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Fed likely to keep raising rates (reuters.com)
116 points by petethomas 5 months ago | hide | past | web | favorite | 182 comments

There seems to be significant disagreement over how robust this recovery is. It’s hard to separate out political posturing from rational economic argument, but the macro indicators certainly seem powerfully positive.

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.

> But I personally worry about knocking the legs out from under the strongest bull cycle we’ve ever seen

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.

A corollary to this is the theory that the bull cycle may actually be what causes the bear cycle. Irrational exuberance and all that. Best to pour water on the flames, not gasoline.

For some reason the notion of Economists “Pour[ing] water on the flames” of a bull economy made me think of the doctors “bleeding out the bad humors” from the front page story here a couple days ago about the techniques used in treatment of George Washington’s final illness.

Low interest rates are no longer a very good stimulus during slumps because few want loans then anyhow. We are no longer a capital intensive economy. It's better to pay down debt during high points so that say infrastructure projects can be created and paid for during slumps. Infrastructure wages flow quickly into the the "99%" economy, unlike many alternative stimuli.

Even at zero percent, there is always the helicopter drop, as non-conventional as that is.

As has been noted elsewhere on HN, helicopter money isn’t actually that non-conventional: tax breaks/rebates are a pretty standard way to goose the economy, but you’re right in that anything past that is sort of terra incognita in the US.

Tax breaks mostly flow to the wealthy, since the poor pay very little income tax. And the wealthy tend to sit on cash during slumps. Thus, tax-cuts are not the best stimulus. The best stimuli are those that flow to the middle and lower classes, who are more likely to re-spend any gains, cycling money quicker into the economy.

Tax breaks are different as they do not create new money. Tax refunds can however.

The problem with zero percent is that it allows corps money too easily, which can lead to sloppy capitalism.

The Feds balance sheet is nuts. We all knew they’d need to deleverage at some point.

The bonds on the Fed's sheet will mature by themselves, no need to do anything with them. (Though I don't know what they are/will do with coupon payments.)

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'm no republican, heck not even close to US. But the timing of it raises eyebrows.

Well I wasn’t going to go there, but yah. The timing does smell a little.

This whole bull market was built not on growth but on stock buybacks by the companies themselves, using free money printed by the Fed. There has not been any real growth.

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.

You're at the wrong bank my friend. Alliant Credit Union is paying 1.9% at savings accounts and has been paying >1% for a year or two.


> People can’t seem to figure out why inflation is so low with employment so high.

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.

You're saying the cause is an increase in household debt? That would seem to cause inflation, not keep it low?

It isn't new debt, the increase in debt already happened when interest rates were at zero.

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.

Technically it's not new debt. It's the cost of servicing an already existing debt.

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.

> Then there's another question, if someone is paying more, it means someone else is getting paid more.

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.

I am not an economist but I think we’re just measuring inflation wrong: anecdotal, but I have noticed for my peers housing and education is now expensive to the point where there aren’t many dollars left to participate in other economic activity.

I'm a systems engineer in Seattle. Thanks to my student loans I can't afford a house, I can't afford to have a child with my wife - thankfully my employer is kind enough to provide health insurance or else I'd probably be screwed there, too. Anyone who thinks this economy is booming is kidding themselves.

Maybe it is time to leave Seattle? It is pretty entitled of you to say that it is your human right to have a house in one of the most expensive metros in the country.

The economy is booming. Go find a new job. You will be able to and you'll get a pay raise.

Cities aren't inherently expensive. Even in some of the richest and most prosperous cities in our human history, there have always been people less well off that could afford to live there. The only reason we have this concept of cities that only exist for a certain class of people is because we have deliberately made them that way.

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.

I'm sympathetic to people living near where they grew up or where there family is at. I live where I live because of family. If it weren't for them, I would have left after college and never looked back.

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.

Likewise, no one has the right to restrict density on property they don't own.

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.

It's booming for some people. You and I are not those people.

We think the economy is booming because these costs are increasing (inflation). Stupid.

Same with GDP. A 50 car pileup will increase GDP!

Can you please explain this to me in more detail? Costs inflating causes economists to think the economy is booming, how? Is it based on how they measure “economic boom”?

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.

1. Most central bank economists have abandoned the standard of price stability, and now target a specific CPI number. The Fed targets 2%, for example.

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.


It's worse than that. Central bankers define 2% inflation as price stability. 2% isn't even stable, it's compounding, prices go up more every year than in the previous year, and CBs say they achieved "stability". Odd use of the word!

Myopic and hyperbolic. While this may indeed be what you're experiencing, and while it sounds as if you're being very negatively impacted, your experience is not universal and is likely due to a number of contributing factors (a couple of which you've hinted towards in your post).

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.

I'm actually rather happy with the choices that I've made in this economy. I would be much worse off not making these choices - however, almost everything I want is unaffordable....things that I view to be human rights.

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.

I’m waiting for housing to drop in price over the next few years. The boomers are dying. Their houses, and I mean all those investment properties as well as their private homes, will hit the market when their kids don’t want them.

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.

Friend skipped college and joined the electricians union during the 2007-8 crash. Started his own business three years ago and is already charging essentially whatever he wants as most electricians are old and retiring. He barely knows any electricians our age.

I knew a man that joined the Navy because he advanced so fast as an electrician that in his early 20s he had people working for him that had been in the industry for 30 years and he was tired of being hassled by them.

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.


Unfortunately it’s not just about the money. In many circles of our society, non white collar work is seen as inferior and lower class. This stigma needs to be lifted before we can expect more people to enter these trades.

The stigma will automatically be lifted once people see non white collar workers living in the nice parts of town sending children to the nice schools and generally having a nicer quality of life.

Maybe. Or maybe it'll just cause frustration, resentment and denial when people realise the expensive degrees that were supposed to confer on them a superior intellect and lifestyle don't seem to have worked.

It looks like the US population is expected to increase [0]. If the boomers are dying, it looks like we're going to have people to replace them.

[0] https://www.statista.com/statistics/183481/united-states-pop...

In theory housing prices could still go down if the people replacing dying boomers have less money to spend on housing.

Just to follow up on this thought: in theory this would not be a departure from the historical norm unless boomers are more wealthy in comparison to incoming people than previous generations of older folks were.

It won't happen within a few years. Boomers are still relatively healthy thanks to improved health care. If you count on that, then you should expect at least decades more.

Let’s not forget medical care.

Included in inflation measurement ( https://www.bls.gov/news.release/archives/cpi_09132018.htm ), but alas it's not perfect, because employer paid portion is increasing, but it's not counted. (A methodology change can be easily argued for, the BEA had a healthcare expeditures price index, but it stopped updating it in 2014.)

There's been plenty of inflation in sectors like education and healthcare except the government, conveniently, doesn't count that as 'core.'

Inflation is pretty well measured (and "core" - which is a term not used by BLS - includes healthcare, education but does not include food and energy: https://www.bls.gov/news.release/archives/cpi_09132018.htm ), but there are a lot of crackpots out there, for example read this detailed rebuttal of one such:


>> " knocking the legs out from under the strongest bull cycle we’ve ever seen ..."

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).

> People can’t seem to figure out why inflation is so low with employment so high.

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.

Hedonic adjustment as it's called and the weird games governments play over housing is a part of it, but not as impactful as you'd think (I looked into this some time ago).

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.

The lack of inflation has been a "mystery" since even the stimulus time during the recession wasn't it?

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.

It's not a mystery. Inflation is everywhere, but the government isn't measuring it. Clinton moved the goalposts by saying that people would downgrade the quality of their purchases as the price increased. So for example, instead of buying authentic Levi's jeans, they claimed that people would buy cheaper Chinese-made jeans.

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.

> Clinton moved the goalposts by saying that people would downgrade the quality of their purchases as the price increased. So for example, instead of buying authentic Levi's jeans, they claimed that people would buy cheaper Chinese-made jeans.

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.

Gas has been / is still low in my area.... not sure that has gone up much.

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.

I get that products are downsized....I don't necessarily think that automatically translates into government inflation numbers. There's nothing about inflation or government stats in your link at all...

Do houses, health and education just eat up any surplus money that could cause inflation?

Or how is it that houses, health and education don’t count as inflation?

Aye, there's the rub. Inflation has more to do with its measurement than it does with the economy. Measure it a different way and you can tell a different story.

I don't know why this is downvoted. Inflation in the USA absolutely is mysteriously low right now. It's a lot easier to explain 5% growth and 3% inflation than 2% growth and zero inflation, even if they work out the same for the median (average?) worker who has no assets and no debt.

Only because of the relative strength of the dollar. We are literally living off the backs (labor) of Chinese workers. Once it plunges, you'll see the real reckoning at hand. It will be stagflation, and people will dump dollar denominated assets faster than you can say BOOYAH! Inflation always lags.

There are two major levers to recover from a down turn - monetary policy and fiscal policy. In the last downturn, 2008, both were heavily pulled - most people forget this but monetary policy was (rightly in hindsight) a near instant drop and fiscal policy was all the hundred billion programs like TARP.

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.

One argument is that all the easy money is going into housing.

well, for better or worse Fed rate hikes have less of an affect on the money supply when banks can loan each other money more cheaply than getting it from the FED (ICE LIBOR [1]).

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.

1 https://en.wikipedia.org/wiki/Libor

Not trolling: Do you believe the fundamentals of the measurements are correct?

> People can’t seem to figure out why inflation is so low with employment so high.

Probably because of the methodical changes that have happened to how employment is calculated post 2009 compared to before…

Could you elaborate on this? I'm not familiar with the changes made.

Take the time to read through the posts here[0] and you'll see.

[0] https://www.alhambrapartners.com/category/markets/

I didn't downvote you (I don't really downvote, thank you for those who do though), but I think the reason this was voted down is because you didn't provide any substance in your answer, and put a potentially large burden on those who were curious (how much shit will we have to wade through to get to your point). I would suggest giving a brief overview of your point before sending people down a rabbit hole. We just don't have time for that.

As a semantic aside, the index call to the single reference was unnecessary, lol. Just trying to help.

Fair enough.

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[0] 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.

[0] https://www.alhambrapartners.com/wp-content/uploads/2018/09/...

Thank you for taking the effort to clarify your point. I think you would be received more openly if you approached it with a bit less passion. I know what it's like to be a passionate person though, so I can relate with that.

You are probably right, but I kind of don't care, because it is not up to me to decide what others should pay attention to or spend their time on. I can only place my own bets.

I can %100 percent relate with giving up on caring. But your voice matters, maybe a lot more than you realize. Don't give up on us. People are difficult, but we all have beauty hidden within us. We will care if you show us how. We're all the same, but lines have been drawn that we must rage against with logic and passion. You have them both, but you are a warrior without armor. Shield yourself with a cool temperament and your enemies will fall before you.

I don't think I've given up, but I don't know how I'm supposed figure out the magical way to pierce through human difficulty that is unique to every person (esp over an internet connection), nor do I want that burden, its way too tiresome for me.

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…

It's the most tiresome thing there is. Take your position, that's prudent. Cultivating this world takes personal sacrifice. I don't blame you for not wanting to take that burden in full, and frankly, much of your time would be wasted in the effort. Personally, I will die a poor man when this planet is through with me, and that's ok. I would even go so far as to say it's my goal. The scores we keep may be different. Take your money to the grave. I'll be taking the changes that I've made.

I just want to live a good life with my wife, family and close friends, maximize the amount of free time I have, minimize the time I spend working, while avoiding the downsides of other peoples decisions.

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.

What's "loco" is not the tightening now underway, but the super-lax monetary policy that preceded it for many years.

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.

This article says that the President cannot fire Fed Governor at will or because of policy disagreement.


"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.

We used to think that Presidents can't unilaterally enact new trade policy. That also turned out to be wrong.

What's more, the active term is "for cause," which is an exceedingly low bar.

So if the president stacked the supreme court, he might have a chance at overturning that precedent?

> unless sooner removed for cause by the President

In labor law, requiring termination "for cause" is the opposite of permitting termination "at will".

US government is implementing pro-cyclical fiscal policy ­­­– throwing more money into already heated economy.

Of course Fed should attempt to suck at least some of that excess out of the system.

Forgive a related question, but I have never understood why quantitively easing was used to get demand into the economy by buying back bonds. Surely the money will just get reinvested in stocks or other bonds and not stimulate demand? Buy back a rich persons Ferrari and they just go and buy a Bently instead.

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.

I think Australia's 2008 cash handout was a good try. On the other hand, post-handout analysis suggests cash handout was not spent. It was saved instead.

Stimulating Savings: An Analysis of Cash Handouts in Australia and the United States. http://press-files.anu.edu.au/downloads/press/p269601/pdf/st...

> Why not do the obvious, which is to give every adult some free money each month?

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 [1]? Sure, but it hasn't shown the initiative to do that.

[1] https://www.marketwatch.com/story/fed-should-forget-about-it... (Federal Reserve should give everyone checking accounts, new study says)


They did just that. In 2009 the US government sent out "stimulus checks" to nearly every household.

> why quantitively easing was used to get demand into the economy

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.

> Forgive a related question, but I have never understood why quantitively easing was used to get demand into the economy by buying back bonds. Surely the money will just get reinvested in stocks or other bonds and not stimulate demand?

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.

> Why not do the obvious, which is to give every adult some free money each month?

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".

Given that it's cash payments "each month", how can that be short term? If all recipients simultaneously wanted to spend the money on burritos, by month 2 there's going to be a lot more restaurants selling burritos.

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.

If money were neutral, prices would rise uniformly, but this is in fact not what happens.

The people I've discussed that with believe it will kill extrinsic motivation and they believe that is a key pillar of capitalism.

BTW can somebody share a link to where can I download historical data on the interest rates of all the major countries central banks (FED, BOE, ECB, BOJ, RBA, SNB etc)? BOE is the easiest, FED is not hard but for the majority of the rest finding the historical rate datasheets seems not really easy.

Thanks. I know this site but it has (or I just can't find where are the full lists there) really short lists - just 10 last rate changes for every country.

We’ve been in a low rate environment for almost a decade. Rates need to rise but it needs to happen more slowly. Just because the fed has been warning everyone it’s coming doesn’t mean the market is ready for it.

> Rates need to rise but it needs to happen more slowly.

How do you know?

Serious question: Would anyone realistically have a better idea than the fed about that?

I tend to agree here. Any tolerance for "slowness" is anti-free-market. I don't necessarily think completely free markets are optimal, but I can't see a reasonable argument for slower being better than faster in general.

Does the Fed have some privileged information that everyone else does not?

What does that even mean though? The market is supposed to represent something close to the "correct" state of things, based on public knowledge.

Given the warnings, how long should it take to "get ready"? And should the Fed "wait for it to be ready"?

The problem is the fed is trying to prevent a speculative bubble from forming in the stock market. 20-30% per year YOY in the stock market is not the norm.

But that's market's fault, isn't it? The Fed is responsible for entire economy, not just stock market.

Exactly! Waiting would just be the Fed preferring slower movers to faster ones.

They pretty much have to. With big tax cuts and trillion-dollar deficits during a boom time, we're not leaving much in the quiver to use in an economic downturn.

Decatrillion dollar deficits.


Even better, tax really rich people who don't need tax cuts. Poor people will spend any more money they got, and we have a consumer driven economy. We should help poor people, not overpaid software engineers like me.

You’ll need a different congress for that

Maybe, just maybe, we will get one.

The top 10% (many people in HN are in this group, it’s $130k+) already pay 70-80% of all income taxes.

How much higher do you think that number should be?

"The top 10% pay 70% of income taxes" sounds scary until you remember they also control 75% of the wealth in the country.

91% for millionaires, like the good ol' days.

The percentage of all taxes paid by the top 10% hasn’t really changed over the past century.

Despite have marginal rates >70%, very few people ever paid them.

True for the top 10%. Put in the top 1% (~$500k), though, on the effective tax rate chart at https://qz.com/74271/income-tax-rates-since-1913/ and you'll see it has dropped significantly for that population (by about half) since about 1980.

If we're throwing clearly partisan sources around:

Sort-of. http://www.slate.com/blogs/moneybox/2017/08/07/the_history_o...

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/

Speak for yourself. I am not overpaid. I get paid exactly what the market for my skills is willing to pay.

$15 per hour for a teenager to sweep floors — now that’s being overpaid.

If you think you are undertaxed, there is a solution: https://www.treasurydirect.gov/govt/reports/pd/gift/gift.htm

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?

I am paid what the market allows also. I pay tons and tons of taxes too! But it's not better for society if people like me get together and take over the government via regulatory capture and get lower taxes just for us (like paying all the senators to do things we like via campaign contributions and. hiring them when they retire). How much taxes do you think you should pay? Less than everyone else? What if your kids or your nephews say, aren't quite as fortunate as you are, they are sweeping the floor somewhere, and they get sick or in a car accident? Should they just die, or depend on the kindness of strangers or a rich aunt? I think we should take care of the poor, the kids who weren't lucky enough to be born to someone who was rich or a programmer (I was lucky and born to two college graduates, and one was even a programmer :-)).

