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The next recession (economist.com)
148 points by briatx 5 days ago | hide | past | web | favorite | 92 comments





A recession is inevitable if one looks at the state of average people and certain economic facts. Eventually a domino will fall.

1. Consumer debt is at an all time high. 2. Consumer savings rates are lower than the mid 2000's and ~35% of adults could not handle a $400 emergency. 3. Inflation is eating already low wage growth. 4. Soaring rental prices for homes 5. High home prices 6. business consolidation and Ch. 11's are up 63%

Sources: https://www.americanbanker.com/news/consumer-debt-is-at-an-a...

https://www.businessinsider.com/rental-prices-are-soaring-ar...

https://www.businessinsider.com/chapter-11-bankruptcies-are-...


A number of your indicators are signs of a booming economy.

Rents go up when people can afford higher rents. Consumers take out loans and save less when unemployment is low and they feel safe in their job prospects. Inflation was below healthy rates for a number of years, and is now where the Fed likes it. Wages aren't booming, but they're up, and up more than inflation.

Chapter 11s were at the same level in 2011 -- were you predicting a recession then too?

There are also reasons to be optimistic, for example, US corporate earnings are way up -- 2018 is up 20% over 2016 alone -- that's huge.

https://tradingeconomics.com/united-states/corporate-profits

I think that the article is right: while the US seems very healthy, there are lots of international issues that could form the next recession (China specifically).


Speaking from this space, everyone I see on my end is paying higher rents but it is eating into their ability to save and forcing them to consume less. Wage increases exist but are coupled with moves to riskier companies.

> Rents go up when people can afford higher rents.

Only if supply is capped artificially, e.g. in major cities where it's almost impossible to build.

> Consumers take out loans and save less when unemployment is low and they feel safe in their job prospects.

Other reasons to take out loans: The wealth effect (currently fully in force), cheap loans (record low interest), easy loans (no risk assessment), outright stupid loans (US student loans) or loans that are necessary to make ends meet. All signs of a market overheating.

> Chapter 11s were at the same level in 2011 -- were you predicting a recession then too?

There was no reason to predict it when it had already just happened.


It goes up regardless of building restrictions in a booming economy, but restrictions can make it worse.

This is called the Law of Rent. Land prices function like monopoly prices, and rise whenever the value obtainable from the location rises compared to the best available rent-free alternative. Seeing how there's usually no rent-free alternatives, prices tend towards the entire value obtainable from the location for an average consumer.

For instance, the value of the location may be money and time saved on commuting. You'll generally find that the money and time you save on commuting about equals the higher land rents, netting out to no monetary benefit between the two options.


The Law of Rent is about the cost of leasing the land from the owner of the land. This is not the relationship between tenant and the owner of the real estate.

It's not the tenant who is looking for maximum productivity from the land, it's the real estate owner renting out places to live. A tall tower housing more people paying individually lower rent is more productive than a small house housing a single affluent person. Unless building is restricted artificially, supply increases until demand is met fully, which leads to price competition and ultimately rents that are as low as they can be.


> supply increases until demand is met fully

That is a very optimistic view.

What I've seen in Finland and UK is pretty much the opposite of what you claim. In both countries the housing supply in growth centers is essentially controlled by a handful of huge developers. In an attempt to make the planning permission system more comprehensive, it has only turned out more complex and expensive to navigate. That means that only the largest operators can afford to work within it.

In both countries we see developers deliberately restricting the speed with which new housing stock enters the market. In UK, the common pattern seems to be to sell a floor or two at a time, while the others are still supposedly under construction. In Finland, the developers literally shut down their sales and rather took a hit in maintenance costs than sell their available stock while the market was too slow.

Your assumption therefore makes a crucial mistake - it stems from an assumption of perfect markets and unrestricted housing supply. In reality neither of those two hold true.


> In an attempt to make the planning permission system more comprehensive, it has only turned out more complex and expensive to navigate. That means that only the largest operators can afford to work within it.

That's exactly what I'm talking about when I say "artificial restrictions". Don't assume that the market players don't want these restrictions, it's easier to sit on past success than fighting for sustained success. Big players always profit (relatively) from regulation, it keeps down competition from below.

> In UK, the common pattern seems to be to sell a floor or two at a time, while the others are still supposedly under construction.

That's because in the current market conditions where cheap money drives up asset prices everywhere, valuations are fully detached from the actual income created by rent, which can make it more profitable to just sit on an appreciating asset. In a more sane market, full tenancy is required to recover investment costs ASAP.

> Your assumption therefore makes a crucial mistake - it stems from an assumption of perfect markets and unrestricted housing supply. In reality neither of those two hold true.

Of course it's an idealization, I'm talking about what would happen to prices if these restrictions didn't exist. Housing supply doesn't have to be unlimited, demand could easily be met, we're far away from any physical limits. You really have to ask yourself, why does San Francisco not look a little bit more like Hong Kong? What would happen to minimum rents if a dozen of residential highrises could be built near the center?


