> It can't be just a number on a computer in a bank, right?
It's two numbers in computers. It's a number in the computer of the bank that issued the money, and it's a corresponding number in the computer of whoever is holding that money as an asset.
> Otherwise some Russian bank could just increase that number to whatever they like. And say "Look, we own 100 Trillion USD. Now let's go shopping."
It's not possible for a Russian bank to pretend they're holding more USD assets than they really are. The issuing bank knows how much USD is in Russian bank's deposit account. The Russian bank can issue its own USD liabilities (i.e. deposits) which are IOUs for the USD reserves that the bank holds on the asset side of its balance sheet. If the bank issues too many USD liabilities, they risk suffering a bank run that drains their USD reserves and puts them out of business.
> So I guess USD needs to be recognized by the US somehow?
Not exactly. It's possible to have a USD-denominated deposit account at a bank that h deposits at banks in the US. Most of the USD-denominated instruments in the world are not directly recognized by the US. But the international monetary system is hierarchical. Every USD instrument is an IOU for another USD instrument. If you follow the chain of IOUs, eventually, you'll get to the Fed.
> How does the system guarantee that nobody's creating money without notifying everyone?
This is a comment that's not related to SWIFT in particular.
Every asset (including money) is generally someone else's liability. The money that we hold as an asset is the liability of a bank. Anyone can issue their own liabilities, but you can't create money that's a liability of someone else. For example, I can't go to my bank and tell them I have a million dollars more in my deposit account than I actually do. They're keeping track on their end.
Similarly, a bank can't pretend that it has more reserve deposits at the Fed than it really does. The Fed keeps track of everybody's reserve accounts on their end.
> Furthermore, does the system guarantee that the central banks of each country are correctly adjusting their books in consequence?
This isn't an issue. The books of central banks don't need to adjust when other banks issue money (i.e deposits).
To be more specific, central banks are allowed to create money. Their liability is /dev/null. It's how they added trillions to their balance sheet during COVID.
Not really their liability is basically the present value of the future which is indeterminate, not null. If the future pain is greater than the present value, or billions printed, then they printed too much, otherwise it was worth it.
You can’t really know for sure if it’s worth it now though.
Yes but my point is that the liability and asset paradigm described still will hold.
It’s simply that the liabilities are held by people who aren’t born or are obsfucated to the point that people don’t realize they are holding them. Inflation is one example
> Could it be that there was sexual reproduction first and asexual reproduction came later?
Unlikely. You can't mate with copies of yourself unless there are already multiple copies of yourself floating around.
I like the story they present in the article. For simple organisms, it's fairly inexpensive to let defective individuals die off. As organisms get more complex, it starts to become more costly to allow defects in the genetic code to persist. Then it becomes worthwhile to perform "integrity checks" to correct errors in the data as it's being copied.
If a population of organism is put into an environment conducive to a lot of data corruption, then the ones who are want to perform these checks are the ones who end up surviving.
You could imagine that when higher complexity organisms are exposed to high-stress environments, it would help establish their population's ability to sexually reproduce. The ones who aren't doing it will tend to die off.
Then as the complexity increases further, the genetic complexity itself can be a permanent endogenous source of high stress. The organism then loses the ability to produce asexually because it's no longer needed.
Sexual reproduction promotes genetic complexity because it allows us to survive while having more complicated genes. The recombination and mixing-and-matching only helps further the process along.
> Unlikely. You can't mate with copies of yourself unless there are already multiple copies of yourself floating around.
Asexual reproduction doesn't require copies of "yourself". Plants can self fertilize and they are some of the most complex organisms to do it and you probably know this.
I /think/ they're saying that if sexual reproduction came first, you have a pretty basic problem: where's the second individual that the first sexually reproducing entity mates with?
Often times sexual organs are multipurpose. It's likely a genetic mutation that allows for sexual reproduction, as with all structural advances. I might end up with a functioning probiscus near my gamete sack and if I end up bumping into my fellow eukaryotes, that's just how it goes.
What matters isn't the size of the Fed's balance sheet or what it contains. The Fed's balance sheet is "invisible" to the private-sector economy. This expansion of their balance sheet is simply a reflection of the stimulus we're doing.
When the Fed expands their balance sheet, what they're doing is replacing private-sector assets with liquid cash. Given that the stimulus is appropriate for the economy, this is all fine. It's not anything that future generations have to "pay back." And it's not going to cause a collapse of the dollar.
The important thing to keep in mind is that we are intentionally shutting down parts of the economy. But some of those parts include mechanisms (jobs) that we normally rely on to supply spending money to consumers and businesses.
Due to the partial shutdown, the economy's productive capacity has taken a hit. But even so, our economy still has the capacity to provide a decent standard of living for everyone. We don't want to compound the crisis by failing to ensure that consumers have sufficient spending power to activate the remaining capacity.
It would be scary if the Fed's balance sheet weren't expanding like this right now.
>When the Fed expands their balance sheet, what they're doing is replacing private-sector assets with liquid cash. Given that the stimulus is appropriate for the economy, this is all fine. It's not anything that future generations have to "pay back." And it's not going to cause a collapse of the dollar.
This is simply not true. The Fed is buying assets at a premium (otherwise counterparties wouldn't sell the assets to the Fed) and is effectively injecting money into the economy. This is a bailout as the Fed is making a liquid market (that otherwise would not exist) for assets, saving the balance sheets of firms. Future generations pay this back not through taxes but through inflation.
