Permanently low interest rates

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Permanently low interest rates

Post by doodle » Thu Apr 18, 2019 7:07 am

Given the continued high deficits and a national debt that will soon be approaching 25 trillions, regardless of whether you think this is an issue or not, does this in some way put a ceiling on interest rates in that rates can only rise so far before servicing the revolving interest payments becomes a drag on other government spending?

I'm still a little unclear on how this national debt functions as it is so unlike private debt. From my understanding it is like an interest bearing savings account at the treasury with a maturity date. Is the government obligated to renew a bond investment once it reaches maturity? Why can't maturing five year treasuries simply be converted into a non interest bearing treasury account, at which time the holder of that asset would have to either hold it at zero percent interest, convert to another asset or spend back into economy? Is there a demand component of currency value that I'm missing here that forces the government to continue to pay interest on these accounts?
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Re: Permanently low interest rates

Post by pmward » Thu Apr 18, 2019 9:13 am

The government can always print the money to pay their debts, so long as those debts are denominated in their national currency, which all of the U.S. debt is. Is there a level where debt suddenly matters? I'm sure there is, but Japan makes us look restrained in comparison and they're still chugging along just fine. It's possible that at some point in my lifetime we will reach the point where our deficit matters, but I don't think it's anywhere near imminent. Debt is much different for a sovereign than it is for a state, company, or individual. They have all the benefits and so long as that debt is denominated in local currency, virtually none of the consequences.

Another thing to keep in mind, unlike for a private entity, for a sovereign debt is necessary. Money is national debt; the more national debt, the more money in circulation; the less debt, the less money in circulation. It would be very restrictive and negative on the economy for the government to swap to austerity and start paying down their debt because it would be removing all that money from the economy. In general, a government is more likely to inflate a debt problem away vs pay the debt down because in the end it is the less painful route. This is precisely why we hold gold. Cycles of inflation are inevitable.

One other thing to keep in mind in regards to the U.S., we have global reserve currency status. National reserves and global trade for all countries on the planet are done in U.S. dollars. Now they don't actually have U.S. dollars in their countries, so they instead use U.S. treasuries as a proxy. In order to keep the advantages of having foreign reserve currency there needs to be massive liquidity in the U.S. treasury market... which means we *need* a lot of debt. If we start paying off the debt and reduce the liquidity for foreign banks then they will stop using the U.S. dollar as reserve currency and it will have a huge negative impact on our country. The cost of servicing the debt is very much worth keeping massive amount of foreign investment that is constantly flowing into our country. This is the real glue that keeps the U.S. on top of the world economically. This is also why we run a "trade deficit". We cannot eliminate the trade deficit, regardless of what some politicians may say, because the balance sheet must equal and if we must have a huge foreign investment surplus then we by rule must have an equally huge goods and services deficit. You can't change one side of the equation without changing the other side in equal measure.

Ray Dalio has a great free ebook on the Bridgewater website about debt crisis which does a great job of explaining how debt works in the system, and also has some in depth case studies into real crisis' that have happened. I think you would find it interesting: https://www.bridgewater.com/big-debt-crises/
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Re: Permanently low interest rates

Post by doodle » Thu Apr 18, 2019 10:05 am

Ill look into that dalio piece.

I guess what I dont understand is that if I purchase a ten year bond and it matures. The treasury doesnt have to pay me anything other than the principal. They dont have to issue another bond. So I would then in essense be holding the value of that bond in currency. Which would have to be reinvested somewhere else...(potentially stimulative??). Maybe Im missing some step in the money creation process. But couldnt the debt be retired by simply not reissuing bonds once they mature? No money has been eliminated from that system, its more a semantic issue. Instead of "national debt" it could be called "treasury deposits". We have 25 trillion in treasury deposits? I'm still confused. Maybe after I read the Dalio piece it will clear up.
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Re: Permanently low interest rates

Post by pmward » Thu Apr 18, 2019 10:36 am

doodle wrote:
Thu Apr 18, 2019 10:05 am
Ill look into that dalio piece.

I guess what I dont understand is that if I purchase a ten year bond and it matures. The treasury doesnt have to pay me anything other than the principal. They dont have to issue another bond. So I would then in essense be holding the value of that bond in currency. Which would have to be reinvested somewhere else...(potentially stimulative??). Maybe Im missing some step in the money creation process. But couldnt the debt be retired by simply not reissuing bonds once they mature? No money has been eliminated from that system, its more a semantic issue. Instead of "national debt" it could be called "treasury deposits". We have 25 trillion in treasury deposits? I'm still confused. Maybe after I read the Dalio piece it will clear up.
That's the thing, if you eliminate the debt from the system money is retired. The transaction between the government and you pays you the cash, but the balance sheet must equal, the money they pay you doesn't just come from nowhere. Behind the scenes the government would have to either roll a new bond, retire the money, or "print the money" (which even "printing" is really just the Fed creating money out of thin air to buy bonds so they would still be rolling a new bond).

