.


Because they don't have to. People are willing to lend them money for almost nothing because there is not enough demand for credit compared to the supply of savings out there.


Demand is huge compared to supply, so prices are high. (A low interest rate for a bond is a high price, and a high interest rate is a low price.) Why sell bonds for more than you need to?


Taking this to a much smaller scale...does anyone have any predictions for how ripples from this will impact the housing markets (particularly in the Bay Area that has lots of money from China pouring in still)?


Is it actually possible to easily invest in housing markets? I looked at some local REITs but none of their stock prices/returns reflect rent increases at all, and their share prices have just been down lately.

Actually buying land is still fairly hard to get into!


Wow, nobody mentioned the natural rate of interest yet?




Registration is open for Startup School 2019. Classes start July 22nd.

Guidelines | FAQ | Support | API | Security | Lists | Bookmarklet | Legal | Apply to YC | Contact

Search: