People can’t seem to figure out why inflation is so low with employment so high. The Fed is doing what they do when unemployment drops this low, despite the fact that inflation isn’t knocking at the door.
It seems like the best assessment is that as long as the macro indicators stay strong, we might as well dry out some powder for a rainy day.
But I personally worry about knocking the legs out from under the strongest bull cycle we’ve ever seen when the next few years seem poised to deliver very strong gains, particularly to disadvantaged populations which are the hardest to bring into full employment, and for whom better paying jobs are life changing.
Because when the tide goes out—and it will—the Fed needs to be in a position to reinvigorate the economy. It's standard mainstream economic theory.
We're already in a precarious position, with the Tax Cuts and Jobs Act doing precisely the opposite of what we should be doing. Thank goodness the Fed has so far managed to remain sensible. I would be far more worried if they were not continuing to raise rates.
And the money created during QE is still not causing any significant inflation (that people harked about). And if it were, the Fed can raise rates, reserve requirements and so on.
I hate to sound gloomy, but the more I look around, the more I see the swindle, the bezzle, and the veneer rather than real value and real wealth creation. I also see a lot of cheapening of formerly great products--Macbook Pro newer models come immediately to mind. But of course, hardly the only example!
The Fed operates on a razor thin ledge and is right to be putting rates back to normal levels vs. the 0.01% or whatever we dropped to--they were even working on how to operate at negative rates, and some bonds (Swiss?) actually paid negative coupons for awhile. Maybe they still do?
Anyhow, I am in favor of reasonable interest rates because that is a major lever that controls price inflation. People think very one-dimensionally about interest rates, as in, how much they are paying to maintain their ridiculous debt loads. Me, on the other hand, I have no such debts to pay off. Freedom is not being a debt slave, being able to walk away from any job at any moment and not suffer a bit for it.
I would like to see banks pay savings interest rates again. They cranked them down very fast, but have never restored them to anywhere close to where they should be right now. My checking account pays a paltry .25%, my bank acct, maybe .7%. Meanwhile, even 3-months CDs are in the 2-2.5% range right now and longer term CD rates are halfway decent again. Long term T-Bonds are up around 3%. You can find Munis and other riskier bonds with decent coupons as wells.
It's all the debt. Wages are going to paying interest instead of driving price growth. And as the Fed raises rates, the amount of cash going to pay interest increases in proportion to the outstanding debt, which means a little increase currently goes a long way against inflation. Especially because it's a double effect -- as interest rates increase, money goes from buying things to paying interest, but it also encourages people to take money they would have bought something with and use it to pay down principal to avoid paying the higher interest rates.
This is a good thing in the right amount -- it should encourage a reduction in the total outstanding debt -- but they need to go slow because of the proportionally large effect of a small interest rate hike against the unusually large amount of existing debt.
Suppose you have an existing $500K variable rate mortgage. Interest rates increase by 0.5%, you have to transfer $2500/year from buying stuff to paying interest, reducing inflation. If you had had a $200K mortgage it would only have been $1000/year for the same rate increase.
The high level of existing debt has made the rate increases unusually powerful at fighting inflation.
Then there's another question, if someone is paying more, it means someone else is getting paid more. So, while some have less disposable income, others have more. The overall net effect on spending can still be negative, but it's not an automatic conclusion that one can simply jump to.
But the someone else is the bank. From there it typically goes into government bonds or some such thing with an equally tenuous connection to consumer prices. Banks don't have a large desire for fresh fish or motor fuel that goes unmet only for a previous lack of funds.
What they'd like to do is find someone new to loan the money to, but higher interest rates make people want to borrow less money, so the bank will often just use the money to reduce the amount it itself has to borrow from the Fed.
The economy is booming. Go find a new job. You will be able to and you'll get a pay raise.
People don't choose cities the way they choose a home. This isn't like someone thinking they have to live in a nice apartment when all they can afford is a nice apartment.
Cities are places where people can choose to live, but more likely than not they are where they haven't chosen to live. Their choice to stay is a choice to be with family that they need or that needs them. Or a choice to advance a career that they are unlikely to find elsewhere. Or to stay in a place that is culturally important to them.
We can afford to give people the possibility of not having to leave a place that they love, or comfortably afford a city they can't leave for whatever reason. It may mean that some people don't get rich off of rent-seeking housing markets, but it is entirely possible, and we should do it. It isn't any more entitled to want to do so than it was for our entire nation to want Life, Liberty, and the Pursuit of Happiness when we didn't have it.
Cities are inherently expensive. The more people you have wanting to bid up the limited amount of real estate in a city, the more expensive it will get. This pressure could be alleviated with higher density housing, but no one has a right to that.
Property owners have actual rights...they are listed explicitly on the deed or easement. Buying a property does not and never will confer the right to restrict other people's decisions of what can and can't be done on their property.
Society may decide on those restrictions together. But it is a bad precedent to give some parts of society more power than others when deciding on those restrictions, and it is in no way "entitled" for a member of society to complain about the results of this trend or want to fix it.
Same with GDP. A 50 car pileup will increase GDP!
Why would a 50 car pile up “increase GDP”? I’ve heard similar criticism of how we measure GDP, but don’t understand precisely what the problem is.
2. A 50 car pileup will employ EMS personnel, hospital staff, tow truck drivers, road cleanup crews, etc. Then later, new car assembly, transportation, DMV workers, and car salesmen.
Myself and many of my peers have had a decidedly opposite experience during the last 2-3 years and are enjoying a thriving economy. I'd suggest you're kidding yourself that it's -not- booming, and are suffering the results of choices made despite the state of the economy.
Whatever you may suspect to be the cause of my circumstance, I am positive the good things you are experiencing are a result of good timing and luck(I'm sincerely happy for you, don't get me wrong but please stop patronizing me - the world is filled with real people) Forgive me for wanting a future where those things aren't necessary for housing or family-raising.
The price of education will only decrease when more people take up manual labor jobs. You can get paid 24$ here in Florida if you’re willing to work on a ladder.
I knew another man that started working at a shipyard out of high school as a rigger (guy that lifts stuff, doesn't get much more blue collar), and in a couple years was supervising the assembly of Warships making thousands of dollars a week - SV eat your heart out.
This is something Mike Rowe has been advocating for years. Not only is college not cheap, even if it was free it's a worse option in every way for a lot of people.
Because "inflation" only exists in the sense that someone has arbitrarily decided what to measure, how to measure it, how to add or remove items from lists, and how to weight everything...and the cranky codger economists that decided to create the index as it is are obviously not experiencing price inflation.
It is not uncommon for an older person who is 30 years into his career and 25 years into a mortgage to be paying less than 5% of his income in housing costs. Recent college grads in this economy have faced what could probably be called hyperinflation...my own rent prices have increased 3x from less than a decade ago, and while I'm relatively well off, rent is still 30% of my income. For some of my peers, it's closer to 50%. If rent goes up 4 percent again, some of those people will have outpaced the CPI on just their housing alone!
Young people have seen their health care expenses skyrocket as well. Old people, thanks to various legislative ways to spread costs around, haven't. Same goes for education: older people don't need it anymore, young people are breaking their backs trying to get it.
I think it would be fair to say that in terms of what the working population is experiencing, our official inflation figures are severely understated. Inflation is legitimately hard to measure. The fact that we take a handful of metrics that only a few people can barely understand, and we base our entire monetary policy off of it should be alarming to everyone. But it's not, and it won't change until long after it has broken an entire generation of voters.
There's unfortunately a simple reason why costs like housing and education can explode without triggering inflation - if everyone reallocates their spending to these two areas, they are buying less in other areas. Less demand = lower prices. That is, a rise in prices in some areas does not imply inflation goes up even if those areas are very important.
That said I do think the "mystery" of where the inflation went is easier explained in other ways. It's not housing or education necessarily. It's debt and stocks. The bulk of the money poured into investment assets that aren't counted in inflation stats at all.
What was the last bull cycle that delivered life changing jobs to those who were low/mis-matched skilled and how sustainable was that? The tail end of most expansionary cycles I've seen are just speculative blow-offs.
Also where's the inflation ? Equity Markets are up over 130% since 2010, while earnings are up ~ 50%. These are some of the most expensive markets we have seen (barring the dot-com boom which was more large cap centric)
QE and the various central bank interventions I'd argue have elevated equity market prices (asset inflation) while increasing income disparity and delivering disproportionate gains to those invested in stock markets -- (not saying there were better alternatives in the years following the 2008 crash, but here we are).
Even optimistic / supporters of the stimulus / spending way back then were sure we'd see some inflation we could tie to that whole thing, and others predicted lots of inflation,
as far as I know they never did see much.
I think the lack of inflation has been a mystery for a long while now.
As well, have you noticed that the size of food products has been cut by 10% or more? A "pint" of ice cream is actually 14 oz now. That's a decrease of 12.5%, but same price. Same goes for orange juice, packages of bacon are 375g instead of 500g, etc.
Gas has been at multi-year lows (until recently) and yet in CA the price of gas was still almost $4. Now, as oil rises, gas will rush towards $5/gallon and we are like the boiled frog because it happened so slowly we didn't notice.
Rather than inflation, this is because of the Baumol cost disease. American labor is too expensive to cost-effectively spend it manufacturing jeans anymore.
> As well, have you noticed that the size of food products has been cut by 10% or more? A "pint" of ice cream is actually 14 oz now. That's a decrease of 12.5%, but same price. Same goes for orange juice, packages of bacon are 375g instead of 500g, etc
There are also clear cut examples of food portion sizes rising over time. Most pints of ice cream are still full pints; Haagen-Dazs is the main brand that shortchanges their pints.
Are you saying the measurement is just for say a gallon of milk isn't for a gallon anymore or something?
I'm not sure that makes sense....
This is common knowledge. Just because you think "it doesn't make any sense" doesn't mean it's not happening. A gallon of milk may or may not be exactly a gallon depending on where you buy it from, just like OJ. It's gone from 64 oz to 52 oz this year.
Raising rates in good times means more of a lever to pull in bad times. Letting the credit bubble continue to inflate, while keeping rates arbitrarily low to let a bull market run for benefiting the wealthiest, makes little sense historically.
But regardless of the money multiplier, raising rates does still have a negative impact on market outlook and optimism. Not too much to worry about probably. unless you are looking to buy or sell a house with a low down payment.
Probably because of the methodical changes that have happened to how employment is calculated post 2009 compared to before…
As a semantic aside, the index call to the single reference was unnecessary, lol. Just trying to help.
For those of you who have other mindless things you would prefer to spend hours on in your life and have no interest outside of wanting a quick fix: ~17,000,000 million disappeared from the numerator since there is a lot of flexibility in ("People are classified as unemployed if they do not have a job, have actively looked for work in the prior 4 weeks, and are currently available for work."). People are fooling themselves if they think the employment rate is relevant signal anymore for determining the strength of the economy, it hasn't been in 10 years.
Much easier for me to see that volatility didn't have much further down to go, swing in and out of it taking profits and building a better position before it blows, and here we are people finally noticing that things aren't what they seem…
I'm much more likely to be able to push the dirt on this glorified ant hill we call earth through the outcomes of my actions, than anything that I could ever say with words.
Of course Fed should attempt to suck at least some of that excess out of the system.
The Fed kept short-term rates close to zero for nearly a decade. Longer terms rates were negative for many years.
All of the world's central banks joined in the orgy of money creation.
The Fed's balance sheet (assets bought by conjuring money) ballooned 4x in the same time:
This Fed will now face unprecedented political pressure to reverse its course of monetary tightening and balance sheet unwinding. The President will almost certainly lose an election held during a recession.
But reversing course is going to be very difficult, given the sharp and sustained rise in inflation over the last few years:
Oddly enough, it looks like the President has the legal authority to fire the entire reserve board if he so chooses:
Upon the expiration of the term of any appointive member of the Federal Reserve Board in office on the date of enactment of the Banking Act of 1935, the President shall fix the term of the successor to such member at not to exceed fourteen years, as designated by the President at the time of nomination, but in such manner as to provide for the expiration of the term of not more than one member in any two-year period, and thereafter each member shall hold office for a term of fourteen years from the expiration of the term of his predecessor, unless sooner removed for cause by the President.
Never before in the modern history of US banking has there been a President with so much drive to kick convention to the curb, nor a Federal Reserve that has painted itself into such a small corner.
If I were a gambler, though, I'd bet on the President. One way or another, the Fed will be forced to reverse its balance sheet unwinding and short term interest rate increase campaign.
"The law goes back to the 1940s when President Franklin Roosevelt removed a member of the Federal Trade Commission and cited as a reason their divergent views of public policy. The Supreme Court unanimously reversed the firing, saying executives of independent agencies cannot be removed in their term of office except for cause. These agencies “must be free from executive control,” the court ruled."
I would be interested to learn more so it would be great if someone has more info to share.
What's more, the active term is "for cause," which is an exceedingly low bar.
In labor law, requiring termination "for cause" is the opposite of permitting termination "at will".
Why not do the obvious, which is to give every adult some free money each month? Most people are not rich and so most of it gets spent very quickly on goods/service? I live in Australia and this happened back in 2008 to stave off a recession. I remember twice getting cash in the bank account without having to do anything! I am not an economist so forgive me if this is a banal question.
Stimulating Savings: An Analysis of Cash Handouts in Australia and the United States. http://press-files.anu.edu.au/downloads/press/p269601/pdf/st...
The federal reserve isn't equipped to do this; the federal government would need to do it (as it has before using the IRS to distribute stimulus checks). The federal reserve is equipped to buy up as many bonds as necessary to put a floor under assets.
EDIT: Could the federal reserve assume an aggressive policy posture and expand out of its swim lane in creative ways ? Sure, but it hasn't shown the initiative to do that.
 https://www.marketwatch.com/story/fed-should-forget-about-it... (Federal Reserve should give everyone checking accounts, new study says)
QE was about getting liquidity back into the essentially frozen banking sector, not getting demand into the economy. You can make an argument for causality (in either direction!) between the two, but the proximate problem being addressed was a specific crisis and not a macroeconomic goal.
It's better to think of it less as buying them back and more as not releasing as many into the market.
It allows Congress to have more spending (or more tax cuts) for a given amount of actual deficit. What Congress chooses to do with the extra money is their business rather than the Fed's. They could use it to make cash payments to everyone if they wanted to -- or middle class tax cuts, which are nearly the same thing but much easier to pass.
Since the supply of goods and services is fixed in the sort term, pouring more money into the economy doesn't change anything in terms of consumption. Only, prices go up, because there's more money competing for the same amount of goods and services. These idea is called "neutrality of money".
A better use of the money is infrastructure spending. It provides employment across multiple sectors and targeted correctly is one of the best investments a government can make.
How do you know?
Serious question: Would anyone realistically have a better idea than the fed about that?
Given the warnings, how long should it take to "get ready"? And should the Fed "wait for it to be ready"?
How much higher do you think that number should be?
Despite have marginal rates >70%, very few people ever paid them.
For a less partisan source, with a neat "pick your income" chart that illustrates the flaws in the Mises argument for sky-high incomes (try anything over ~$500k/year), https://qz.com/74271/income-tax-rates-since-1913/
$15 per hour for a teenager to sweep floors — now that’s being overpaid.
If you think you are undertaxed, there is a solution:
In 2018, just over $700,000 has been donated. So clearly all of us “overpaid” people don’t really care.
I pay taxes for public transit I don’t use, public schools my kids don’t attend, healthcare I don’t consume, wars I didn’t ask for, bridges in places I’ll never go. I subsidize food for people I’ll never meet, housing, universal service fees; I pay sales taxes on everything, excise taxes created to pay for a war almost 100 years before I was born, subsidies to farmers, oil, green energy — we pay for all of this stuff. I am on with paying taxes, but dammit, I pay enough already. Over half of everything I earn goes to pay for government. I even had to pay US taxes when I didn’t even live in the US.
I understand taxes are necessary; but it’s not fair that I work 1 day for the government for every 1 day I work for myself. It doesn’t matter how much I get paid, what matters is that half of everything I do goes to taxes.
I worked very hard to get to where I am — that ought not result in being punished for it.
I consume just as much “government” as the guy standing next to me; why should I have to pay more than him?
The Fed’s debt is made up of (other) Treasury bills which it purchased during QE using “printed” money.
If this makes your head spin, then you’ve probably understood it correctly.
> The interest that the Fed collects on its investments is paid by the federal government, and then returned to the government. But this wash cycle still saves money because those interest payments would otherwise be made to the outside investors who would have purchased the bonds.
> “It’s interest that the Treasury didn’t have to pay to the Chinese,” Ben S. Bernanke, then the Fed’s chairman, told Congress back in 2011, when the annual windfalls were still new and surprising.
Besides, even after the tax cuts, the government has collected record revenues this year. We are collecting plenty in taxes — but we are spending it wrong.
Here is a list of some of the more ridiculous expenditures:
None of the 9 listed in the article sound particularly egregious. Almost all are grants to research institutions, which as a process has a lot of flaws, sure, but unilaterally cutting all grant funding is definitely not the solution.
The report totals at $5 billion, but the supposedly most egregious are not even in an order of magnitude near that cost.
Meanwhile, federal income is measured in trillions.
If you want to actually cut federal spending, you have to cut pensions or military spending—political suicide.
Of course, the problem with this economic philosophy is that it can be difficult to implement given political constraints. During bad years, there is a sense that the government needs to tighten its bootstraps, and during good years there is a sense that the government has the money to invest. While this is a good philosophy for household budgeting, it just turns the government into a pro-cyclic actor, which is the opposite of what we want.
 As long as the money makes it throughout the economy that is.
Democrats don't want to cut social programs like Medicaid and Medicare. I mean, everybody needs health care so those costs are not avoidable. Unfortunately, health care costs too much because the industry overcharges.
So what does that leave us with? Well mostly military, and the Republicans (and probably many Democrats) only want to increase it. It's over $700B a year now.
If I could wave a magic wand I would:
1) Tweak social security witholding rates to ensure continued solvency. Probably the easiest thing to do.
2) Bring health care costs (ie what providers charge) down to developed world standards.
3) Either raise taxes enough and/or lower defense spending enough to balance the deficit.
It seems simple to me. But it means some people in healthcare and the defense contractors will make less. They would fight it so that's why everything stays the same.
Which is another way of saying, it's unpalatable to politicians to focus on spending side cuts, in pretty much every regard. Even Republicans have become a party of no spending cuts, they've entirely abandoned the premise (which was a core party pitch for decades).
More realistically, problematically, there's very little spending to cut except for military (which neither party will argue for, save for a few outlier politicians). Nearly all of the above-inflation spending growth is in entitlements, debt interest and military.
The budget deficit and debt interest are high enough now, that they nearly equal (or do equal) the cost of all military spending. So if you want to balance the budget, you'd have to wipe out the US military; or cut military spending in half (shave $300b-$350b), and very considerably raise taxes on the top 1/3.
There's nobody interested in touching the third rail of entitlement cuts. Few are interested in arguing for military spending cuts. There isn't much that can be done about debt interest expenses, US debt per dollar is already historically very cheap (they'll have to go the way of Japan sooner than later, slashing that cost as low as possible with perma low rates, that creep lower with every cycle, reducing economic dynamism and growth along with it, culminating in Japanese style economic stagnation). So in short, all that is left to cut - things that enough people will agree on cutting - is relatively little edge expenses.
That's the reality of why spending isn't looked at more often for cutting.
It's actually still possible to fix this fiscal mess, there's no will for it however, few are willing to eat the shit necessary to do it.
Here's the sane, Save America From Financial Ruin, plan:
1) Slash military spending by $350 billion. Pull back from global policing. Cut almost everywhere as it pertains to the military. This will leave a vacuum for Russia and China, which they will expand into, that has to be accepted. Regional militaries will have to step up to counter that, such as Japan, South Korea, Germany, France, UK, etc. The military is primarily a human employment cost, slashing the military in half would result in two million unemploymend persons, that would have a serious cost initially to it. Over time those persons would become net tax contributors, instead of primarily a net spending cost (soldiers sitting in buildings are epic net cost centers and very poor producers of economic activity and tax contribution).
2) Raise several hundred billion dollars per year by increasing taxes on the top 1/3. Needs to be at least $300 billion, ideally more.
3) Abuse the USD global reserve standard while we have it, and while the dollar is relatively high. Use it to cheaply refinance our debt to as low of an interest cost as we reasonably can. Every $100 billion per year we can shave off of the annual debt interest cost, is a big plus.
4) Freeze entitlement spending increases for ten years. This will involve pain, nobody will be happy about it. It's better than cuts, which is even more ideal. Slightly increase worker contributions to these programs to shore them up further.
5) Freeze nearly all other government spending for ten years, no matter what. It will be painful, that's part of the process. Raise the gasoline taxes by quite a bit, that all goes into infrastructure to offset that that segment isn't going to get any inflation adjustment for ten years.
6) Hammer down costs in education and healthcare, which will free up capital for economic investment and wages. The top 1/4 income bracket receives an income / wealth transfer in the form of the outsized US spending on healthcare. Redistribute that back to the bottom 3/4, by slashing healthcare costs by a lot. This will push up wages for the bottom 3/4, and reduce wages for the top 1/4 (who are the overwhelming beneficiaries of healthcare spending). Doing this right, can both broaden healthcare access/coverage, and offset the hit the bottom 3/4 will take from various freezes on spending increases.
The first five items will get you to a balanced budget, plausibly a modest surplus. After a decade of freeze, relax spending increases to something modest, 2% max, for another decade. You'll be at a budget surplus, the economy will hopefully be larger in real terms, and your ratio of debt to GDP will rapidly begin to decline, as you both outgrow it and modestly pay down some of it. You can also continue to somewhat abuse the USD reserve to have the Fed buy and cancel out the most expensive US debt (effectively debasing some of the wealth held in USD, by slightly debasing the currency, but that wealth is overwhelmingly held by the top 1/3, so it's really a stealth tax on the wealthier block of the population).
You can't really stop a government from borrowing except by taking away the power to print money. Grab your popcorn and watch Italy a.k.a. "Greece: Part II" over the next year to see what happens when government overspending meets currency it doesn't control.
The debt ceiling isn't in the Constitution, and, as such, doesn't really demonstrate anything relevant. OTOH, all wars are characterized as defensive, and the US has usually been at war, particularly in the times of concerning deficits; aside from—if construed to require formal declaration of war for borrowing—making declarations of war more common, I can't see that the proposed restriction really would have changed much even if it existed and weren't amended out.
> You can't really stop a government from borrowing except by taking away the power to print money
Taking away the power to print money prevents monetizing debt, but it doesn't prevent borrowing (it actually eases borrowing, which is one of the reasons for having independent central banks separating monetary from fiscal policy; the degree of perceived risk of debt monetization makes borrowing more expensive, so controlling that risk facilitates borrowing.)
I doubt that breaking point is as high as it was in the late 1990s, both because of the debt load in the economy being higher and markets being a lot more sensitive to rate hikes after nearly a decade of exceptionally low rates.
More broadly, mortgage rates just hit a seven year high. That's going to start to slam the brakes on some economic activity as people re-adjust to more expensive borrowing costs. It'll soon climb well over a 5% average for the 30 year fixed at the rate the Fed is hiking. That's cheap vs the 1980s, however consumers have been spoiled. On the affordability upside, it'll start restraining house price increases.
Corporations are fairly well loaded up with debt. That's all going to start getting more expensive. The increase in interest costs over time will to a modest degree eat into some of the profitability gains the corporate tax cut delivered. Fortunately for US corporations, their profitability is also at an all-time high, if they're smart about it at all they can trim back debt as it gets more expensive (we'll see, I'd expect a mixed bag of behavior).
Better to look at the fractional reserve system. The Fed creates money (M0), a lot of it in the shape of quantitative easing. But it was offsetting the deleveraging banks (reduction in M, M2 and M3). M0 = cash, M1= M0+ short-term instruments, M2= M1 + medium-term, M3 = M2 + long-term stuff /mortgages.
Even now, banks are less leveraged due to more stringent capital requirements (think Basel accords).
Translation to inflation is tricky. It's about demans vs. supply at its fundamentals - too much supply them you introduce inflation. Since banks can create money, supply is governed by M1,M2,M3 depending on the horizon. Demand is the economy which looks to be booming. Plus in the case of the US, the dollar is still the global reserve currency. So we have China, developing countries wanting more dollars. And the world still uses it as a vehicle currency, trade in brent oil is in dollars.
And we have inflation expectations - which is why the Fed is independent. And Trump should be quiet. The Fed will target 2%, thus we expect it to be 2%.
McSquared - The Coming War between Trump & The Fed: https://www.youtube.com/watch?v=xnYZwxzxd9Y
When phrased like that, you realize there is literally no debt an individual could possibly take out which offers a higher return on investment than student debt. For example, lets say you take out $60k @ 4% and plan to pay it off over 20 years. You'd pay $27k in interest. But if that enables you to upgrade from a $40k/year job to a $70k/year job, you've literally paid for the interest in the first year.
The reason it gets complicated is because not everyone invests their student debt as well as they could. So not everyone sees a rate of return like that. Lets say we solve that by allowing student debt to be subject to default; sounds like an interesting idea because banks would make smarter investments. That means investing in students who take traditionally high-earning degrees (STEM?) and students who have a good academic history.
Uh oh. Now this doesn't sound so good. We'd probably see discrimination against lower income students because they statistically show poorer academic success in high school, discrimination against poorer performing schools, centralization of students into high performing schools causing wait lists and overcrowding, discrimination against liberal arts and low-performing degrees, the list goes on. This probably isn't a better world we've created.
The big things schools need to fix is overwhelming growth in administrative costs. I don't think that problem is in student debt itself and as a concept, but where the problem actually lies doesn't have an easy answer.
Or, to put it another way, wiping out all student debt in the US would increase the national debt about 7%. Hardly catastrophic sounding.