One thing you have to keep in mind, is just like I mentioned above with the trade deficit, where if we have a surplus in one area we need an equal deficit in another. The same relationship exists between the government, corporations, states, and individuals. If one of those entities has a deficit on the whole, then an equal surplus must exist in the other entities. So, as sad as it is to say it, it is better off that the government holds a deficit against the other entities so that the other entities can have a surplus... because the government can print money to cover the deficit and the other entities cannot, and if the government holds a deficit the surplus passes through to companies, individuals, and states. If individuals, corporations, or states have a deficit against the government, then things economically get really painful, unemployment rises, wealth deteriorates, asset prices fall and crisis' are not able to be recovered from efficiently... so government debt really is an absolute necessary in a fiat world, and the U.S. especially is dependent on debt, without debt the whole system would implode. The real question is how much debt is too much? How much debt is healthy? How much debt is optimal? I don't think anyone has an answer to those questions.
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Re: Permanently low interest rates

Post by doodle » Thu Apr 18, 2019 10:58 am

pmward wrote:
Thu Apr 18, 2019 10:36 am
That's the thing, if you eliminate the debt from the system money is retired. The transaction between the government and you pays you the cash, but the balance sheet must equal, the money they pay you doesn't just come from nowhere. Behind the scenes the government would have to either roll a new bond, retire the money, or "print the money" (which even "printing" is really just the Fed creating money out of thin air to buy bonds so they would still be rolling a new bond).
Or just leave the "money" sitting in a non interest bearing account for me at the treasury. I mean the only difference between and bond and currency is that it is printed on different paper and one bears interest and the other doesn't. At that point "debt" becomes "deposit". The lingo surrounding all of this accounts for half the confusion I think.

How can the person who creates the currency ever have "debt"...at least the way this term is commonly used. They have created currency which through arbitrary convention was introduced or spent into the system through a bond issuance. What difference would it have made if they simple printed 100 dollar bill and spent it versus issuing a 100 dollar bond other than the associated interest payments? Government "debt" is simply my savings deposited in an interest bearing account at the treasury.

What is the rationale behind even using the word "debt" with regards to this entire process?
pmward wrote:
Thu Apr 18, 2019 10:36 am
One thing you have to keep in mind, is just like I mentioned above with the trade deficit, where if we have a surplus in one area we need an equal deficit in another. The same relationship exists between the government, corporations, states, and individuals. If one of those entities has a deficit on the whole, then an equal surplus must exist in the other entities. So, as sad as it is to say it, it is better off that the government holds a deficit against the other entities so that the other entities can have a surplus... because the government can print money to cover the deficit and the other entities cannot, and if the government holds a deficit the surplus passes through to companies, individuals, and states. If individuals, corporations, or states have a deficit against the government, then things economically get really painful, unemployment rises, wealth deteriorates, asset prices fall and crisis' are not able to be recovered from efficiently... so government debt really is an absolute necessary in a fiat world, and the U.S. especially is dependent on debt, without debt the whole system would implode. The real question is how much debt is too much? How much debt is healthy? How much debt is optimal? I don't think anyone has an answer to those questions.


So how did the country function and grow for so long without such a large "national debt" ? How were we able to go from the 1790's to really the great depression with such a low level of national debt? Certainly we were growing rapidly as an economy during this time.
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Re: Permanently low interest rates

Post by doodle » Thu Apr 18, 2019 11:02 am

doodle wrote:
Thu Apr 18, 2019 10:58 am
. so government debt really is an absolute necessary in a fiat world, and the U.S. especially is dependent on debt, without debt the whole system would implode.
Is it "debt" that is necessary...or money supply? Why are we calling this "debt"? It carries so many negative connotations and confuses so much.
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Re: Permanently low interest rates

Post by pmward » Thu Apr 18, 2019 11:15 am

doodle wrote:
Thu Apr 18, 2019 11:02 am
doodle wrote:
Thu Apr 18, 2019 10:58 am
. so government debt really is an absolute necessary in a fiat world, and the U.S. especially is dependent on debt, without debt the whole system would implode.
Is it "debt" that is necessary...or money supply? Why are we calling this "debt"? It carries so many negative connotations and confuses so much.
In a fiat currency, national debt is money. They are one and the same.
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Re: Permanently low interest rates

Post by pmward » Thu Apr 18, 2019 11:23 am

doodle wrote:
Thu Apr 18, 2019 10:58 am

Or just leave the "money" sitting in a non interest bearing account for me at the treasury. I mean the only difference between and bond and currency is that it is printed on different paper and one bears interest and the other doesn't. At that point "debt" becomes "deposit". The lingo surrounding all of this accounts for half the confusion I think.

How can the person who creates the currency ever have "debt"...at least the way this term is commonly used. They have created currency which through arbitrary convention was introduced or spent into the system through a bond issuance. What difference would it have made if they simple printed 100 dollar bill and spent it versus issuing a 100 dollar bond other than the associated interest payments? Government "debt" is simply my savings deposited in an interest bearing account at the treasury.

What is the rationale behind even using the word "debt" with regards to this entire process?
"Debt" and "deposit" are the same thing, just like "debt" and "money" are the same thing. When you "deposit" money into a bank you are lending them money, and they owe you that amount of money in return at a future date (i.e. "debt").
doodle wrote:
Thu Apr 18, 2019 10:58 am

So how did the country function and grow for so long without such a large "national debt" ? How were we able to go from the 1790's to really the great depression with such a low level of national debt? Certainly we were growing rapidly as an economy during this time.
We still had a lot of national debt back then. Part of why the Great Depression took so long to recover from was that the government tried to recover through austerity, see my post above as to why austerity is bad, haha. As soon as they devalued the dollar the nation immediately started to recover. The main difference between 2008 and the Great Depression was that the government didn't try austerity and the Fed stepped up and printed money when we needed it. Had they not done that 2008 would have been every bit as bad as the Great Depression. Debt is not always bad. Printing money is not always bad. It's the balancing act of too much vs too little vs just right that is the tricky part.

And let's not forget that just after that period of time, WWII was one of the most indebted times the country ever had as far as debt to GDP is concerned. And debt is not the only way for the country to grow, though it is certainly the easiest lever that can be pulled. Growth of a country without debt requires an equal shrining in other countries. If the money supply is static for one thing to grow something else has to get smaller. It's much easier to grow when the money supply is constantly increasing. Let's not also forget that back when we were on a gold standard we still mined more gold (increased money supply) and still printed money beyond what we had in gold reserves.
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Re: Permanently low interest rates

Post by doodle » Thu Apr 18, 2019 11:27 am

As far as my second question then, how did this country grow for over 100 years with a "national debt" that pretty much stayed constant as a percentage of gdp at around 30%. Whereas the last 60 years has seen it spike to three times that level?
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Re: Permanently low interest rates

Post by pmward » Thu Apr 18, 2019 11:31 am

doodle wrote:
Thu Apr 18, 2019 11:27 am
As far as my second question then, how did this country grow for over 100 years with a "national debt" that pretty much stayed constant as a percentage of gdp at around 30%. Whereas the last 60 years has seen it spike to three times that level?
I already answered that question above... the country grew because other countries shrunk equal to the amount we grew. Also, while debt to GDP stayed relatively stable, absolute debt still increased (because GDP increased, because once again we grew while other countries shrunk)... and we still mined more gold which allowed us to print more money... and even still we manipulated the system by printing money beyond the gold supply... and changed the peg of gold to dollars to print even more money... so just your one statistic doesn't paint the full picture. Money supply was constantly increasing during that time, it was just through different means since we were on a "gold standard".

Comparing fiat to gold standard is not apples to apples. The gold standard is a gold backed system, fiat is a debt backed system. Debt is what gives a fiat currency it's value. I think this is where the wires are getting crossed in your thinking. The rules for both systems are completely different. If we went back on a gold standard things would be very different (subjectively, I wish we would, alas it will never happen). But so long as we are fiat we are stuck with the debt balancing act because debt and money are the same thing in a fiat world.
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Re: Permanently low interest rates

Post by boglerdude » Fri Apr 19, 2019 12:56 am

> Is it "debt" that is necessary...or money supply? Why are we calling this "debt"? It carries so many negative connotations and confuses so much.

Optics. If the gov said "we'll just print money" what do you think would happen to faith in the dollar? This is why MMT is getting pushback from economists.

We could stop issuing new dollars and go into a deflationary system where dollar purchasing power grows as more stuff gets produced. The problem is long term contracts dont adjust for deflation. Mortgage modifications (lowering what you owe to adjust for deflation) are a new thing developed in 08. In the great depression, the bank called the mortgage and took your house.

Also, the public demands a nominal minimum wage, despite it reducing jobs and overall productivity. They demand a guy who sells $10 of ice cream per hour, be paid 15/hour. So, he gets fired. To get around that you can inflate the wage down.

When inflation gets too high you get inefficiencies like having to change the prices on menus every day. And you get clamoring for rent control, which ironically results in less new housing being built because there's less profit in it.
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Re: Permanently low interest rates

Post by pmward » Fri Apr 19, 2019 8:21 am

boglerdude wrote:
Fri Apr 19, 2019 12:56 am

Optics. If the gov said "we'll just print money" what do you think would happen to faith in the dollar? This is why MMT is getting pushback from economists.
It's a bit more than just optics, although it certainly is easier to comprehend using the mental model of optics. To get to the heart of the matter you have to ask, what is a dollar? Well the dollar says right on it that it's a "Federal Reserve Note", in other words cash is a 0% interest bond. The difference between what is commonly understood as a "bond" is that traditional interest bearing bonds are debt of the U.S. treasury and dollars are a debt of the Federal Reserve. When you have a dollar it's the Fed being in debt to you for the value of one dollar. Now in the days of being off the gold standard, the tricky part is what is the "value" of one dollar? It's the faith that the government will honor that debt to you.

Now that we've kind of looked that the fundamental aspect of the dollar being a debt instrument, we can look at the technical aspect of money creation. In our current system as you alluded money is created through issuing bonds. The only way to keep the money supply the same is to keep the debt levels equal. Likewise, as I mentioned above the easiest way to keep the economy growing is to have a constantly increasing money supply, and that's why the Fed targets a 2% inflation rate. Is it a coincidence that GDP growth just happens to average out in the long term to be right around the inflation target? Now things were all well and good until we introduced QE.. where the Fed utilized their balance sheet as a value derivative to essentially create money out of thin air to buy assets from banks and stimulate them with cash essentially created out of thin air. Mind you, to make things even more complicated, even private banks already do this, issuing cash using their balance sheet as a derivative to create money out of thin air. Money is being "printed" every day by banks, even just up the road from you as you read this.

Now the interesting part of this comes down to stimulus. Up until now everything is the same between our current system and MMT. So what is QE? In our current system when we did QE it all went to banks, which functioned in a role to keep the credit markets liquid. This was necessary and saved our bacon back in the initial round of QE. I'm not sure the later rounds of QE did what they were hoping. It certainly allowed asset prices to inflate, but did the benefits actually make it into the economy and increased GDP like they had hoped? I'm not so sure.

I've been doing a lot of reading up on MMT the last few months trying to fully grasp it, because I think its inevitable that we at least test the waters. So I'm going to attempt here to try to formulate the thoughts I have on the subject and throw them out there for discussion/critique. While I very much dislike and am opposed to giving congress the ability to regulate the money supply in any way, I have to say that fundamentally I don't think that MMT is such much worse than what we are currently doing with QE. The problem isn't in the system, the problem is in the people controlling the system that are known to be corrupt.

So now that I've gotten that disclaimer out of the way, let's think of a couple things here. What is the difference between the Fed creating money and giving it to banks, and the Fed creating money and giving it to people? What if instead of doing later rounds of QE they instead chose to stimulate the household sector (or some combination thereof)? Would that have accomplished their goal of increasing the economy and GDP? I would think so. Sure it would have increased inflation a bit, but they were hoping for that so they could start to bring up interest rates and unwind the QE. QE failed to accomplish their goals, and fiscal stimulus of some sort would have helped to those ends.

Another thing is that MMT doesn't have to be cash given away, it can be used for services, and services can be chosen that specifically provide a high ROI. You can read Ray Dalio's recent paper about why capitalism needs to be reformed on this, he does a great explanation. But for a quick example he provided, what if the Fed created money and instead of giving it away to banks, they instead gave it away to K-12 schools around the country? Schools normally fall under state control, so they don't have the ability to print away debt like federal entities can. What happens if they stimulate our public school system, especially the schools that are in areas of rampant poverty that don't have the tax flows of schools in the better areas? Well a few things happen. First in the short term, schools have more money for resources. This stimulates the economy by them purchasing needed supplies, upgrades and raising teacher salaries. Teacher make more money, which means they pay more taxes, which means they spend more, which boosts the economy and GDP. Then let's look at the future impact... studies have shown that better schools and teachers lead to less drug use, less of the population in prison, and a more productive society that earns more money, pays more taxes, and buys more things. So in this case I would say a little fiscal stimulus wouldn't be such a bad thing. Might it boost inflation a bit? Sure, but I think that would be a welcome thing at this point in time so we can get interest rates back up off the floor. https://www.linkedin.com/pulse/why-how- ... -ray-dalio

Where MMT falls on it's face is having congress control the creation of money and using taxes to regulate inflation. It's simply a joke that I will not even bother discussing because we all know how that would end. I think that the government could stick to it's current system and just simply utilize the fiscal stimulus levers when they want to boost GDP and stimulate inflation. I think there are ways, like above that fiscal stimulus could be used responsibly. I also don't think that just giving money to banks is any better or different. So I'm not in favor of wholesale MMT, but I'm not opposed to using the fiscal stimulus lever instead of just doing endless QE where the cash just blows bubbles in the financial assets and does nobody any real good. The problem currently exists that the Fed by law can only provide monetary stimulus, and they have felt like they have had to do something, so we have wound up with a bunch of useless QE that is doing nothing. So if nothing else there needs to be some sort of lever that the Fed, or some other independent body, can pull outside of the normal monetary realm. Else, we risk becoming Japan economically and we risk having a complete political meltdown due to the left and right populists eventually bringing our democracy down on our heads.

I'm still in the learning/research process on MMT, but this is kind of my thoughts at the moment, which are still a work in progress. Our system is very complex and very difficult to understand. I honestly don't think the Fed even fully understands the system, as the effects of their actions are often a surprise to all (like QE failing to stimulate the economy and inflation). I will also state that as such I think it's prudent to hold a gold allocation.
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Re: Permanently low interest rates

Post by Kriegsspiel » Fri Apr 19, 2019 4:18 pm

pmward wrote:
Fri Apr 19, 2019 8:21 am
Now that we've kind of looked that the fundamental aspect of the dollar being a debt instrument, we can look at the technical aspect of money creation. In our current system as you alluded money is created through issuing bonds. The only way to keep the money supply the same is to keep the debt levels equal.
Hmm, would it? A citizen purchases (loans to the government) a $1,000 Treasury. If the government uses that $1,000 loan to purchase goods or services, then whoever supplied them also now has $1,000 dollars. They don't have their goods or services/labor any more, but presumably they made a profit, so they're really only out $800 or $950 or whatever their profit margin is, which would create commensurately more money.

Plus, after a year, the government gives the lender back $1,002 or whatever. Now the Fed would be in more debt to you, since you have 2% more dollars, even if they didn't do anything with the money in the mean time.

This doesn't even take into account private bank lending, which is the main source of money in a fractional reserve system as you say below.
Likewise, as I mentioned above the easiest way to keep the economy growing is to have a constantly increasing money supply, and that's why the Fed targets a 2% inflation rate. Is it a coincidence that GDP growth just happens to average out in the long term to be right around the inflation target? Now things were all well and good until we introduced QE.. where the Fed utilized their balance sheet as a value derivative to essentially create money out of thin air to buy assets from banks and stimulate them with cash essentially created out of thin air. Mind you, to make things even more complicated, even private banks already do this, issuing cash using their balance sheet as a derivative to create money out of thin air. Money is being "printed" every day by banks, even just up the road from you as you read this.

Now the interesting part of this comes down to stimulus. Up until now everything is the same between our current system and MMT. So what is QE? In our current system when we did QE it all went to banks, which functioned in a role to keep the credit markets liquid. This was necessary and saved our bacon back in the initial round of QE. I'm not sure the later rounds of QE did what they were hoping. It certainly allowed asset prices to inflate, but did the benefits actually make it into the economy and increased GDP like they had hoped? I'm not so sure.
From what I gather, QE was intended to get the banks to make loans; if the banks were making loans, then deflation would be kept at bay. But the banks were leery of making loans that they didn't think were going to be paid back (mortgages). I think they were willing to make business loans to corporations, which they did, but as Das showed in The Age Of Stagnation, corporations generally were at a loss as to what to do with the credit that was available to them (other than buying back stock).
While I very much dislike and am opposed to giving congress the ability to regulate the money supply in any way, I have to say that fundamentally I don't think that MMT is such much worse than what we are currently doing with QE. The problem isn't in the system, the problem is in the people controlling the system that are known to be corrupt.
At least bankers are somewhat intelligent, as opposed to a lot of Congress. After seeing Maxine Waters on video, I am inclined to believe she is mentally retarded. As the Prussian general says, fear the industrious & stupid.
So now that I've gotten that disclaimer out of the way, let's think of a couple things here. What is the difference between the Fed creating money and giving it to banks, and the Fed creating money and giving it to people?
"Giving money" to banks means they'll try to make more loans. But if they can't find any good borrowers, they don't have to destroy capital. And if they were on the hook for losses, they wouldn't be morally hazarded to make bad loans. Giving money to people will cause inflation in the absence of new products/services being created.
What if instead of doing later rounds of QE they instead chose to stimulate the household sector (or some combination thereof)? Would that have accomplished their goal of increasing the economy and GDP? I would think so. Sure it would have increased inflation a bit, but they were hoping for that so they could start to bring up interest rates and unwind the QE. QE failed to accomplish their goals, and fiscal stimulus of some sort would have helped to those ends.
If giving people money that was created out of thin air (as opposed to being created for a new good/service) to buy goods/services, and thus causing inflation, accomplishes a goal (increasing GDP), is that a good goal to have? GDP only seems useful if it's measuring a country's productivity/standard of living.
Another thing is that MMT doesn't have to be cash given away, it can be used for services, and services can be chosen that specifically provide a high ROI. You can read Ray Dalio's recent paper about why capitalism needs to be reformed on this, he does a great explanation. But for a quick example he provided, what if the Fed created money and instead of giving it away to banks, they instead gave it away to K-12 schools around the country? Schools normally fall under state control, so they don't have the ability to print away debt like federal entities can. What happens if they stimulate our public school system, especially the schools that are in areas of rampant poverty that don't have the tax flows of schools in the better areas? Well a few things happen. First in the short term, schools have more money for resources. This stimulates the economy by them purchasing needed supplies, upgrades and raising teacher salaries. Teacher make more money, which means they pay more taxes, which means they spend more, which boosts the economy and GDP. Then let's look at the future impact... studies have shown that better schools and teachers lead to less drug use, less of the population in prison, and a more productive society that earns more money, pays more taxes, and buys more things. So in this case I would say a little fiscal stimulus wouldn't be such a bad thing. Might it boost inflation a bit? Sure, but I think that would be a welcome thing at this point in time so we can get interest rates back up off the floor. https://www.linkedin.com/pulse/why-how- ... -ray-dalio
Will come back to this.
You there, Ephialtes. May you live forever.
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Re: Permanently low interest rates

Post by Kbg » Fri Apr 19, 2019 4:23 pm

This stuff can make your head explode. I think one of the best sources for understanding is pragcap.com. Lots of excellent material there. Two articles are very helpful...what is money and where does money come from. The first is the most important...really when you peel the banana money is pure faith.

I really think there is a Nobel prize somewhere in the decades ahead for who ever figures out what is going on right now. it’s relatively clear current economic theory isn’t descriptive of reality.
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Re: Permanently low interest rates

Post by pmward » Fri Apr 19, 2019 5:00 pm

Kriegsspiel wrote:
Fri Apr 19, 2019 4:18 pm
pmward wrote:
Fri Apr 19, 2019 8:21 am
Now that we've kind of looked that the fundamental aspect of the dollar being a debt instrument, we can look at the technical aspect of money creation. In our current system as you alluded money is created through issuing bonds. The only way to keep the money supply the same is to keep the debt levels equal.
Hmm, would it? A citizen purchases (loans to the government) a $1,000 Treasury. If the government uses that $1,000 loan to purchase goods or services, then whoever supplied them also now has $1,000 dollars. They don't have their goods or services/labor any more, but presumably they made a profit, so they're really only out $800 or $950 or whatever their profit margin is, which would create commensurately more money.

Plus, after a year, the government gives the lender back $1,002 or whatever. Now the Fed would be in more debt to you, since you have 2% more dollars, even if they didn't do anything with the money in the mean time.

This doesn't even take into account private bank lending, which is the main source of money in a fractional reserve system as you say below.
The piece you're missing is where does the government get the money to pay back the debt? The only way to pay it without issuing new debt or printing money is through austerity. It's taking money from the tax supply to pay down the debt, which is no different than retiring the money they borrowed in the first place. In small quantities that is fine, but if they do this at mass scale it will cause liquidity issues and a lot of pain in the economy. They've basically created a mess that is almost impossible to unwind. So the real question is where do we realistically go from here?
Kriegsspiel wrote:
Fri Apr 19, 2019 4:18 pm
Likewise, as I mentioned above the easiest way to keep the economy growing is to have a constantly increasing money supply, and that's why the Fed targets a 2% inflation rate. Is it a coincidence that GDP growth just happens to average out in the long term to be right around the inflation target? Now things were all well and good until we introduced QE.. where the Fed utilized their balance sheet as a value derivative to essentially create money out of thin air to buy assets from banks and stimulate them with cash essentially created out of thin air. Mind you, to make things even more complicated, even private banks already do this, issuing cash using their balance sheet as a derivative to create money out of thin air. Money is being "printed" every day by banks, even just up the road from you as you read this.

Now the interesting part of this comes down to stimulus. Up until now everything is the same between our current system and MMT. So what is QE? In our current system when we did QE it all went to banks, which functioned in a role to keep the credit markets liquid. This was necessary and saved our bacon back in the initial round of QE. I'm not sure the later rounds of QE did what they were hoping. It certainly allowed asset prices to inflate, but did the benefits actually make it into the economy and increased GDP like they had hoped? I'm not so sure.
From what I gather, QE was intended to get the banks to make loans; if the banks were making loans, then deflation would be kept at bay. But the banks were leery of making loans that they didn't think were going to be paid back (mortgages). I think they were willing to make business loans to corporations, which they did, but as Das showed in The Age Of Stagnation, corporations generally were at a loss as to what to do with the credit that was available to them (other than buying back stock).
Yeah I agree with this. QE was necessary in the first round, but it's been useless in the subsequent rounds. I think a lot of those issues you mentioned came into play. I'm not sure the exact cause, but it's obvious that all of the QE wound up in assets instead of working it's way through the economy like they intended.
Kriegsspiel wrote:
Fri Apr 19, 2019 4:18 pm
While I very much dislike and am opposed to giving congress the ability to regulate the money supply in any way, I have to say that fundamentally I don't think that MMT is such much worse than what we are currently doing with QE. The problem isn't in the system, the problem is in the people controlling the system that are known to be corrupt.
At least bankers are somewhat intelligent, as opposed to a lot of Congress. After seeing Maxine Waters on video, I am inclined to believe she is mentally retarded. As the Prussian general says, fear the industrious & stupid.
No arguments from me here on this one, haha. I think that if the government wants to provide a fiscal stimulus lever it either needs to be somehow worked through the Fed, or perhaps another independent party that works as an intermediary between the Fed and congress. I think that congress taking control of the monetary policy is a nightmare waiting to happen. It will basically result in them printing money to buy themselves election.
Kriegsspiel wrote:
Fri Apr 19, 2019 4:18 pm
So now that I've gotten that disclaimer out of the way, let's think of a couple things here. What is the difference between the Fed creating money and giving it to banks, and the Fed creating money and giving it to people?
"Giving money" to banks means they'll try to make more loans. But if they can't find any good borrowers, they don't have to destroy capital. And if they were on the hook for losses, they wouldn't be morally hazarded to make bad loans. Giving money to people will cause inflation in the absence of new products/services being created.
Well, part of the problem is that we converted from a corridor system to a floor system. Banks are now paid interest on their reserves, whereas before they had to lend the money to generate a return. It's attractive to collect that 2.25-2.5% per year risk free as opposed to risking that money by lending it out. I think the floor system was OK back in 2009/2010, but after we were out of the crisis woods we should have swapped back to a corridor system. And yes I agree that fiscal stimulus would create inflation, but right now I think that we need to generate some inflation. Right now our biggest risk is that the Fed does not have the firepower it needs to fight another strong recession. Historically it has taken at least a 5% cut in interest rate to reflate the economy, and in 2008 it took much more than that when you count all the QE in the equation. If we can get a boost inflation they can raise rates, which would be good in the long term. They've been trying to create inflation so they could raise rates and start unwinding QE and failing miserably at it. In this case some fiscal stimulus might not be so bad? I'm not for using these stimulus levers unless they are absolutely needed, but I think a case can be made that we desperately need to get interest rates back up to normal or we risk a devastating and long lasting crisis which will lead to more populism and potentially the destruction of capitalism and democracy in the U.S.
Kriegsspiel wrote:
Fri Apr 19, 2019 4:18 pm
What if instead of doing later rounds of QE they instead chose to stimulate the household sector (or some combination thereof)? Would that have accomplished their goal of increasing the economy and GDP? I would think so. Sure it would have increased inflation a bit, but they were hoping for that so they could start to bring up interest rates and unwind the QE. QE failed to accomplish their goals, and fiscal stimulus of some sort would have helped to those ends.
If giving people money that was created out of thin air (as opposed to being created for a new good/service) to buy goods/services, and thus causing inflation, accomplishes a goal (increasing GDP), is that a good goal to have? GDP only seems useful if it's measuring a country's productivity/standard of living.
I think it achieves the goal of allowing us to clean up the mess that was made in the financial crisis. I think that we had no choice back then but to liquify the system. Now we are living with the consequences. And until we get some inflation and GDP growth in the system I think we are at a great risk of an even worse crisis than we had in 08. I think that the asset bubbles that the Fed created alongside anemic growth, and the fact that they've created an environment where people are only rewarded for taking high risk, is dangerous. I think that the fact that they stimulated the banks and corporations but did not do anything to help the households created populism of the left, which in turn created populism of the right. I think that the political and economic ramifications if the government doesn't do *something* are "yuge". I think the period of time we are in reminds me a lot of the 1930's and that is scary. My views tend to be fairly in line with Dalio's in that link, so if you read through it he does a better job of expressing his views than I am; I'm still kind of formulating and refining my thoughts and opinions on the subject. Discussing them here helps that process a lot.

Also, as a side note, none of what I am mentioning is what I think is the optimal system. I assume that we are likely to be inline with what we think is optimal, and that's a stable value dollar system. What I'm doing is looking at the reality of the crap economic and political situation we are in and comparing and contrast our current system with MMT, and seeing if there are any merits that can be gleaned from it that could potentially be a happy medium between one crap system and another crap system.
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Re: Permanently low interest rates

Post by boglerdude » Fri Apr 19, 2019 10:08 pm

The future is Japan. Fed's gonna buy stocks in the next asset price downturn, like Japan's doing now. MMT is just semantics, we already print money, MMT is a moral crusade from a few economists who get triggered when politicians say "but there isnt enough cash for that social program"

UBI wont work because hookers and drugs. None of you here are addicts so you cant understand it. Free food, medcare, transportation and internet are better. Minimum wage and extreme property rights (Restrictive zoning, overly generous patent protection, underused eminent domain ie cant build high speed rail) are whats holding down GDP
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Re: Permanently low interest rates

Post by pmward » Sat Apr 20, 2019 9:15 am

boglerdude wrote:
Fri Apr 19, 2019 10:08 pm
The future is Japan. Fed's gonna buy stocks in the next asset price downturn, like Japan's doing now. MMT is just semantics, we already print money, MMT is a moral crusade from a few economists who get triggered when politicians say "but there isnt enough cash for that social program"

UBI wont work because hookers and drugs. None of you here are addicts so you cant understand it. Free food, medcare, transportation and internet are better. Minimum wage and extreme property rights (Restrictive zoning, overly generous patent protection, underused eminent domain ie cant build high speed rail) are whats holding down GDP
I don't think I strongly disagree in a general sense with any of this, though it may be a bit overstated in some cases.

I think the main point I'm getting at is that we still have a deflation problem that has been hanging over our heads since 2008. Whether that is because of giving free shit away, because low interest rates yield deflation, because of other countries, because we saved businesses instead of letting them fail, because of the Eurodollar, etc I don't know. There's a billion reasons and conspiracy theories we can hypothesize on why this is happening, but the reality is nobody, the Fed included, has any clue what is going on. Like kbg stated earlier, all of the textbooks have been proven wrong at this point. So if a lot of things we believed to be fundamentals of economics have been proven wrong, where do we go from here?

We have a deflation problem and we are on a fiat currency. So, the only way to fix a deflation problem on a fiat currency is to generate some inflation. It's been clearly proven that purchasing assets has not done the trick. So I personally see nothing wrong with trying to pull the fiscal stimulus levers a bit to see if that works. I'm not saying the fiscal faucet needs to be permanently turned on, but given the current situation and potential dire circumstances we face, I am open to the idea.

There's two guaranteed ways to generate inflation and growth (both tend to go hand in hand). The first and best way is through population growth. Since we are not reproducing at levels that we once did in this country I think that our current anti-immigration push is folly. Republicans used to get this idea, it's sad that they've lost touch with it in recent years. We either need to find a way to convince people to start having more kids, or we need to be more open to immigration. This is not a short term fix, but it is the best long term fix for the issue. A growing population is a growing economy.

The second is to stimulate spending. So far, corporations, banks, and anyone holding large amounts of financial assets are the only people that have received any benefits from the government stimulus. Yes, you heard that right, you, me, all of us here on this forum have received government stimulus over the last decade because asset prices have become disconnected from earnings and now simply follow the Fed. And since most people (like us) who have been stimulated by the government tend to be wealthy savers, the money has not made it back to the economy. One way to increase the demand side is to stimulate the part of society that will spend it all. Like I mentioned above, that doesn't have to even be giving away money directly to people. That could go to education, health care, state governments, organizations, infrastructure, whatever. There are some ways the money could be used that have a high return on investment. I'm not a democrat and I don't agree with 99% of what they stand for, but I don't think it's so bad stimulating the one part of the economy that has not received any stimulus yet to try to spur some inflation. Is this really any worse than giving money away to banks? What is the difference between printing money to give to banks, printing money to inflate asset prices, and printing money to give to "social programs"? I don't think there is any of those that is any more/less evil than the other. The government has been picking the "haves" and "have nots" for the last decade instead of letting capitalism and democracy do the job for them. That has been the root of the populist movements we have going on, that threaten our country as we know it. It's this cronie capitalism and the government intervening in the markets that is the problem, and it's led to an entire political party revolting and ready to throw the baby out with the bathwater by calling for the head of capitalism as a whole. It's not capitalism that's broken, it's simply its current incarnation over the last 10 years that is broken and needs to evolve.

What are the repercussions if we don't pull the fiscal stimulus levers a bit? Continued populism which could lead to authoritarian rule and destruction of both capitalism and democracy in the U.S? Civil war? World War III? What happens in the next recession when we only have 2% of interest rates to cut? What do we do when we hit the 0 bound again and it's not enough? Give more money to banks? Go to negative interest rates? I mean, we are running out of options. The situation is a lot more dire than most people comprehend.

I also do want to state again that I do not think this is optimal and if I were in charge of designing the economic system from the ground up it would not look like this. I think the reality of our system and the mess we are currently in has put us in a bind. This is a fight for survival at this point, not a pursuit of optimization.
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Re: Permanently low interest rates

Post by ochotona » Sat Apr 20, 2019 9:52 am

This situation strikes me as being like that of a poor soul diagnosed with prostate cancer. Do you remain vigilant and simply monitor, or do you treat? There are arguments for doing both.
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Re: Permanently low interest rates

Post by pmward » Sat Apr 20, 2019 9:54 am

ochotona wrote:
Sat Apr 20, 2019 9:52 am
This situation strikes me as being like that of a poor soul diagnosed with prostate cancer. Do you remain vigilant and simply monitor, or do you treat? There are arguments for doing both.
That is indeed a very good analogy. Of course, one side of the body cannot wage war on the other side of the body if treatment is not issued.
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Re: Permanently low interest rates

Post by pmward » Sat Apr 20, 2019 1:24 pm

MangoMan wrote:
Sat Apr 20, 2019 11:06 am
Both of these go hand in hand. You are not going to convince people to have more kids; it's a different country than in 1900. But if you are going to have immigration, which I am fine with, it has to be legal and selective, i.e., productive intelligent people who will be contributors to the economy and tax system, not simply users of social safety nets at the current taxpayers' expense.
Of course, there has to be a process. A completely open border that lets everyone in and gives anyone here access to the social benefits of citizens is silly. The problem is the current process for citizenship is a joke. There are plenty of well educated and productive people in foreign countries that would love to come here, but the process takes forever and is a complete joke. have a friend who is married to a Canadian immigrant that is currently here on visa. She's educated and even teaching at the state university here, but even still getting citizenship has been an arduous multi-year process akin to pulling teeth.