Rent rises with the productivity of locations, and density makes locations more productive in the aggregate. Agglomeration is the economic term for why that is.

It may seem paradoxical to you, but supply and demand simply doesn't function the same way when it comes to land. The supply of land is fixed. That is why rents are more like monopoly pricing.


The supply in question isn't land, it's housing. There's enough vertical space available, so far all intents and purposes, it's not a limiting factor.

What's limiting efficient land use is artificial constraints put on construction.


> e.g. in major cities where it's almost impossible to build.

If you define a major city as > 1mil, then nearly 10% of the US population falls into that category. That doesn't include cities, like Portland OR, which are notorious for artificially capping housing. So it's likely to be closer to 20-25% (or more) of the US population.

1. http://worldpopulationreview.com/us-cities/


"Consumers take out loans and save less when unemployment is low and they feel safe in their job prospects" - this likely applies to the upper 20% (my estimate) who have enough savings to survive an emergency and can afford to save a little less to put in the new kitchen. The majority of people especially those who cant afford a $400 emergency save less and take out CC debt because they need it to survive until the end of the month.

Rents do go up when people can afford it and then there is the very real possibility of a a large portion of people suddenly not being able to afford it anymore and evictions spike. People afford it because they have to live somewhere if all rents in the area are high and they cant afford to move, they cut elsewhere. The 35% of people that cant afford $400 cant afford to move so they will eat the rent increase of $50 per month because they have no choice.

Chapter 11's are an indicator, perhaps not a strong one but as business consolidates, employee choice is affected.


> There are also reasons to be optimistic, for example, US corporate earnings are way up -- 2018 is up 20% over 2016 alone -- that's huge.

Isn't that mainly the result of the large cuts to corporate taxes? Deficits are also up as the article notes for the same reason making it harder for the US government to respond with stimulus in the event of a recession.


Sadly, booming economies often create the conditions for recession (e.g. supply chain constrictions, pricing distortions). They're hard to predict - often we don't know we're in one until it's been going for months. The old adage still stands - if it can't go up forever, it'll come down.

> A number of your indicators are signs of a booming economy.

35% of adults not being able to handle a $400 emergency is a sign that a third of the country is barely managing to live, and a relatively small problem can have huge consequences for them. I don't know about you, but it really makes me sad.


> Rents go up when people can afford higher rents

Or is it that rents go up when people can't afford to buy homes due to higher interest rates and down-payment requirements, which ends up putting a lot more people in the renters market, thereby raising rents in a supply-demand price war?

Asking, not stating.


In my opinion, you are right. Supply-demand is a universal driver. Ie. An aging youth that cannot afford homes. A whole generation, introduced to the renting market.

There's been a flashing indicator light in the subprime auto loan sector for a while now: https://www.bloomberg.com/news/articles/2018-02-02/never-min...

Slight correction here. According to the Report on the Economic (2015), only 31% of the people responded stated that they could not cover the expense. It should also be noted that 46% of the total respondents said that they would have a hard time paying the $400.

Page 22: https://www.federalreserve.gov/2015-report-economic-well-bei...


This is a very American perspective. The article is talking about a global recession.

> and ~35% of adults could not handle a $400 emergency.

That is observed in the US, but in some european countries the outlook is even more bleak. Sovereign and consumer debt is skyrocketing and governments are considering growth rates below 2% to be an economic boom.


So, it appears that this has a bit to do with how you slice things. A few days ago, a commenter published several debt related indicators which are far better than they were prior to the 2008 crash: https://news.ycombinator.com/item?id=18177141.

I think it might be a product of low interest rates, but I'm not entirely sure.


Recessions are a normal part of the economic cycle. In most developed countries there is one every 6-10 years, so of course one is inevitable.

> The efficacy of QE is debated, but if that does not work, they could try more radical, untested approaches, such as giving money directly to individuals

I'm not an economist but I feel like when a country is in a situation where they have to give money to citizens to stave off a market collapse, said country's economy is fucked.


> The efficacy of QE is debated, but if that does not work, they could try more radical, untested approaches, such as giving money directly to individuals

For one thing, QE was a massive handout to debt holders (banks, asset managers, hedge funds) which took (essentially public funds c/o inflation) and indirectly gave it to the wealthy by purchasing assets at prices way higher than "market" at the time.

Perhaps it worked, but it also created a lot of resentment. In some ways, giving money directly to individuals would have been more fair, perhaps we wouldn't have the current radical shift right in the US, resulting from people fed up with the elite coastal beneficiaries of the past system.

Unfortunately, giving money directly to individuals would not have solved the past crisis because a lot was about the downward spiral of asset prices and how that forced more collateralization and reduced bank equity. However, a more balanced approach that solved the mortgage issues for the common person would have been better.

As for the country's economy being screwed. In some ways, we are now. Just that there are winners and losers. Holders of real assets won (massive home inflation continues.) And paycheck-to-paycheck individuals / renters / youngsters lost. Speak to a young person now [who doesnt work at a FAANG] and you'll find someone coming to terms they may never own a home or put down roots. Its a massive turn away from the classic American dream and social contract. Thats pretty screwed up.


I want to tack on this comment by adding that everyone seems to ignore the fact that QE is essentially just printing money.

Historically this is usually coupled with run-away inflation, however since it was isolated to the wealthy sectors of the economy (rather than the typical economy as a whole) there is only inflation among goods in that sector (housing etc). The big red flag is that stocks and VC are in that pool as well.

So while there was 20 trillion dollars of growth over the last 10 years, there was also 21 trillion dollars of debt generated.

The way I see it, QE successfully generated economic growth, however none of that economic growth was "real" growth. There were new innovations, particularly in the tech space, but a huge swath of them have no method to generate real sustainable profit.

All this means we should see a MASSIVE correction in markets. Due to financial rules, banks likely won't exit the market like 2008, but the massive number of companies that took out cheap debt will be at risk.

Basically we have a potential repeat of 2008, but swap out sub-prime homeowners with corporations.


The US QE consisted of printing money in a moment of deflation (reducing of the money supply), so the country would experience something close to a monetary stability.

It did create inflation, and basically offset the natural tendency of the market. The fact that the money was inserted directly into the capital markets, instead of the consumer market probably caused a huge loss of efficiency on the deflation containing goal, a bubble at the capital markets and the requirement of collecting the money back once it starts flowing in a non-controlled fashion into the goods. All that probably caused some instability down the line, but the US seems to be dealing with it just fine.


> but the US seems to be dealing with it just fine

I don't think we have seen the full consequences as of yet.


This comment is spot on. We never actually "solved" the consumer crisis of 2008. We only solved the acute corporate crisis (money market funds breaking the buck, under-capitalized/insolvent investment banks, bond liquidity leading to a markdown death spiral.)

The problem we didn't solve IMHO is the massive housing bubble. To be fair, solving the housing bubble involves lots of winners and losers, so the government would rather kick this can down the road. Obama was able to keep kicking this can for 8yrs.

While there were pops in many places, the steady state price has become whatever a two-earner household can afford with massive debt living paycheck-to-paycheck on a 4% mortgage. That isnt sustainable and causes numerous problems:

- Everyone not already in "the game" loses (youngsters)

- Moving is difficult due to transaction costs (poor job mobility)

- Selling will be impossible (underwater) once rates go up

- Disposable income for spending is reduced, causing people to borrow further.

On top of that, Fannie Mae and Freddie Mac continue to stay in an uncertain state: https://en.wikipedia.org/wiki/Federal_takeover_of_Fannie_Mae...

On the other side of the fence, low rates are horrible for pension funds, pensioners relying on fixed incomes, etc. Pension funds and asset managers with return expectations struggle and reach for riskier assets yielding more. (Tech, to some extent has been a winner here as one result of this has been diversification of pension assets into VC.)


That's likely. The question is how much the future consequences will be like the past ones.

Honestly I didn't look at your numbers for a couple of years, so I don't even know if you got out of that deflation already.


> I want to tack on this comment by adding that everyone seems to ignore the fact that QE is essentially just printing money.

This is actually inherently necessary and the fact that the government hasn't been doing it more has been the cause of the debt crisis.

Money is created both by the government (directly) and by banks (whenever they make loans with less than 100% reserves, i.e. whenever they make loans). As the economy expands, the money supply needs to increase with the demand for currency to use for transactions, or there would be deflation (very bad).

When that money is created by banks, it necessarily leads to an increase in outstanding debt. And paying the debt back destroys the money that was created by borrowing it, so the only way to maintain the money supply at that level without the government creating any is for the amount of outstanding debt to never go down. Which, of course, means that it only goes up.

If you print unlimited money at some point it causes inflation, especially when people use it to buy stuff. But if, instead, they use it to pay down debt -- which is what happens when people have a high debt load -- all it does is replace the bank/debt money with the government money.

Which is actually really healthy, because it it gives people the few bucks back in interest-not-paid on the debt they no longer have. That has a much smaller immediate effect on prices (interest-not-paid per year is only a fraction of the principal paid down), but a very beneficial long-term effect because it leads to more wealth in the hands of people rather than lenders.

It also has immediate positive knock-on effects because with less debt, people are more financially stable. If you're leveraged to the hilt and an emergency comes up, no one will lend you anything more. You also pay lower interest rates if you can e.g. make a bigger down payment, which reduces the lender's risk (the asset is worth the whole loan amount even if it depreciates some), enhancing the positive outcome of people paying less in interest.


All easing central bank monetary operations involve "printing money" in that sense. What's more, when you have central banks operating an inflation-targeting regime, the entire purpose of easing operations is to stimulate higher inflation. This wasn't new with QE.

Before QE, central banks mostly influenced the market via interest rate targets. If the "market" rate is higher than the "target" rate, that means printing money to buy debt in the market). (And before interest rate based policy, some central banks explicitly targeted money supply measures).

QE extended that from short rates (overnight secured) to long rates (long-dated government bonds at first, then other high quality collateral), because once short rates were near-zero all they could do was to target long rates (well, some central banks have experimented with negative rates but I think the jury's still out on whether that's really worth trying or not).

The thing is, that's not what people (at least used to) mean when they talk/talked about "printing money".

"Printing money" is normally shorthand for "printing money to give to the government to spend". This is generally viewed as "bad" because if government simply prints money to finance itself then it suffers none of the short term negative political or practical consequences of doing so via taxation. This means it also faces comparatively little pressure to spend efficiently, which results in serious misallocation of resources over time.

It is only a short step from QE to "printing money" in the "government spends it" sense though, and some central banks have gone at least some way down that path. If the central bank provides a significant bid into auctions of government bonds, either directly or because market participants know the central bank will immediately purchase bonds in the secondary market at a known, or fairly easy-to-guess price, then the government is really financing itself by selling to the central bank who is printing money.

It still has to pay interest, but it's no longer worried about being unable to raise the money, or the impact raising too much money will have on the rate of interest it pays.

But it can also absolve itself of responsibility for paying the interest bill, by giving the government a claim over the "profits" made by the central bank, including interest income on its government bond portfolio. So the government pays interest to itself on bonds it sold to the central bank. Some governments/central banks have done this.

That only leaves the government concerned about principal repayment, and the theoretical view that QE is temporary and will be wound down still constrains behaviour here.

As a separate point though, I don't think QE is the sole cause of the asset bubble we're arguably experiencing. I'd put much more blame on the ultra-low short rates of "conventional" policy personally. QE being withdrawn is much less of a problem than short rates going up for that.


> This is generally viewed as "bad" because if government simply prints money to finance itself then it suffers none of the short term negative political or practical consequences of doing so via taxation. This means it also faces comparatively little pressure to spend efficiently, which results in serious misallocation of resources over time.

If you proxy government for companies in this sentence I would argue that is what is happening now. A large number of companies borrowed as much money as they possibly could during QE because they viewed it as "free money" with the low interest rate.

The impact being "money is cheap" and a large number of ventures have been engaged in that do not have real value.

Ultimately the "price of money" is always going to have a counter-balance of inelastic goods aka raw assets. While I agree that QE is not the sole cause (low interest rates are also to blame), I do believe it has had a net negative impact, particularly by inflating the price of assets among those who had access to excess (often times QE involved) funds to acquire them.


Difficult to prove impact but during 08 global recession the Australian (Labor) Govt gave everybody money with the directive “to spend it”. Also pumped money into system through govt projects and rebates (schools building, solar rebates, etc).

On the other hand, Australia was also exporting coal and iron ore to insatiable (at the time) India and China. We also didn’t have the same real estate bubble (at the time).

Hard to prove either way, but Aus did move first and injected a lot of capital into the system, we didn’t enter a recession (unlike rest of OECD), and we didn’t end up having to bail out banks.


Everyone used the money handed out to buy property, and now your real estate prices have gone up an enormous amount, to the point where it's been pointed out as one of the biggest property bubbles, and young people will have an incredibly hard time affording a home.

This seems pretty unlikely. The handout mentioned was a one-off 900 Australian dollars per individual earning less than $AU100k, and a one-off "back to school" bonus per school-aged child.

900 dollars, or even $2100 for a small family isn't the sort of cash that would inflate an auction for a home anywhere, let alone in one of the australian cities affected by the current bubble.


Those 900 dollars don't just stay in everybody's bank account, they get spent, and start circulating the system and eventually consolidated into fewer hands, who in turn buys properties or other assets.

Yeah ok, I don't have anything to point to which refutes that.

An analysis of the breakdown of the contributors to the Australian housing bubble in 2018 would be cool to see, though. Probably some kind of even split between significant foreign investment in property, negative tax gearing, zoning laws, transport infrastructure issues and a one-off $900 payment that went to middle and low-income earners a decade ago.

Damned trickle-up economics.


I think AUS housing bubble has much more to do with Chinese buying it all up than those money government gave out.

This is really the opposite of what happened.

The wealthy did not sell assets at above market prices, they in fact sold them at bellow market prices. Remember when they were trying to sell assets, they were exchanging these for cash. The problem was that the cash that they were getting in exchange had above market returns.

What was happening during the financial crisis is that even the safest private assets were risky illiquid and had low expected returns.

Some estimates say that marginal "safe" private assets had a expected real returns of around -4% after adjusting for risks and liquidity.

But since central banks were not aggressive enough, not creating enough inflation and unwilling to use negative interest rates, the returns on cash was like -1.8%, way above what you could get with safe and liquid private stores of value.

Investors wanted to get their hands on this government paper having above market returns so they attempted to sell private assets and stockpile cash. This is clearly visible in the shooting up of excess reserves in banks. Investors were hoarding cash. The low inflation and relatively high 0% interest rates (compared to market rates) was a huge subsidy to those who wanted to get out of the private markets, stop investing in the real economy and hold government paper to protect their savings.

Destruction of the economy, throwing workers to the curb was basically subsidized. Investors were being shielded from the markets by the government. They kept their government paper promises to be redeemed in the future when private markets looked more favorable. Central banks allowing cash to have returns above market put the private investment markets in a gridlock and economic activity slowed down significantly.

Cash is effectively an IOU from non cash holders to cash holders. This means that the above market returns investors got by hoard cash was a implicit subsidy from poor unemployed to rich savers. The unemployed and underemployed effectively subsidized the destruction of their own jobs.

When jobs returned and workers could buy stuff again, the savers' cash, now worth above what they could have gotten in the private markets, also flowed back into the asset economy and bid assets prices up and made them more expensive to those who were just starting to have money again, at just the time when they were buying again. People who had been the poorest during the crisis were effectively paying the bill for the subsidy that destroyed their past careers.

It is crucial that central banks run a counter cyclical monetary policy and that inflation is kept higher than usual during a crisis to avoid all this from happening. It is crucial that cash doesn't become a subsidy to divestment and crowd out private investment like it did. When the private markets return -4% (risk and liquidity adjusted), government paper should return less than -4%.


To add to this, I think a lot of the confusion about this stems from people not grasping how natural negative returns on assets really are.

Historically, negative real returns on stores of value were the norm. Before financial systems existed, almost all investments had negative returns if you didn’t put work and energy into them. To store value, you had to accumulate stuff, buildings or land. Most options either had high maintenance costs, were subject to risk of damage from natural causes and theft, were very volatile or required hard labor to get production out of.

Even in societies with financial systems, getting low risk, hassle free, liquid, positive real returns has been difficult for most of history. This just reflects the natural laws of thermodynamics that tell us that everything tends to decay without a constant supply of work and energy. In general, most things require maintenance to keep their worth.

The 20th century was probably the most notable exception. Because of unprecedented demographic and technological growth, positive risk free real returns were easy to find. The recency effect probably explains some of the confusion people have about this. It is possible that under favorable conditions, wealth can have positive returns and even compound into very good long run returns but it is not a guarantee and there is nothing natural about it. It may not continue forever, particularly amidst an aging and retiring population in a world no longer as rich in easy to exploit natural resources.

While people are used to get negative returns on very short term purchases, you buy fresh vegetables at the supermarket, even if they degrade over time, many can’t seem to accept the normalcy of negative returns on longer term assets. In nature, squirrels’ nut caches have a certain percentage of losses from theft and spoilage. Real returns tending towards the negative is natural even if they can seem unusual for people just out of the 20th century.


Policies closer to giving money directly to citizens are not, as the article suggests, more radical; targeted fiscal stimulus has long been understood to be more powerful than broad monetary stimulus, it's just usually in the hands of the government proper not central banks, which has become a problem as economic conservatism which opposes fiscal stimulus has taken an increasing hold in major governments, leaving central banks alone (or worse, as fiscal anti-stimulus is often applied alongside monetary stimulus) to handle problems which don't respond well to monetary policy alone.

A big part of the recession danger was that if several of the too large wall street banks failed, there would be chaos and cascading failures, because you wouldn't be able to get your money from them for a while, it would take months or maybe years to figure out what really was owned or loaned. If I was say retired, my 401k might be 25% bonds and 25% cash and x% stock but if the company that held the records failed (say fidelity) and the stock market crashed, and the value of the bonds was unclear since so many companies went out, you can't easily get your money to live on - that was the danger of the 'cascading series of failures' scenario.

All of that was a good reason to bail out the banks, but not a reason to bail them out and then not break them up into the smaller banks that they had been, not so many years before. The banking industry had just gone through a long series of mergers. That the banks were "too big to fail" was a reason for the bailout, but also a reason to break them up again; only one of these was actually done.

Whatever the gov does to them afterwards, bailing private companies and not taking possession of them on the spot is a huge failure of the duties of a government with their citizens.

Break them apart later, sell them, or keep them for a few years until the economy can absorb them. But I still can not accept how a democratic government can push money at will into private hands and nothing happens out of it.


agreed, we definitely should have forced them to split, but there are limited powers in a democracy (a good thing :-)). Imagine if this happened today.

QE was more of a way to keep the system alive than a "broad monetary stimulus".

Giving money directly to the people in a crisis creates ultra-high-velocity spending and massive inflation. People rush to the stores buying up wares expecting the money to become worth far less soon. Store owners hold back stock and raise prices, fulfilling the fears of the people. A similar situation is currently unfolding in Turkey, by the way.


Well, "everyone" accepts that we "need" to give lots of money to the richest citizens to stave off market collapses, so it doesn't seem like a very big leap to give money to poor citizens as well. But somehow it's politically impossible.

For instance, in the last crash, the US government could have chosen to bail out homeowners instead of just banks.


It's not really such a dire ("it's fucked") situation, or desperate prescription.

The (Keynesian) idea is that close to the zero rate boundary, you have a "multiplier" > 1, so that fiscal stimulus leads to even larger GDP growth (thus, it partially finances itself). Furthermore, this works best when people spend, not save said stimulus, and it is uncontroversial that poor (ie most) people have a higher propensity to spend than the super rich (which are main beneficiary of QE).

So, it should be an effective (and relatively orthodox, unless you consider standard Keynes totally off-limit) measure.

EDIT for clarity.


> said country's economy is fucked

Indeed. It's the road to currency collapse. The precedent was set in a big way during the last debt crisis; the US government used QE money to buy bad debt, recapitalized institutions and buy treasuries bonds to fund deficit spending. So now the question[1] is; is it possible for the US to suffer a recession without US politicians resorting to the virtual printing press?

[1] https://news.ycombinator.com/item?id=17954531


If it's the road to currency collapse (presumably via inflation), that doesn't explain why inflation not only failed to materialize, but the Fed undershot its own inflation targets for most of the next decade.

As far as I understand it, it's not that the central banks are unaware of inflation pressures due to QE, it's that they see other deflationary pressures and try to use QE in a proportionate way to counteract them. Judging by the end result of minimal inflation, if QE is inflationary there was probably substantial deflation pressure.

I don't think it is reasonable to be concerned primarily about inflation but not also deflation. A deflationary collapse not only leads to reduced investment in the future (why invest when prices are falling), but a big enough one will lead to bank failure, with people unable to get money out, the FDIC insurance program bankrupt, etc.

The US domestic political situation is already dysfunctional as it is. It's hard to imagine it remaining stable through an inflationary or deflationary collapse. And if history is any guide, radical political changes in a crisis are often not positive ones, since someone who knows who to blame and promises to solve everything can often undermine democratic institutions. I'll take (some level of) stability, thanks.

Anyway, to answer your last question, QE is determined by economists at the central bank and not directly by politicians. I think the main reason they are looking at unconventional monetary policy is that their traditional way to end recessions, lowering interest rates, stops being effective once interest rates are at zero.


> It's the road to currency collapse

This is overly simplistic. QE led to neither rampant inflation nor dollar depreciation. Money velocity fell and monetary policy responded. (Fiscal policy’s relative non-responsivensss meant monetary policy had to overcompensate.)


And why didn't QE lead to rampant inflation? In the crash, about $4 trillion evaporated. The danger was a deflationary spiral, not an inflationary one. So the Fed injected $4 trillion back into the economy via QE. The result was that we had a bad recession, but not a deflationary collapse. We had the Great Recession, but not Great Depression II. That was actually extremely well done by the Fed.

Of course, the danger always was whether they could unwind in without making a mess. They seem to be doing well so far.


> This is overly simplistic.

No, it isn't. Print enough and the currency fails. The lesson has to be learned over and over again, in part because there is an endless supply of deniers whispering magical thinking into the ears of the powers that be.

QE didn't lead to this only because they stopped. That time. We're still left with the precedent however; giveaways like "cash for clunkers," bailing out UAW and public sector pension funds... all those supposedly "good" things done with magic money from Washington, enabled in part by QE funded deficit spending.

What evidence can you cite that they won't turn to QE again to try to paper over whatever bump in the road comes next? What assurance do you have that they'll stop printing next time?

You don't have either. That's why it's a question.


> Print enough and the currency fails. The lesson has to be learned over and over again

Another lesson: refuse to print in a deflationary spiral and a recession turns into a depression.

> What assurance do you have that they'll stop printing next time?

This is a slippery slope argument. Central banks could always print. Deciding how much to print is their entire job. QE simply meant instead of using printed money to buy Treasuries, as the Fed has always done, it would also buy other assets.

> bailing out UAW and public sector pension funds... all those supposedly "good" things done with magic money from Washington, enabled in part by QE funded deficit spending

QE didn't monetize the bailouts. Buying Treasuries is something the Fed has always done. QE meant buying other assets, e.g. agency debt.


> QE had little to do with funding the government deficit.

This is demonstrably false. For a time the Fed was buying over $2 billion of long term debt per day [1]; bonds that had no hope of finding buyers on the open market. They were directly funding federal deficit spending with QE.

[1] https://www.federalreserve.gov/newsevents/pressreleases/mone...


> For a time the Fed was buying over $2 billion of long term debt per day [1]; bonds that had no hope of finding buyers on the open market. They were directly funding federal deficit spending with QE

You're quoting a Federal Open Markets Committee (FOMC) statement [1]. This is the arm of the Federal Reserve which has always bought government debt. Without QE, the FOMC would have been buying huge amounts of Treasuries to keep (a) the money supply constant and (b) interest rates low.

QE's novelty was the Fed saying "we aren't only going to buy Treasuries." Complaining about the Fed buying Treasuries is complaining about the Fed per se. Complaining about QE is complaining about the Fed not buying Treasuries, and instead buying other securities.

[1] https://www.federalreserve.gov/newsevents/pressreleases/mone...


> You're quoting a Federal Open Markets Committee (FOMC) statement

You're pretending not to see the scale and exceptional nature of that historical event. Characterizing that maneuver as routine is disingenuous and indicative of precisely the sort of thinking that creates the slippery slopes. Will this be the sort of bad guidance our leaders will use to rationalize future decisions? We'll see.


> Characterizing that maneuver as routine is disingenuous and indicative of precisely the sort of thinking that creates the slippery slopes

It wasn't routine. It was unusually-large FOMC activity directed by Ben Bernanke's study of the Great Depression. (It appears to have worked at keeping the money supply stable.)

But all of that is not QE. If you don't know the difference between QE an the FOMC, mightn't the nuances of monetary policy be similarly escaping you?


> But all of that is not QE

It's a distinction without a difference. QE recipients used QE funds to heal their balance sheets by buying deficit funding Treasury bonds as directed by the Fed. So we have both Fed created money funding deficit spending indirectly through QE and Fed created money funding deficit spending through direct monetization.

Dwelling on this minutia misses the point entire, and I suspect that's deliberate. The hazard is that -- as a result of these events -- we are now a nation with a propensity to print staggering amounts of money to deal with economic pressures. The question is; will we control that impulse or not?


>QE led to neither rampant inflation

QE did lead to rampant inflation in asset prices (housing, shares, etc.). It just didn't lead to rampant inflation in consumer goods.

That's purely because of how it was "spent" (on buying up treasuries). If it was spent on actual goods and services then it would have kicked off inflation in consumer goods instead.


> QE did lead to rampant inflation in asset prices (housing

The housing market in the US didn't even stop dropping until about the time of QE3 and only recovered slightly by the time QE ended. QE certainly didn't lead to “rampant inflation” in housing except perhaps by comparison to the rapid deflation that would have happened without it out some other policy change directed at the same issue.


You're looking at the wrong real estate. The people that bought and drove up prices for all this junk real estate in the middle of nowhere were ordinary people who had no idea about investment, fueled by subprime loans. That kind of money wasn't coming back with QE.

The kind of investors that got money via QE wouldn't invest into junk like that, instead they've driven up prices in urban areas. The same kind of people are driving up stocks, which are currently massively overvalued.

Either way, you can't look at the initiation of QE and expect results by next tuesday.


The US does fiscal stimulus like this fairly often.

In January 2008, Congress & President Bush sent $600 checks to each individual ($1,200 for joint tax filers) to stimulate the economy. I remember getting my check in the mail.

They also did this in June 2001 ($300-$600 'rebate' checks).

The American Reinvestment and Recovery Act in February 2009 included $400 per worker payroll tax credits for 2009 and 2010, immediately available in W-2 paychecks through lower withholdings. It was a classic Keynesian fiscal stimulus, clumsy but likely effective at speeding up our recovery.

I agree with the article's concerns that we've built an unsustainable hole in our ongoing budget, especially after the most recent tax cuts. We should not be operating at a deficit at this point in the economic cycle. We should be at a surplus, like we were in 1999/2000, in order to preserve some flexibility for the next downturn.

Will it tie our hands in the next recession? I don't think anyone really knows. I suspect we'll weather it better than most other global economies. US Treasuries remain the global safe asset of choice, which should keep borrowing costs down. We'll probably just emerge with an even more enormous debt burden.


where exactly do you think money comes from? there are two kinds of money, debt money and non debt money. Banks create most money which is debt based. Government creates non debt based. If government didn't give money, there would be no money!

Money is always debit based. It can be private debit, or government debit. Some government debit is also interest free. But it's always debit.

Not related to the article, but I was overwhelmed by popups on first visit. The amount of screen real estate they took up [0] was obnoxious.

[0] https://i.imgur.com/GwkHKT1.png


we never left the recession. ignore that twaddle about the "jobless recovery".

point is, they had a depression II slated. so they did what any cunt would; they punted.

could have been 8-9 years of pain; ex-rich people throwing themselves out of windows.

instead, they screwd the next four generations.

it only looked like a recovery, because it stopped collapsing for a brief period. reality they've screwed the entire country for decades.

all this nonsense about growth? is what happens when you reinflate the bubble with QE. classic keynesian garbage.


the economist didn't even see the 2008 crash coming.

their prognostications are useless


I remember reading articles about the subprime problem in the Economist way before the crash. I think they're pretty good on the whole at being informative and not sensationalist.

Here's one from 2006 [1] that I found relatively easily. But there's one in my head that I remember about an HSBC owned bank that was flailing and could potentially start a crisis, but I can't find it right now - I just remember reading it at the time, it was the reason I decided to wait for a downturn in the housing market. I wish I'd ignored it and bought at the time, but with the benefit of hindsight ...

[1] https://www.economist.com/finance-and-economics/2006/12/13/s...


Yup. I’m always amazed when people say nobody saw the recession coming, because I distinctly remember multiple news stories about the subprime mortgage brouhaha for a year or two before the bubble burst.

People hear what they want to hear, and remember what they want to remember, I suppose.


Many people saw that housing was probably overvalued and that there was a wave of unaffordable payment hikes in the pipeline on the loans secured against that housing coming. A falling housing market is hardly a once in 100 year phenomenon, and many other housing markets had operated with similar products (teaser rates etc) for many years, and continue to operate on that basis.

Many people also saw a recession coming, because recessions always come eventually - it's a normal part of the economic cycle.

Relatively few people saw that these two things would result in many of the largest financial institutions on the planet coming near to collapse.

Even fewer people got the timing right. And not many of those had the courage of their convictions to actually place bets on it.


I clearly remember NPR was talking about the subprime in Feb-Mar of 2007. That does not mean that NPR foresaw 2008 great recession. Most people saw a dip, but very very few people saw a Valley that it truly was.

The scale was unclear, the problem wasn't.

Why do you wish that you had bought the house despite accurately predicting and waiting for the downturn? Didn’t you get a significantly better deal or did it just get offset anyway? Curious because it’s a similar decision now. A recession is inevitable, will it happen in the next 3-6 months or take two years is hard to predict.

> Why do you wish that you had bought the house despite accurately predicting and waiting for the downturn?

Because in the UK prices didn't fall, but the requirements for purchase became significantly more difficult.


This kind of "economists are always wrong because they didn't foresee a major problem" is like saying "engineers are always wrong because they don't foresee issues caused by DNS"

It's almost as if people don't understand uncertainty.

Just because economists are not EXACTLY right about everything, does not mean they are ALWAYS wrong...

Think about all the possible scenarios that could have happened in 2008, and think about how closely economists -- on average -- were to that. They're actually ASTOUNDINGLY accurate. But just because they're not completely accurate, for some reason so many people think they have 0 value.


Eh, I think the sentiment is more like that saying "Economists have predicted 10 out of the last 3 recessions".

There are always lots of reasons to be concerned, lots of leverage that could crash catastrophically (and often does). Whether that triggers an actual recession or just a correction is the nebulous part. I mean, the S&P is down ~6% over the last 5 days. Are we at the start of a recession right now? Would you be willing to actually bet money on your answer? For the people who do: Are they just lucky, or actually insightful? How would you know the difference?

People have always worried about politics interfering with recession recovery - I mean, hell, a big part of the tea party's agenda was opposition to TARP and ARRA (I'm not going to go so far as to say that's WHY the tea party exists, though). Not to be too politically cynical, but I think it's fair to say that politicians will do everything within their power to protect the wealthy and the status quo and any opposition to that will be for show.


> Economists have predicted 10 out of the last 3 recessions

On that spirit, engineers have also predicted 200 of the last 5 bridges that felt.


This is a false analogy. Economists bill themselves on being able to guide policy and large-scale decision-making given the tools and research at their disposal. If said tools and research are bunk, then the appropriate action is not to press on with guidance, but to stop with the guidance and predictions altogether. We're in the mess we're in now partly because of risk management techniques that don't work.

>if said tools and research are bunk

They aren't though. Also, it's a bit rich to blame economists when all they do is advise politicians who very often throw all the advice out the window.


"Other countries may also be looking nervously at America. And about time. An American recession would scarcely be welcome—even if for the moment Asian and European economies seem to be doing nicely on their own account. However, the true cause for concern is that just as America's housing boom was part of a synchronised global binge on cheap money, its bust may be part of a global story too."

"The trouble with the housing market", Economist, March 2007


Yes, they did. Leading up to 2008,there were a chorus of predictions of a near-future general collapse driven by housing market bubble popping from economists across schools and across the political spectrum.

It's true that this was perhaps still somewhat understated because the levels of outright fraud supporting the bubble weren't recognized, but the nature of fraud is that it tends to be actively concealed.


Isn't a basic premise in finance that past results don't guarantee future returns? Why does their past predictions invalidate their current argument? Sounds like you just have a bias...

They warned about the 2015 crash in China in time. They're not omniscient, obviously. But there's rumblings and talk about misalignments way before a crash, and The Economist is well placed to pick it up and report on it.

They had a famous plunging house cover two years prior to the crash and frequently covered the case-shiller index.

After the fall - House prices - The Economist https://www.economist.com/leaders/2005/06/16/after-the-fall

There's no one class of economists who all share the same opinion and make the same predictions.

The idea that cheap money leads to bubbles (which can lead to recessions) was well-established, it just doesn't harmonize well with the kind of naive Keynesian feel-good economics that politicians want to apply and universities want to teach.

Few people who correctly predicted that outcome at the time got the timing exactly right, but that's to be expected.


The economist was warning of the subprime bubble in 2005.

They also know that if you are always claiming a crash is coming, they will eventually be right.

one bubble in the making is fracking, it's built on debt and has no chance of making profits anytime soon https://www.truthdig.com/articles/death-by-fracking/



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