I just don't see much political appetite for austerity/entitlement cuts/more taxes, so I don't think we're going to fix this in any orderly way.
I guess the thing that worries me most about this is how this interacts with the USD's reserve currency status - that's historically absorbed a lot of the govt's deficits and suppressed inflation. I don't see many good alternatives to it in the set of global currencies, but there's been a lot of central bank buying of gold, and I could imagine a basket of other hard capital goods maybe functioning that way. And we're seeing more rmb-denominated trade.
>There is no evidence of this. There was in Japan. But Americans don't save as much as the Japanese, and the concavity of the wealth effect means that those who do don't tend to spend much more when their interest income rises.
I believe it tends to get sunk into asset inflation? Real estate/housing being one of those, and one of the biggest inflation drivers. Also of populist unrest. Agree that it doesn't push up labor prices as much because of the distribution effect you're talking about.
Yeah, anyone talking about the dollar being replaced by RMB or something is just kind of talking out of it.
China specifically does not actually want to be the reserve currency and replace the US, a good reserve currency should be fairly liquid and they like the ability to shut down capital flows into and out of China.
The other alternatives are not great; JPY has the same debt problems as USD. EUR has the same debt problems in certain member states like France, and the fiscal/banking crossborder liquidity isn’t very good and the governance still fickle and precarious. CHF is too small.
We could restore tax rates to what they were in the 80s, maybe. When I was a kid investment income was taxed at a higher rate than earned income. Maybe that's an idea.
True. I think CPI excludes mortgage interest, but in terms of real actual housing expense that people experience, it seems like it'd still cause it to rise. And as renting becomes more attractive as an alternative to buying, landlords get more pricing power.
> as renting becomes more attractive as an alternative to buying, landlords get more pricing power
You're right.
"...contractionary monetary policy increases both real and nominal rents. A 25 basis point unexpected increase in the 30-year fixed rate mortgage raises real (nominal) rents by 1.7 (1.4) percent 12-24 months following the monetary policy shock. We find that the effect is driven primarily by a shift in household demand from the owner-occupied market to the rental market. Using transaction level data, we show that when monetary policy tightens, renters are less likely to become homeowners and the home-ownership rate drops. This then crowds in the rental market and increases rents. We find that the increase in demand for rentals is accommodated by real-estate investors who capitalize on the higher rents by buying houses from owner-occupiers and renting them in out the rental market" [1].
Going back to the top, however, despite rent being "the single largest component of" CPI, we have not seen evidence anywhere of higher rates causing higher inflation. I suppose one could argue within the constant-unemployment state the effect of rates on inflation may be muted by the above. But again, being in an economy where private investment rivals personal consumption gives the Fed a lot more leeway on the upper limits of rate rises.
> I just don't see much political appetite for austerity/entitlement cuts/more taxes
One of these things is not like the others, one of these things just doesn't belong...
Austerity and entitlement cuts are what we've been trying since Reagan. They haven't worked. They don't work.
Raising taxes is unpopular, sure, but a) it can actually solve the problems—not just the symptoms, but make a good hard dig in at the root causes—and b) if we do it right, only a tiny fraction of the people will have to bear those increases.
Because what we need to be doing is returning tax rates to what they were like before Reagan. Before "trickle-down economics". Before all this black magic shit that has never worked, will never work, and any actual economist with a brain and a functioning heart could tell you would never work right from the start.
I guess the thing that worries me most about this is how this interacts with the USD's reserve currency status - that's historically absorbed a lot of the govt's deficits and suppressed inflation. I don't see many good alternatives to it in the set of global currencies, but there's been a lot of central bank buying of gold, and I could imagine a basket of other hard capital goods maybe functioning that way. And we're seeing more rmb-denominated trade.
>There is no evidence of this. There was in Japan. But Americans don't save as much as the Japanese, and the concavity of the wealth effect means that those who do don't tend to spend much more when their interest income rises.
I believe it tends to get sunk into asset inflation? Real estate/housing being one of those, and one of the biggest inflation drivers. Also of populist unrest. Agree that it doesn't push up labor prices as much because of the distribution effect you're talking about.