Whether or not the U.S. dollar will collapse or not is another topic, but what can be said is that it is not sustainable to continue bailing out irresponsible businesses like banks and others when they do not exercise good business practices like prudence, not being overleveraged, or having a buffer in case of lost revenue. The only way this ends is either a depression the scales of which we've never seen in history before (which would liquidate and clear out bad businesses), or a hyperinflationary collapse of the U.S. dollar whereby more and more money is injected to prop everything up. I'm betting on the latter as the former is too politically inconvenient.
> The Fed is buying assets at a premium (otherwise counterparties wouldn't sell the assets to the Fed)
That's not necessarily true, economic transactions aren't necessarily zero-sum. I would assume for most of the assets being sold to the Fed, the banks need liquid cash more than they need the asset and so would be willing to take a haircut.
>The only way this ends is either a depression the scales of which we've never seen in history before[...], or a hyperinflationary collapse of the U.S. dollar
Why specifically do you think this will happen now when it didn't happen post 2008? Sure the scale so far seems bigger, but also the scale of the hit the "real" economy is taking is much bigger. And, in March, when some of these asset purchases had already started, CPI declined by 0.4%.
Asset managers are front running the Fed. The Fed hasn’t even bought junk corporate bonds yet. They’ve only signaled that they are willing to do so, which immediately sent the price of junk corporate bond ETFs skyrocketing.
If the Fed steps in to save this market they’ll overpay for debt from companies included in these bond ETFs that will likely go under anyway.
It also creates a moral hazard situation where poor performing companies can raise cheap debt because everyone now thinks the Fed will step in and guarantee it.
This is not accurate. A "plummet" in value when it comes to the fallen angels that the Fed is purchasing is more like a 10% drop, and even if you treat the difference between the "true" value of the bonds (if the Fed didn't purchase them) and what the Fed pays as a surplus, the aggregate value of all those surpluses is still tiny in the grand scheme of things.
It likely would have fallen even further, until the fed decided to intervene and buy corporate bond ETFs.
Now LQD has fully recovered and is back to pre-corona virus levels.
More interesting is the rebound in HYG, another Corp bond ETF, which is 50% BB rating, and the remaining 50% below BB rating. I imagine those will get downgraded and be even worst.
Now what happens when companies can’t meet their debt obligations is that covenants will get triggered and that can mean a whole lot of bad things for corporate debt. Which the federal reserve now holds because nobody else wants it.
Yes, this is a good methodology: we should take the lowest point of a random ETF, extrapolate it out, and use that number in our analysis of the Fed's actions.
edit: they edited their comment extensively after I sent this haha.
I'm not saying I agree or disagree given mild inflation trends over the past decade, but how long do you think inflation takes to really get in gear if you're right? We experienced deflation last month according to the consumer price index despite fiscal stimulus and Fed buying assets. [0]
The consumer price index is definitely flawed. However, one thing I've heard is that the massive drop in demand and velocity of money is necessary to consider when analyzing inflation. I also was initially worried about inflation given the massive stimulus numbers we're seeing but have been reconsidering this.
I'm not well-versed in this at all, but demand-pull inflation under Keynesian economics [1] or a drop in V (velocity of money) in the equation of exchange in the monetarist theory of money [2] seem to be what is supporting why folks are worried about deflation. I would venture to guess that this is part of why the Fed is doing these massive buys right now, too.
Tangentially, pointers to good econ learning resources from anyone would be helpful. I've only started with Khan Academy and what I remember from old classes so far.
It's worth noting that part of the reason that inflation statistics are so "low" is that there's an official adjustment done when things cost more but (supposedly) have increased quality, called a "Hedonic quality adjustment"
This adjustment has been made multiple times in recent decades for housing, which is a large part of any given adult's spending.
So the Fed economists keep saying "wow inflation is so low even after we pump gazillions of dollars in during QE", while ignoring the fact that easy money has lead to massive multinationals consolidating control of real estate and jacking prices up.
So even if it is somehow true that houses have gotten better in some ways (I'm not really convinced), that doesn't matter to people lower on the income scale where the price of housing is the difference between having a roof over their head and not - they can't really afford to care about the latest greatest improvements in housing. They have a different demand curve - be homeless or spend most of their income on rent.
"The theory is that the vast majority of that 70% price increase of a Camry since 1990 is due to quality improvements, with buyers today getting a far superior Camry; and that only a smaller part of that 70% price increase is due to monetary inflation, namely the dollar losing its purchasing power"
Just anecdotally, I wouldn't be surprised if a Camry really were "more valuable" (as measured by some sort of ideal fixed value-marker not subject to inflation) than in 1990. I seem to recall when I was growing up that the average expected lifetime of a car if well-maintained was about 100k miles; now it seems to be about 200k.
I agree that’s an opinion many people familiar with cars would share.
However the usefulness of that improvement is going to be a lot lower to someone who just needs a car to get somewhere rather than someone who can afford to buy a car with the long view of how it will affect their finances over many years.
The “purchasing power of the dollar”, even if you accept the accuracy of hedonic adjustments, is an extremely limiting view of the value many participants in the economy are deriving from that dollar.
I agree housing is a better example because the cost floor is much higher.
"the usefulness of that improvement is going to be a lot lower to someone who just needs a car to get somewhere rather than someone who can afford to buy a car with the long view of how it will affect their finances over many years."
I don't understand how a longer lifespan could not affect TCO regardless of how long you keep your car or what portion of its life you use. What does it mean to say people can't afford to spend less money?
> So the Fed economists keep saying "wow inflation is so low even after we pump gazillions of dollars in during QE", while ignoring the fact that easy money has lead to massive multinationals consolidating control of real estate and jacking prices up.
This is not remotely grounded in fact. The majority of real estate is controlled by homeowners and small-time landlords, not massive multinationals. Landlords don't have monopoly pricing power, rents have gone up (in specific cities) because anti-development policies restrict supply.
If you only look at home rentals, yes corporations make up less than 10% of ownership. But even the small percentage of ownerships really affect things, in Chicago we can see it has repeatedly taken just a few new luxury high rises to blow up cost of living in entire neighborhoods - it has a follow-on gentrifying effect where stores rush in to serve the new monied residents and the people living there can no longer afford to participate in their local micro-economy.
Again, real, actual lived experiences tell the store more than the super-super high level macro numbers might suggest.
There's still the effects on non-home real estate too, in which there is significant consolidation:
"During the past ten to twelve years, Blackstone has grown tremendously. Since going public in 2007, it has quadrupled in size. On top of that, Blackstone’s real estate division has exploded from a $17.7B venture to a $100B portfolio. According to BizNow, since 2009, it has spent more than $50 billion on commercial real estate. In addition, Blackstone closed a real estate fund worth about $16B in 2015. As a result, Blackstone now has the crown of ‘Largest Real Estate Owner in the World.’ Business Insider has even called the group’s Chairman and CEO Steve Schwarzman, ‘America’s landlord.’"
> If you only look at home rentals, yes corporations make up less than 10% of ownership. But even the small percentage of ownerships really affect things, in Chicago we can see it has repeatedly taken just a few new luxury high rises to blow up cost of living in entire neighborhoods - it has a follow-on gentrifying effect where stores rush in to serve the new monied residents and the people living there can no longer afford to participate in their local micro-economy.
You are confusing cause and effect. The luxury high rises are the result of rising demand and rising prices, not the cause. If you could magically cause prices to increase by building luxury apartments, you would see luxury apartments sprouting up all over the impoverished parts of the South side. But you don't, because the demand is not there. If you stop luxury apartments from being built in desirable neighborhoods and desirable cities, people will just bid up the prices of crappy older housing stock and drive poorer people out anyway (see: San Francisco).
Building new housing decreases the price of existing housing by expanding supply. It does not increase it. People who have a vested interest in seeing housing costs go up (landlords, existing homeowners) understand that fact, which is why NIMBYs keep voting against development. Unfortunately many people who do not want housing costs to go up do not understand the basic economic fundamentals and are motivated by reflexive hate of wealthy developers, so they sabotage their own interests by voting against new housing to the delight of their landlords.
I think it's a bit more complex than this. No, you can't magically create a yuppie utopia in the middle of the Southside, but you can start on the northwest side and expand it just a couple blocks west, then a few more blocks west. It's a coordinated effort from the large-scale developers and the city - look at Lincoln Yards for the most large-scale and egregious example.
Housing supply absolutely needs increased, but we must require developers to build mixed-income housing. The wealthy developers can afford to leave many units empty to maintain the luxury cache of the building or area. The relationship between supply and price in housing is not that sweet sweet smooth curve - it's lumpier than that in reality.
Additionally while the increase in supply can hurt your local landlords, it can also raise the average income of the clientele of an area, which then benefits them. In practice these landlords have not been staunch opponents of all the new luxury buildings.
> but you can start on the northwest side and expand it just a couple blocks west, then a few more blocks west.
Again, you are confusing cause and effect. The luxury apartments are popping up because of rising demand and rising prices; they are not the cause the rising prices. San Francisco refuses to build new housing stock and rents are still soaring there because people just bid up the prices of crack shacks.
> The wealthy developers can afford to leave many units empty to maintain the luxury cache of the building or area.
That is completely false. Real estate developers don't intentionally leave a large fraction their buildings empty to project an image of luxury. No renter is going to pay 2x as much rent because they see that the building is half empty and they think that makes it more exclusive. If they wanted an excuse to pay 2x the rent they would just get a larger apartment or move to a more expensive zip code. Deliberately leaving part of a building empty would be an extraordinarily financially dumb move. If a building is substantially empty then the developers screwed up their market research and are losing money on the project.
> Housing supply absolutely needs increased, but we must require developers to build mixed-income housing.
Building luxury housing frees up existing cheaper housing stock for lower income households. You don't have to build cheap housing to make more cheap housing available. Blocking the construction of luxury housing is counter-productive because it just means people will bid up worse housing stock.
I didn't say the Fed calculated it. I did say they reference it to say their policies (or whoever's policies) aren't causing inflation.
When a majority of leading economists subscribe to economic views that don't reflect the lived reality of an average person, it may not be a conspiracy, but the effect (groupthink) is similar.
>Sorry, but it's at this point in the thread that I realize that talking to tech bros on hacker news about monetary policy is actually the seventh circle of hell. Glhf.
Appealing to the authority of mainstream economists in a perpetual state of groupthink is not an argument. It is this kind of hostile and borderline elitist attitude that scares away people from discussing monetary policy and makes it seem more complex than what it really is, and I don't think that is productive at all. Ironically it is the same kind of elitism that caused the collapse of the planned economies of the 20th century (which grade-school students learn about today), despite being comprised of supposed "experts" in economic affairs who should never be questioned.
Please, this isn’t Soviet Russia, economists disagree about practically everything, so the whole argument that the profession has a serious groupthink problem is unconvincing to me. The reason why economists mostly agree on this particular topic-the way the Fed operates-is because it’s exceedingly transparent, theoretically (not to mention mathematically) simple, and empirically verifiable.
>Please, this isn’t Soviet Russia, economists disagree about practically everything, so the whole argument that the profession has a serious groupthink problem is unconvincing to me.
They disagree on a lot of things, that is true, but the one thing they all seem to agree upon (except for Austrian economists) is that the economy can be effectively modelled and that effective policy prescriptions can be derived from said statistical models. It is a supremely complex system and it is the pretence of knowledge (in the words of Hayek) to believe that you can use monetary policy to command it, much less policies based upon empirical models which are as you say constantly bickered and debated about.
Furthermore, the Fed is not exceedingly transparent - audits of its operations and its meeting minutes are classified and are not open to public review, as is the case with most central banks in the world. I know because I've tried to ask for copies of open market operation details from my central bank (the Swedish Riksbank) but was denied as they are classified by law (which is incredibly unusual for a society where other government agencies publish everything, including income tax returns).
Statistical models exist primarily for the falsification of hypotheses. The Austrians didn't submit such models so their theories could never be subjected to the same scrutiny that mainstream theories are. "It's too complex" is a cop-out, and Austrian theory's lack of math is enticing to people who don't want to put forth the effort involved in rigorous study (i.e., internet scholars). They pretended to be agnostic about economic principles, when really they just applied ad hoc explanations for economic events (which they were free to do because they weren't constrained to those pesky mathematical models).
I’m sorry that your Swedish central bank is classified, since, based on your worldview, there are presumably a bunch of Swedish economists working there behind closed doors to screw you over.
"Effective March 15, 2020, the meeting was closed to public observation by Order of the Board of Governors1 because the matters fall under exemption(s) 9(A)(i) of the Government in the Sunshine Act (5 U.S.C. Section 552b(c)), and it was determined that the public interest did not require opening the meeting."
This seems to be the case for almost all of their meetings.
They only keep certain parts secret so market actors don’t make decisions based on what the Fed is thinking about doing. Obviously if people knew the Fed was thinking about raising interest rates, for example, it would affect their decisions (and the market as a whole) negatively. This is something any business or economics undergrad learns in an introductory banking class; since you are evidently unfamiliar with the Fed’s system (as opposed to the Swedish one), you may find it helpful to consult an American money and banking textbook.
From your own link, verbatim:
"Items considered in closed session include primarily
- Bank and bank holding company supervisory matters, discussions of which generally disclose information from bank examination reports or commercial and financial information obtained in confidence by the Board
- Monetary policy and other matters whose premature release could be used in financial speculation
- Personnel matters."
> But over the same period, the Consumer Price Index for new vehicles – so this is one of the many subcategories of CPI – has risen only 22%. In fact, it rose 22% from 1990 to 1997, and today is flat with where it had been in 1997.
So inflation only accounts for log(1.22)/log(1.77) = 37% of the price rise.
I had the same question a few weeks ago! Apparently, the delay between monetary stimulus and the time we'd notice inflation is estimated to be greater than 12 months. I found one of the sources whose abstract I scanned when I had this question[0].
Hedge: I'm not saying it's true or that I've verified any of the research, only saying that economists have studied the effects of central bank stimulus action on inflation rates and the economic response seems to take a while.
It's complicated. Hyperinflation occurs generally when the banking system's regulation is gets out of control and goes into a lending/money creation spiral. That can happen very quickly - within several month. All things considered what's more likely to happen at the moment though is a monetary implosion, as massive debt defaults occur destroying the money in the banking system. Which is why people are muttering about Great Depressions.
Demand for dollars won't evaporate overnight. The thing about being a reserve currency is in a crisis, the entire levered world is short your currency.
That, combined with the fact that it's not like any major developed economy is doing that much better, means US goods, services and financial assets are still pretty competitive with the rest of the world.
The dollar is up 40% vs the lows of 2008. When DXY is back at 70, it's time to worry about a crack in the dollar reserve system.
The worry isn't demand dropping over night, since in that case the Fed could just sell the assets it's been buying. The worry is that the value of the Fed's assets will drop overnight.
This is inaccurate; most economists think we're most likely to see deflation over the next several months as demand collapses. Considering the position of the dollar, a "monetary implosion" like you're describing is still exceedingly unlikely.
"Well, unquestionably, housing prices are up quite a bit; I think it's important to note that fundamentals are also very strong. We've got a growing economy, jobs, incomes. We've got very low mortgage rates. We've got demographics supporting housing growth. We've got restricted supply in some places. So it's certainly understandable that prices would go up some. I don't know whether prices are exactly where they should be, but I think it's fair to say that much of what's happened is supported by the strength of the economy." - Ben Bernanke, Chairman of the Fed, in 2005.
I don’t understand how your quote from Ben Bernanke is relevant. Where in the quote does Bernanke say that we’ve fully eliminated volatility? And how is he representative of “most economists?”
I’ve said in other parts of the thread that economists can, in fact, be wrong sometimes. I just find the people making completely unjustifiable assertions about the economy, while simultaneously castigating the economics profession as some cabal of out-of-touch elites who can’t be trusted, unconvincing, when I know that the vast majority of economists are simply researchers trying to understand the world and how to improve it.
I don't think the problem at the current time is inflation - it's deflation. There's less money chasing the same amount of goods and services. That was the case during the Great Depression - and the Fed exacerbated things at that time by not intervening in controlling the money supply because they were bound by rules which prevented them from doing so.
If inflation suddenly increases, then the Fed has tools to combat that. They can sell off some of their balance sheet or raise interest rates to reduce the amount of money in the system. Inflation only occurs because there's too much money chasing goods and services.
> They can sell off some of their balance sheet or raise interest rates to reduce the amount of money in the system.
The Fed was unable to unwind more than ~$650B out of $4T from their balance sheet in one of the longest expansion periods in US history. How will they do this? This is not a rhetorical question, I am genuinely curious in how people think this will be done if the Federal Reserve itself can't do it (either reducing the balance sheet or influencing the target rate above low single digits).
They couldn't do it without causing deflation which they didn't want. But if they were combatting hyperinflation then they would want to cause deflation, so it would be fine.
Look at what happened in December 2018 when the Fed tried to raise interest rates and let assets bought during the financial crisis roll off at maturity...the market immediately crashed.
Fed is backed into a corner where it can’t raise rates without crashing the market and can’t lower rates now that we’re at 0.
> The only way this ends is either a depression the scales of which we've never seen in history before (which would liquidate and clear out bad businesses), or a hyperinflationary collapse of the U.S. dollar whereby more and more money is injected to prop everything up.
Uh, the latter is not a distinct option from the former.
Also, you've left out: “the government continues as it has for generations, occasionally bailing out out wide sectors of the economy in black swan events with wide impact but mostly letting businesses big and small that are not prudent fail while cushioning some of the impacts of that failure with bankruptcy (both regular rule-based bankruptcy and similar, ad hoc restructuring in special cases; the latter is often also referred to as a ‘bailout’, but is meaningfully distinct from other bailouts.)”
The fact that it has been going on for decades doesn't make the point less valid. This kind of monetary intervention is compounding in nature, and it can be clearly seen as how each financial crash over the past 2-3 decades has been worse than the one before.
> The fact that it has been going on for decades doesn't make the point less valid. This
No, the fact it what you describe has not been going on for decades. It is an occasional response to extreme events, not a continuous mode of operation, and your criticism is all about the potential risk it has as a continuous mode of operation. There've been a couple major cases fairly recently, but that was in response to the biggest financial crisis in 70 years and the most significant acute global pandemic in over a century happening to fall a little over a decade apart, not some change in general approach.
>The only way this ends is either a depression the scales of which we've never seen in history before (which would liquidate and clear out bad businesses), or a hyperinflationary collapse of the U.S. dollar whereby more and more money is injected to prop everything up. I'm betting on the latter as the former is too politically inconvenient.
Most countries are actually passing larger fiscal stimulus measures than the USA so far, at least relative to their existing currency base, so wouldn't this mean every currency hyperinflates all at once?
>The only way this ends is either a depression the scales of which we've never seen in history before (which would liquidate and clear out bad businesses), or a hyperinflationary collapse of the U.S. dollar whereby more and more money is injected to prop everything up. I'm betting on the latter as the former is too politically inconvenient.
Or, like last time, a global war.
Also, I cannot emphasize more fervently your accurate correction here:
>Future generations pay this back not through taxes but through inflation.
It's a form of theft, really. Increasing the velocity of money is important to Keynesians and the faster that stuff degrades in value the faster those who are paying attention want to get rid of it in tangible or better-performing assets rather than, say, saving it long-term for something like capitalizing a small business.
And, whether an individual or organization, taking out loan after loan and not worrying so much about bankruptcy is easier to tolerate since sooner or later the gambling will pay off and it'll be easier to pay off in the future with easy money. When a dozen eggs cost 50$, 100,000$ in student loans will be easier to pay off.
I read something today about how China is gambling on the dollar collapsing and have been hoarding lots of gold in anticipation of some kind of at least partially gold-backed currency that's likely to be digital.
> Future generations pay this back not through taxes but through inflation.
Inflation expectations have collapsed in recent months. We didn't see steep inflation when the government pumped trillions of dollars into the economy after 2008, why do you think we'll see steep inflation now?
The most obvious illustration of this is the jump in junk-bond ETFs after the Fed began buying up junk bonds.[1]
The Fed is supporting the price of dubious, high-yield corporate debt. Whether or not that's good for the economy is a separate question, but it's not as if the Fed is just replacing assets with cash at 1:1 value. It is encouraging lending to risky enterprises, by itself taking on the risk.
That could be true, but one thing is that the way (or some of the ways) the money is added to the economy is dubious and another that nothing should be done.
>Future generations pay this back not through taxes but through inflation.
I don't think that's a fair characterization. Inflation helps people with student loans (salary grows but debt stays the same) and hurts people with retirement accounts full of bonds. Broadly speaking, inflation helps the young (by closing the wealth gap between haves and have-nots).
The actual reason why inflation hurts young people has to do with economic stability and its cascading effects on the economy. A period of significant inflation can wipe out generational mobility. Inflation has a minimal effect on "closing the wealth gap" in comparison and I think it's irresponsible to act like hyperinflation would be a reasonable way to solve economic inequality.
Yes, fully agree that economic instability from hyperinflation hurts far more than reducing the wealth gap could help.
In recent times, the fed has been below its 2% inflation target.If it missed on the other side, and inflation went to 3-4%, I think that would be totally reasonable economic policy. Double digit inflation, however, would end up making everyone poorer.
"Given that the stimulus is appropriate for the economy, this is all fine."
Very casually assumptive, but ok, let's go with it...
"It's not anything that future generations have to "pay back. And it's not going to cause a collapse of the dollar."
If this is true, then what's the catch? What then are the adverse affects of the Fed printing money? Does it not inadvertently devalue the dollar? Why not double, triple, or quadruple the "stimulus" if it is, as you claim, appropriate and without any noted trade-offs??
> If this is true, then what's the catch? What then are the adverse affects of the Fed printing money? Does it not inadvertently devalue the dollar? Why not double, triple, or quadruple the "stimulus" if it is, as you claim, appropriate and without any noted trade-offs??
This is a good question. The answer is that the virus and lockdown are currently causing lots of deflation. So the Fed needs to cause lots of inflation to cancel it out. But if they did four times more then that would be too much and would cause inflation to be far too high.
Personally I suspect the the Fed has undershot and we'll see net deflation over this year and the next.
The GP is saying that the future generations have not to pay back and that the stimulus is necessary now and it will not be inflationary. It's not saying that it's not possible to spend too much and create undesired inflation.
But note that, in the same way it's possible to spend too much, it's possible to spend too little. For some reason there are people who think that is impossible.
The Keynesian theory of economics doesn’t exactly have a spotless track record for modeling and predicting outcomes of non-routine interference in the economy.
The velocity of money has gone way down so the current liquidity injection makes great sense.
A major question is whether and how the Fed will absorb the excess liquidity back later to prevent too much real inflation, beyond what is measured by consumer price index. (Some inflation is expected as the economy is less productive because of Covid-19 and the stimulus is used to partially offset its impact.)
> It's not anything that future generations have to "pay back."
I really wish the term "debt" were not used in these contexts. This type of "debt" is fundamentally different from private sector debt or other ordinary forms of debt.
In this context the term is being used to refer to an accounting construct that looks like debt, but the meaning of this particular accounting entry is completely different. Using this term only creates confusion among the public and even politicians who don't understand the complex and esoteric details of modern economics.
In the end it's still a debt. The nominal value in USD may not be all that important, since the Fed can manipulate it more or less at will, but you're still borrowing productivity from the future—by consuming capital—and that debt will be repaid one way or another.
The fallacy here is assuming that capital is finite over all time. It's not. Capital is created.
Of course not all economic activity creates capital at the same rate, and I do definitely agree that the type of economic activity you get during and after a recession with massive QE is likely of a lower quality than what you'd get otherwise. But it may still be that more capital (wealth) is created this way then if you allow the economy to completely shut down.
I also disagree with the premise that recessions/depressions are good because they clear out dead or dying companies. Dead or dying companies do die under such circumstances, but so do really innovative ventures that have not yet reached comfortable sustainable profitability. A mega-recession right now might take out a lot of junk, but we'd also risk losing stuff like SpaceX, Tesla, Boom Supersonic, and hundreds of small innovative startups. We might also lose the whole renewable energy revolution and any work being done on next-gen nuclear power like small modular reactors.
In short we'd lose both the bottom and the top end of the innovation curve, keeping just the boring middle.
I suspect you may have intended to reply to a different comment, but since you're here…
> The fallacy here is assuming that capital is finite over all time.
Capital is "finite"—as opposed to "infinite", "unlimited", "superabundant"—but I agree that it isn't fixed. There is no law of conservation of capital; it can be created or destroyed.
With that said, taking on debt is not necessarily a bad thing; it depends on how you use it, and whether you have a viable plan to repay the debt out of future earnings. QE fails on both counts; there's no real direction beyond "inject more money into the economy", and no viable repayment plan.
> I also disagree with the premise that recessions/depressions are good because they clear out dead or dying companies.
I'm not sure whose premise that was, but I would also disagree. Clearing out underperforming companies would be a silver lining at best, and not enough to make recessions or depressions "good". In any case the companies hit the hardest are not necessarily the ones with marginal profits but rather the ones which are incapable of adapting to changing circumstances. That can include old companies set in their ways as well as new, experimental ones which depend on emerging opportunities.
This is a pretty naive take. You are suggesting that all these trillions are somehow ending up in the hands of people when the primary effect has been to prop up asset prices e.g. the stock, mortgage, and corporate bond markets.
The second order consequences of a massive balance sheet will be felt not in the immediate future but at some point down the line when the Fed attempts to shrink the balance sheet.
We have a very recent example of the Fed trying to do exactly that in late 2018, and the market immediately crashed on rate increases and assets rolling off at maturity.
Another way of putting it is that it took the Fed 10 years to even think about trying to extricate themselves, and they realized they couldn't. Now they have gotten their hands much deeper in.
Yes. The next recession will just be worse since Fed cannot lower rates any more and if they signal any sign of pulling back on propping up corporate bonds or mortgages those markets will just crash.
The Fed is not focused on the stock market. When they improve the status of the economy through monetary policy, they indirectly improve the value of publically listed companies. This makes sense, because companies are the central entities in the economy. I don't know how the Fed could improve the state of the economy without affecting the prices of shares.
Take a look at December 2018. There was no pandemic. The Fed tried to very slowly reduce its balance sheet. The stock market threw a major tantrum (by dropping 20% or so) and voila, the Fed reversed its course.
The same in 2016, and other times
How can you say they are not focused on the stock market? They are primarily focused on propping up the markets.
If you think they are propping up the stock market, then it doesn't make sense to be worried about inflation. Inflation would devastate the stock market.
They shouldn’t be but this is not true now. What they’ve done has directly propped up asset prices. No question. This isn’t a second order effect. They know what they are doing.
This would make sense if the Fed's newly-created money went directly to households that need it due to economic shutdowns. But it doesn't, it mostly goes to financial institutions. You're confusing the Fed's ability to monetize assets with the Treasury's ability to spend money on whatever it wants.
Also, your statement that our economy has the capacity to provide a decent standard of living to everyone is an article of faith, not some falsifiable statement supported by facts. We don't know if that is true or not.
Uh, actually, the notion that the economy has the capacity to provide enough for everyone is a falsifiable statement supported by facts. You can analyze the total amount of resources and the amount of work required to produce them, and figure out how they could be distributed differently. We've known for a long time that, in the US at least, there is enough food, shelter, and healthcare for everyone.
> You're confusing the Fed's ability to monetize assets with the Treasury's ability to spend money on whatever it wants.
They're related. There's both fiscal stimulus and monetary stimulus going on here. The monetary stimulus only makes its way to consumers indirectly. On the fiscal side, as you say, Treasury can spend money on whatever they want. And when they do, they transform some of the financial sector's money into assets (treasuries). If the Fed wants to maintain its accommodative monetary policy, they're going to want to re-monetize those assets.
> your statement that our economy has the capacity to provide a decent standard of living to everyone is an article of faith
"decent standard of living" was not crucial to my point.
There's some part of our economy's productive capacity that we have consciously decided not to shut down because we've deemed "essential" to consumers. My point is that it would be a mistake for us not to provide consumers with the means (money) to access that capacity.
The Federal Reserve's balance sheet, and its actions matter very much. What is essentially in the process of happening is a massive disconnect between the "operating system" of the economy - the financial system, which is in the process of crashing (bear with it, it's a very slow system it takes a while), and the economy - the computer - which is as you say, essentially fine, but no longer working because... operating system.
As far as the balance sheet itself is concerned, it's important to look at all of it - with any magician it's critical to watch both hands - and in this case, the right hand is doing this to the M2 money supply, i.e. creating $2 trillion.
M2 is the total sum of all liability deposit money in the US banking system, and liability money has dominated in all monetary transactions since at least 1890. (Dunbar.)
This isn't your term paper-you don't need to cite your sources. But, if you're going to, at least try to do it correctly (the parentheses go inside the sentence, the period goes outside the parentheses).
Regardless, it's this line: "Approximately 15% of the real money supply, or about $5,000 for every man, woman and child in the USA, had it been handed to them directly" that I was referring to. That calculation does not reflect what the M2 number actually means. You already have a definition of M2, so I'm sure you can figure out where you went wrong yourself if you just stare at that for a little bit longer.
Wow. Blast from the past. Greenspun's company ArsDigita used to run free web development boot camps. I did one of the boot camps back in 2000. It was the first time I'd ever heard of such a thing.
Apparently, there was also an ArsDigita University, which ran for a year:
The interesting questions surrounding UBI are macroeconomic in nature. How does it change the economy? We know that consumers need money in order for the economy to function. The question is whether basic income is an efficient way to provide it to them. Is it even possible to give everyone free money?
These trials are just testing how individual people respond to unconditional direct cash transfers. We already know that people are better off if they have more money. Not super interesting. It's not changing the economy around them.
Not that they would, but even if everybody just spent their basic income on booze and drugs, it wouldn't really be evidence against the effectiveness of basic income.
The choices aren't UBI versus no UBI. The choices are UBI versus all the convoluted ways we currently try to push money to consumers through the labor market. To the extent that we're creating jobs to push money to workers, we're not creating those jobs because there's actually work that needs doing.
If we calibrate the amount of the basic income to the economy's productive capacity, then we can allow the labor market to be efficient. In an efficient labor market, jobs only exist because there's actually work that needs doing and the only purpose of wages is to provide an incentive for people to do that work.
(not an economist but I'm really interested in this)
What's the difference in theory and practice between UBI and changing the standard deduction/marginal rate? Like if we give out $6k a year to everyone through a $500 check, what is the difference in how that money is spent versus if we increased the standard deduction to where people would pay $6k less in taxes? (assuming that people are in fact paying at least $6k)
I get that this is partly an experiment to figure this out, but what does the current theory say?
> assuming that people are in fact paying at least $6k
That's the big difference. UBI most helps the people who are paying the least tax right now, such that a pure deduction wouldn't do anything for them. It's a "negative regressive" tax, whereas an increase in deductions/decrease in marginal rates—or a tax credit—is a "negative progressive" tax.
A tax credit, if it is refundable, is exactly the same as UBI, and even if nonrefundable isn't “negative progressive” in the sense that a deduction is.
(I'm not an economist either, but I'm also really interested in this)
> What's the difference in theory and practice between UBI and changing the standard deduction/marginal rate? Like if we give out $6k a year to everyone through a $500 check, what is the difference in how that money is spent versus if we increased the standard deduction to where people would pay $6k less in taxes? (assuming that people are in fact paying at least $6k)
You've partly answered your own question. One of the big differences is that people who wouldn't have paid at least $6k in taxes wouldn't get the full benefit. It's also true that the standard deduction is a deduction of your taxable income. Depending on your tax bracket, that's going to reduce the amount you owe by a different amount.
We could instead talk about doing it as a tax credit similar to the Earned Income Tax Credit, but giving it to everyone equally regardless of whether they're working. This would be more like a basic income. If we can pay people the tax credit at finer intervals instead of in one lump sum at the end of the year, that's even better.
The disadvantage is that people would still have to file tax returns. The people who need the money the most are also the ones who are least likely to be able to navigate the system. If it's exactly the same amount of money to everyone unconditionally, then we reduce the bureaucratic burden by not tying it to the tax system.
Here's a video where I answer the question of why basic income should go to rich people. I advocate keeping the complexity separate from the cash benefit system and putting all that complexity on the taxation side.
Is a higher-paying job the goal of UBI? I thought the fundamental macro issue was that as automation of one kind or another becomes an increasingly inherent part of new technologies, it will inevitably depress the human job market beyond its ability to employ enough people to maintain the economy.
Avoiding trapping people in positions where they need a dead end job with no advancement potential which forecloses opportunities for self-improvement is, indeed, one of many arguments for UBI.
> I thought the fundamental macro issue was that as automation of one kind or another becomes an increasingly inherent part of new technologies, it will inevitably depress the human job market beyond its ability to employ enough people to maintain the economy.
That's less credible of an argument than that it will create a rate of change of needed skills which will leave people stuck who cannot afford to retrain.
Short of AGI or output levels so high that diminishing returns make greater output of minimal value, automation should multiply the value of human labor while shifting skills in demand.
The plan is for the startup to make money eventually or for one of my side projects to turn into a business. If my entire income was replaced then I would focus on making the side projects into real businesses if possible. But that is a small amount but much more than $500.
Frankly, people that close to the edge can't budget out a yearly installment. The fact that it's monthly, instead of coming once a year in the Spring, is a huge difference.