That’s actually happening. The increase in interest paid on Treasury bills is being used by the Fed to help pay down the $4 trillion in quantitive easing debt they hold.

Huh? Who is paying that interest? To whom?

Anyone who buys Treasury bills is paying that interest to the Fed. So banks, pension funds, social security, etc.

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.

So are you saying that if the Fed prints $x money, it gets back $x money + interest. It is using the interest to pay back the $x money... and then in theory it erases it from its balance sheet. What does it do with the excess money it collects?

Wait, if you buy a Treasury bill, you pay interest, rather than receive? Doesn”t sound right.

Maybe I misunderstand something here, but the debt is of the US govt to the Fed. Rising interest that the Fed collects is the Fed's not the US govt's... That's like asking Citibank to allocate the interest it collected on me to my credit card balance...

No, the debt I’m talking about is the Fed’s own. They leant fictitious money to themselves (quantitive easing). It’s included in the public debt, but it’s not a literal debt of the U.S. government, which a is separate, massive debt.

Why does money need to be allocated for rising interest?

Because the increasing interest on government issued paper needs to be paid by the government


> 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.


You mention tax cuts and deficits — isn’t spending equally to blame? Why is cutting government spending viewed by some as not an option? Those who oppose the tax cuts almost never suggest cutting entitlement spending which is the largest percentage of the federal budget — 56% of all federal outlays are from mandatory entitlements. That’s far more significant than any tax cut effects.

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:


The list of "maddening" items in this article are so comically low-budget it's hard to take this complaint seriously.

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.

A few thousand facebook, twitter and reddit bots and we could get trump fans to start asking for this.

The general economic principle in play is that the government should act counter-cyclically. That is, it should tax high and spend low during good years, then tax low and spend high during bad years. What the government spends the money on is not particuarly relevent [0]. Hiring an army to fill in ditches that your other army digs would serve this purpose just fine. If you are able to spend this money doing productive work, that is a plus; but not particularly relevant to the core economics.

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.

[0] As long as the money makes it throughout the economy that is.

Because nobody agrees what to cut.

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.

I think doctors / nurses / etc would be very resistant to making less. Not sure if it can be avoided but I think we're not in a good situation where someone could make it big being a video game developer but not being a doctor.

Deficits implies spending, as a deficit occurs when spending is greater than receipts.

Because a huge number of the voters that demand lower taxes are on the dole.

Because the majority of American adults pay either no income taxes or very close to that.

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).

The utter political impossibility of what you just described (despite it making total sense) makes be believe that, if the founding fathers could do it over again, the constitution would probably include a provision prohibiting government borrowing except in the case of defensive wars.

It would just have been amended out. Look at the debt ceiling.

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.

> It would just have been amended out. Look at the debt ceiling.

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.)

Yes, I know the debt ceiling isn't in the constitution. My point is that when faced with a legal limit to borrowing Congress always voids it. It would have happened a long time ago if the restriction was constitutional in nature.

Congress can't amend the Constitution, and it takes a much higher bar for them to even propose amendments than to pass normal legislation. So, no, you can't use the debt ceiling (which isn't even nominally a legislative limit on Congress—which would be unconstitutional, as Congress cannot bind future Congresses—but an additional limit on the executive alongside budget limits) to make an argument about the prospects if there were a Constitutional limit on Congress’ part to authorize borrowing.

So will this force all the tech companies that have been raising huge amounts of capital in the private markets to finally go public?

The question is the point where rates start to cause serious valuation deflation. Is that very near? Is it 3%, 4%, 5%, etc? There is a lot of money sloshing around looking for somewhere to go. There's a rather epic pile of cash sitting on the sidelines at this point.

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).

Or, perhaps, go under.

Lack of inflation is not easily understood through the lens of individuals.

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%.

On the plus side, higher rates means lower assets prices and greater wage growth.

How is wage growth getting higher because of higher rates?

This doesn't do anything to address the new Gilded Age we're entering.

Paul McCulley, the guy who called the housing bubble and liquidity trap first, had this to say (18 months ago):

McSquared - The Coming War between Trump & The Fed: https://www.youtube.com/watch?v=xnYZwxzxd9Y

Stupid^3. When (not if) the dollar is dropped, within a decade, as the de-facto intl currency, the American economy, combined with the insane and unsustainable public and private debt, will tank like nothing before.