Maybe forcing people into debt to pay for a necessary education is the moral hazard, and we could pay off that debt and publicly fund secondary education like most of the rest of the developed world already does.
Let's say we have a very responsible government which taxes well, reinvests well in productive work, private markets that operate smoothly, why does the FED have to step in periodically to raise/lower interest rates (outside of very bad circumstances).
Another way of asking this question is, "What is a neutral rate?" or "What is an economy in equilibrium?"
Manipulating the supply of the dollar via interest rate adjustments, along with open market operations, is how the Fed attempts to control inflation.
One of the Fed's purposes is to moderate that cycle. And clearly it does not always succeed, but there is no reason to believe that the economy would reach some kind of equilibrium or neutral rate without it, because we know that didn't happen before the Fed existed.
I wonder if there's a better way to do this though. Maybe letting lenders fail, arresting bankers for not pricing risks in loans and setting an example is a better way to set up the money supply?
The busts are only painful if they affect non-speculators. Speculators (lenders and borrowers) should handle their own risk?
I'm sure it's not easy but the current system really really favors the rich with resources at the expense of retail retirement stock holders.
I'm not in favor of arresting people who did not break any laws, and it's not illegal to misjudge risk when making loans.
All it takes to stop boom/bust is full reserve banking and abolition of central bankers. Very simple, technically. After that to get yield on savings, people must invest in funds and be exposed to their relative lack of liquidity. Good bankers can keep things relatively liquid anyway, at least when times are stable, but you'd still have to wait to get your money back if you wanted out of investment funds. The underlying mechanics of finance are exposed: loans still occur, but investors see that their money is gone from their current accounts until the fund reaches maturity.
Now, will the citizens or politicians tolerate the long sucking sound as all the unstable credit is withdrawn from the economy? No, probably not. It's politically hard, not technically hard.
I don't expect economy to reach equilibrium, some mythical state of neverending growth. I want economy to stay dynamic, with boom periods interlaved with occasional, small crises.
Once you introduce Debt you get cycles. If I make $50k and can borrow $10k, I can spend $60k despite $10k of that $60k being "created from thin air". This creates an exponential growth curve whereby if I'm spending $60k, the sum of all the people who receive the $60k I spent could borrow $12k, allowing them to spend $72k. And so on.
When spending (and thus growth) is high, the central bank increases interest rates to slow it down, because too much spending leads to rising price of goods, which leads to inflation, which is not something anyone ever wants too much of. When spending is low, the central bank drops interest rates to ramp it back up.
Its easy to say "we should just get rid of debt", but the issue there is that we know debt works, when used well, even over the long run. Think about it: If I want to open a business, there's no way I can afford that without Debt. So I take out $100k. In five years, lets say I've made $500k total. I can repay that $100k, even with interest, and have a bunch of money left over. My productivity (ability to generate income) increased, and it was only possible because of Debt.
So we can get rid of debt, but we know that over the long term the economy will grow slower without it than with it. Its the job of the fed to try and keep as much equilibrium as possible, which is insanely difficult given the complexity of a 7 billion actor economy, many of whom do not treat debt with the respect it needs.
> Its easy to say "we should just get rid of debt", but the issue there is that we know debt works, when used well, even over the long run. Think about it: If I want to open a business, there's no way I can afford that without Debt. So I take out $100k. In five years, lets say I've made $500k total
This is the part where I fumble. In a society with 2 citizens and one bank, if citizen 1 borrows $100k, the maximum profit they can make = money borrowed by citizen 2.
Three cases in the above example with 10% interest:
1. Citizen 2 doesn't borrow but instead just lives by hunting deer. Citizen 1 and the bank will go bust
2.Citizen 2 borrows 200k and spends 100k on something citizen 1 provides. Citizen 1 makes 100k profit and repays the loan with interest, say total 110k. Now citizen 2 is still on the hook for 220k. How will Citizen 2 get 220k if he has only 100k left and the other citizen has only 90k left? The only way I see it is they produce another kid who takes another loan.
3. Citizen 1 takes 100k loan, Citizen 2 takes 5k loan. Citizen 2 pays 5k to Citizen 1. Citizen 1 did not make enough to repay the 10% interest. So bank sucks it up and gets back 105k. Citizen 2 absolutely doesn't have any money to repay that 5k loan they took. So both Citizen 1 and 2 are busted. What now? They have to take more loans infinitely? (Short of producing other citizens who take loans)
I would really appreciate your views.
But, reality isn't as simple as that example.