> Is it even possible to give everyone free money?
It's interesting that this question has two clear, opposed answers:
The answer from Economics: it's impossible to just give everyone money, because you just devalue your currency. In essence, given a fixed pool of "stuff" to buy and sell, the "buying power of the total pool of circulating currency" remains constant no matter what you do to your monetary policy. And, because certain things have elastic supply but inelastic demand (like housing), the owners of those goods (rentiers) can suck all benefits of wealth redistribution right back out of the economy.
The answer from Technology: it's certainly possible to just feed everyone for free, or to otherwise enable "free" increases in net global utility. An agrarian co-op covering just the current arable farmland of the United States, with all possible economies of scale due to centralization of resource processing, could probably feed the whole world using maybe 10,000 farmers. Eventually even those people could be replaced by robots (and the people producing the robots and doing the maintenance on the robots, too.) This rounds off to literally no human having to do work, for every human to be able to eat.
So, the disconnect: if we can (or could, in theory) increase net global utility with public-works projects, then why can't we increase net global utility with money? What's the economic difference between a world where robots grow all our food for us, and a world where we have the robots "grow" some free money instead (y'know, like by mining Bitcoin or something), and then use that money to pay the human farmers to grow the food? It seems like there's some part of market capitalism not working out for us here, if one world is possible and the other isn't.
This is a great question. I would say that the "answer from economics" you describe is incorrect. There are some economists who think this way. And they have a term for it: The Quantity Theory of Money.
But the reality is that inflation isn't about the amount of money "in the economy." It's about the rate at which money is flowing through the economy. That flow is the level of spending. To keep prices stable, we have to keep spending balanced with production.
The reason why we can make this distinction is because money doesn't just perpetually circulate through the economy. It flows through the economy like a river from consumers to producers to the financial sector. It's true that money in the financial sector gets "reinvested," but in order for that money to support consumer spending, you have to be able to connect the dots and tell a story about what mechanism is getting money into the hands of consumers.
Basic income is a possible mechanism for that. If we want to, we can continue to use taxes or create jobs to force "existing" money is flowing back into the hands of consumers, but what's the point? Why not just hand them new money instead?
>The interesting questions surrounding UBI are macroeconomic in nature. How does it change the economy? We know that consumers need money in order for the economy to function. The question is whether basic income is an efficient way to provide it to them.
I was curious about this so I did some digging. Alaska effectively has a UBI, or at least a program that is quite close to it. When the program came what's interesting is how it reduced poverty. However, two decades later, inflation has caught up and now Alaska's poverty rate is 15th lowest in the nation at 11.1%. In comparison, right before their oil UBI took place their poverty rate was 10%. The program is still helping reduce poverty when compared to other states, two decades later, but not as much as I'd like to see.
I suspect if it was a country wide UBI, instead of an entire state, inflation would catch up at a quicker rate than we're seeing in Alaska, but it would still be at least a decade before it would balance. Likewise, I suspect that inflation will never come completely to the level of no UBI, but I don't have data to back that suspicion up.
>Is it even possible to give everyone free money?
If we absorbed the social security tax, merging everything into one large UBI program. Lets say we want to balance near min wage workers so they get as much as they give, but support people who are in poverty as one hypothetical UBI. In the US the poverty rate is 17.3%, so given people who work near min wage pay about as much taxes as they get from the UBI (which would help reduce inflation, and because we pay 6.2% of our income in social security up to 128k: 0.062*1.173 is 7.27%.
We'd pay almost exactly a 1% tax bump to pay for a UBI, plus the money the UBI gives (eg, if we got $400 a month we'd have $400 more in taxes + the 1%), to gives out the same amount as social security does. However, realistically the UBI would have to give a bit more than social security currently does, or the elderly might not like it, for psychological reasons, and a 1% tax raise on near minimum wage works isn't a good idea, so lets do some more math.
Lets say 50% of the country is paycheck to paycheck (some studies say it is as high as 78%, so ymmv on this stat). If it's a 1% tax bump across the working country, and 50% we don't want to be taxed higher than they already are, then it's a 2% middle class and upper class tax raise. Then given an increase for the reasons above, if it's a 1.5% tax this becomes a 3% tax bump for half of the country to pay for it. Then, of course, there is making tax brackets out of that as well.
So long story short, is it possible? Yes, yes it is.
The oil dividend has pays out ~$2,000 or less per year in one of the more expensive states to live (food, energy, etc). That's hardly worth calling UBI.
> Alaska's poverty rate is [...] 11.1%. In comparison, right before their oil UBI took place their poverty rate was 10%
That implies to me, at least, that their poverty level has gone _up_ not down.
It's two numbers in computers. It's a number in the computer of the bank that issued the money, and it's a corresponding number in the computer of whoever is holding that money as an asset.
> Otherwise some Russian bank could just increase that number to whatever they like. And say "Look, we own 100 Trillion USD. Now let's go shopping."
It's not possible for a Russian bank to pretend they're holding more USD assets than they really are. The issuing bank knows how much USD is in Russian bank's deposit account. The Russian bank can issue its own USD liabilities (i.e. deposits) which are IOUs for the USD reserves that the bank holds on the asset side of its balance sheet. If the bank issues too many USD liabilities, they risk suffering a bank run that drains their USD reserves and puts them out of business.
> So I guess USD needs to be recognized by the US somehow?
Not exactly. It's possible to have a USD-denominated deposit account at a bank that h deposits at banks in the US. Most of the USD-denominated instruments in the world are not directly recognized by the US. But the international monetary system is hierarchical. Every USD instrument is an IOU for another USD instrument. If you follow the chain of IOUs, eventually, you'll get to the Fed.