Are you placing any bets? What are you putting it up against, the Euro? That's a bet I would love to take.

Everyone will be trading in <strike>gold</strike> bitcoin.

This combined with student loan debt is disaster in making


Student Debt is a weird one. The purpose of all debt is to act as an investment to increase net productivity for the borrower at a rate higher than the interest rate.

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.

If I'm Googling correctly, there's $1.5 trillion in US student loan debt right now. We spent about that on the F-35 thus far, and it's only an extra year and a half of the current annual deficit to pay it off entirely.

Or, to put it another way, wiping out all student debt in the US would increase the national debt about 7%. Hardly catastrophic sounding.

There is a major moral hazard in just canceling student debt. Unless it comes along with serious reform of higher education financing, the problem is just going to come back much worse because, not only did we not resolve the original cause of the problem, but now borrowers think that their debt will be erased if they wait long enough.

Maybe you're fixing the wrong moral hazard.

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.

The Fed is notoriously independent and cannot appear to be influenced by the President. So if Trump comes out and tells the Fed to put a pause on rate hikes... Well... It's enough reason to turn a "no hike" vote into a "hike" one...

What is this based on? I tried correlating decisions with presidential remarks advising the opposite, but I’m having trouble finding and dating the presidential quotes.

You won't find the quotes from US Presidents (present excluded). Heads of state who comment harshly on reserve bank decisions are typically met with steepening rates enforced by the sovereign debt market's perception of higher credit risk.

Does anyone know why the FED has to keep manipulating the supply of money?

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?"

It's important for the US dollar to maintain reasonably constant and predictable purchasing power from year to year. This is part of their dual mandate. Their target is just under 2% inflation per year, as measured by the Core-PCE index. If the dollar didn't have reasonably constant and predictable purchasing power, people would be afraid either to issue or to take out loans denominated in USD.

Manipulating the supply of the dollar via interest rate adjustments, along with open market operations, is how the Fed attempts to control inflation.

All you need to do is look back a little over 100 years to a time before we had the Federal Reserve. It didn't look good. There was no equilibrium, but rather a boom and bust cycle, banks going under and people losing their life savings, and so on.

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.

The best explanation. Thank you.

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.

> 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?

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.

You don't ban making loans! You ban fractional reserve banking - the act of issuing currency not backed 1:1 by central bank money.

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.

The boom and bust cycle was actually a good thing: it gave badly managed companies an "opportunity" to go bankrupt before they grew "to big to fail". Now that FED tries to regulate market cycles it actually makes things worse. It's not a coincidence that The Great Depression happend mere 16 years after creation of FED. And while some people did loose their savings during "bust", they could quite easily make up for it during the "boom" that followed.

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.

Simply, an "economy in equilibrium" is one in which there is no concept of Debt.

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.

Very good explanation. Thank you!

> 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.

I think, in that example, the bank wouldn't loan the money in the first place. This sounds like a cheat, but banks do this every day; if you ask for money and their analysis concludes that its unlikely they'll get it back, they're not going to loan it out.

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.

Thanks for the details again! The phrase "selling your soul" has a new meaning to it now :)

> 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.

I don't believe the situation you outline is the case in reality. Dollars are not, in a sense, "debt" to the Fed. I don't owe the Fed a dollar because I have a dollar (you could make an argument that inflation actually makes this statement false, but that's a different argument outside the realm of Debt).

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.

> I don't believe the situation you outline is the case in reality. Dollars are not, in a sense, "debt" to the Fed.

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)?

In terms of Fed policy it means they are neither focusing on restraining inflation (and thus economic growth) with high rates nor promoting growth (and thus inflation) with low rates. Equilibrium means that they don't need to intervene for either problem right now - and both have proven to be problems to be avoided.

I'm not so naive to think that FED's goal is restraining inflation. Also, I don't know why people think of inflation as if it was some force of nature - it isn't. Inflation is created artificially by central banks, as a form of hidden tax on all of the citizen's wealth. Increasing inflation is the easiest way to help repaying government debts, because government is first to spend the money that FED creates out of thin air, thus screwing everyone else over.

Because economies tend to get carried away. The fed comes in to pump the breaks by lowering/raising interest rates.

Why can't the government do that with structural changes? What is the role of the money supplier?

Since we have fiat currency we must therefore have monetary policy. We can either adjust our monetary policy in response to changes in the economy or we can nail it to a peg and hope that it works.

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