The biggest thing that's missing there is Collateral. Lending isn't about just dollars; a bank is happy to loan you $100k if you've got $100k, or even say $50k, in assets to write on there. Because if you declare bankruptcy they can send their goons to your house and take everything you own.
Another way to think about collateral could be something like "intrinsic productivity"; its the things you own due to your own work and brain, not because a bank bought it for you. Everyone has something like this. Even back in 1200 BC, you were cutting down forests (with your hands) using an axe (which you built) to make a farm (which you run). That's collateral; it has value because human nature gives it value, not because it has a dollar sign attached to it. The bank can recognize that and assign a dollar sign to it. Hell, in civilizations past, you could be collateral; if you default, you get sold into slavery.
Another more minor thing that's missing is that the number of dollars in the world isn't a zero sum game. The fed is constantly printing more dollars. That's a job of a central bank. And its not just to replace bad ripped up dollars; they often increase the total amount of dollars in the world.
When they want to put more money out there, the Fed buys assets from the public using money that didn't even exist before the purchase. That right there is the power of the Central Bank. Normally this takes the form of buying Treasury Bonds back from the public, but I don't want to get too deep into the weeds of "where did these bonds come from in the first place"; conceptually they can buy any asset, and because the money they just bought it with didn't exist until right now, they've added dollars to the system without impacting the "net value" of goods in the world. Then in the future, if they feel there are too many dollars, they can sell those assets back to the public.
> Normally this takes the form of buying Treasury Bonds back from the public
This is the scary part though. The major way "new money" comes into existence is by the pledge of the government (and thus citizens) to pay the Fed back.
Extrapolating my earlier example, If citizen 1 is US Treasury and citizen 2 is a real person, the only way citizen 1's (US treasury) debt can be repaid is if citizen 2 (real person with no assets besides intrinsic productivity) borrows at least as much and pays to citizen 1 or produces a child who also takes a loan and pays to citizen 1(setting the debt into perpetuity for all US citizens).
The alternative to paying US dollar denominated debt seems to be taking all US citizens' intrinsic productivity (assuming all collateral is already taken away)
Is there any money that is not debt to the Fed? I'm not saying Fed is evil but I don't see the sustainability of this system unless there is a "constantly increasing supply" (not gold, land which are limited) of wealth that is not debt or falling back to some form of slavery.
Another way to look at this is: Even if I am prudent and don't take on any debt but bootstrapped myself into wealth, I'm subject to debt to the Fed simply because the treasury owes money to the Fed, simply because that's how money was created in the first place.
A Treasury Bond is more the opposite; its a debt where the treasury is the borrower. The simple goal of T-Bonds is such that the government makes an assumption: the rate of GDP growth (and thus taxes) will outpace the rate at which they have to pay back their interest. This has almost always been the case, including today.
> I don't see the sustainability of this system unless there is a "constantly increasing supply" of wealth
There is a constantly increasing supply of wealth (lets call it by its real term: Productivity). Our population is increasing. And we're getting better at building technology. These are the two primary sources of increased productivity. When Productivity goes up, GDP goes up, and taxes go up. Debts get repaid.
Maybe this isn't sustainable over the long term. But nothing is sustainable over the long term. That's not the point of an economy. If you like toilets, and iPhones, and $5 shirts from H&M, and HackerNews, then you have to respect that it works for us. And it'll probably work for our children too, because as long as we keep having children Productivity will increase.
Here's another way to think about it: We are on this planet for 80 years. That's it. We need to engineer systems that maximize those 80 years for every interval of 80 years every person has. That's why we have Debt; otherwise our only Wealth would come from (1) inheritances, and (2) our intrinsic Productivity. That doesn't sound like a great system to me.
But they are. The origin of fiat currency is exactly that. Historically, dollars were backed by something (gold, assets) held by central banks from citizen deposits.
But today, they are backed by nothing. Fiat dollars are simply loans taken by US govt and private citizens.
While that does keep the economic engine running, it's all running on debt. Debt by citizen 1 creates money. Citizen 2 sells them corn to get that money. Citizen 2 takes that money and more debt to buy a tractor from citizen 1. Then time comes to repay money and one of them defaults. Central bank seizes assets of the defaulter for not returning the money they printed out of thin air in the first place.
That system is great if there was some base backing so that savers are not disproportionaly affected. But todays massive boom busts take down the whole world except the 1%.
I mean, why should a newborn baby pay more taxes for the debt of Citizen 1 (US govt)?