The populists on the right have also grown anti-immigration of any kind though, and that's the trend we as a nation as a whole seems to be currently going down. The right populist friends of mine remind me of South Park when they talk about immigration: "they took our jurbs" https://www.youtube.com/watch?v=toL1tXrLA1c&t=14s . They don't realize that for every job an immigrant takes, it creates net new jobs through their contributions to the economy. Both sides of the equation *have* to balance. So we really are at a point in time where both sides are very wrong. The left populists want us to rescue the world and we don't have the ability to do that. The right populists want us to lock the borders down and not let anyone in. Both sides are wrong, imo. And because of that we all as a whole will suffer the consequences.
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Re: Permanently low interest rates

Post by pmward » Sat Apr 20, 2019 3:32 pm

MangoMan wrote:
Sat Apr 20, 2019 2:30 pm
Well, that in a nutshell is why the West is going down the tubes. Everything is polarized left and right, no one is willing to compromise or entertain alternative points of view, and the people in the middle (who are probably closest to reality) are grossly outnumbered and ignored.
Haha, truth right there. I have a number of friends on both sides of the spectrum, and none of them know how to handle an independent thinker like myself. They are so used to only having two neat little packages to choose from that when someone like me comes and actually starts challenging them to think things through to their logical conclusions they just completely lock up and lose interest. They would rather be in discussions where people are either agreeing with them wholesale, or they are arguing with the other extreme. Alternative views don't seem to hold their interest.

I personally don't understand the herd mentality. I've always wanted to look at the data with an unbiased eye and form my own conclusions. I don't understand how others would not want to do the same. I guess ignorance truly is bliss /shrugs.
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Re: Permanently low interest rates

Post by boglerdude » Sat Apr 20, 2019 11:11 pm

^ its not a choice, they're not capable and we have to work around that. Legal immigrants DO take "good" jobs. Jobs that overpaid given how complex they are. In the 70s you could get $20/hour to stamp out widgets. Now thats done in Vietnam and those Americans are either unable or unwilling to struggle with computer science etc. I know I hate coding.

Re: econ being "mysterious" its because bloggers use the terms cash, money, and credit interchangeably and they're not always the same. eg If I have $1k in my wallet but I borrowed it, do I have cash? Money? Credit? Are stocks money?

Also, the Fed knows what they're doing but cant speak in plain english about money printing. If everyone understood inflation they'd demand inflation-adjusted wages and they'd save less cash and buy commodities, surging inflation. The more people save cash, the more the gov can print to get free stuff.

And the Fed has to prevent panic so they always have to act like everything's fine. Finally, the economy is gigantic so they cant move it quickly.

Is deflation bad? Global population will eventually shrink and robots will make cars and food for free. Prices are going to fall.

This is bad because wages wont fall (so they get fired) and long contracts are written without falling prices considered possible. But Im not sure "fighting deflation" with more printing is the best fix. Maybe those wages could be allowed to fall, and if your house loses value the mortgage could too.
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Re: Permanently low interest rates

Post by Kriegsspiel » Sun Apr 21, 2019 11:47 am

MangoMan wrote:
Sat Apr 20, 2019 11:06 am
pmward wrote:
Sat Apr 20, 2019 9:15 am
boglerdude wrote:
Fri Apr 19, 2019 10:08 pm
UBI wont work because hookers and drugs.
There's two guaranteed ways to generate inflation and growth (both tend to go hand in hand). The first and best way is through population growth. Since we are not reproducing at levels that we once did in this country I think that our current anti-immigration push is folly. Republicans used to get this idea, it's sad that they've lost touch with it in recent years. We either need to find a way to convince people to start having more kids, or we need to be more open to immigration.

I also do want to state again that I do not think this is optimal and if I were in charge of designing the economic system from the ground up it would not look like this. I think the reality of our system and the mess we are currently in has put us in a bind. This is a fight for survival at this point, not a pursuit of optimization.
Both of these go hand in hand. You are not going to convince people to have more kids; it's a different country than in 1900. But if you are going to have immigration, which I am fine with, it has to be legal and selective, i.e., productive intelligent people who will be contributors to the economy and tax system, not simply users of social safety nets at the current taxpayers' expense.
If only intelligent (read: educated) immigrants are allowed in, it won't raise fertility levels, because educated people (females, more accurately) have lower fertility rates than less educated. That's not necessarily the worst thing in the world, and hopefully they can get to work building the robots and fusion reactors. What seems to follow, and what I don't think is correct, is the idea that since our population isn't having enough kids, we need to raise our immigration levels.
You there, Ephialtes. May you live forever.
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Re: Permanently low interest rates

Post by Kbg » Sun Apr 21, 2019 5:40 pm

I’m going to break ranks with this thread, by the vast majority of objective economic indicators the US is doing extremely well right now. Inflation is low (with NO deflation) wages are up, unemployment is down, corporate profits are doing quite well, tax receipts are up. It’s quite easy to receive an objective view of the US economy with about 5-10 data points from the FRED website. In fact, you can do it pretty well with just 1 - the monthly employment numbers.

We can debate economic inequality, the best way to do stimulus, debt levels, quality of jobs etc. but the economy is very solid.
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Re: Permanently low interest rates

Post by pmward » Mon Apr 22, 2019 9:11 am

Kbg wrote:
Sun Apr 21, 2019 5:40 pm
I’m going to break ranks with this thread, by the vast majority of objective economic indicators the US is doing extremely well right now. Inflation is low (with NO deflation) wages are up, unemployment is down, corporate profits are doing quite well, tax receipts are up. It’s quite easy to receive an objective view of the US economy with about 5-10 data points from the FRED website. In fact, you can do it pretty well with just 1 - the monthly employment numbers.

We can debate economic inequality, the best way to do stimulus, debt levels, quality of jobs etc. but the economy is very solid.
An argument can also be made that whenever the economy has looked that good by the statistics you listed, it usually was the peak of the cycle. Just because we are doing good today does not mean we will be good next year, or the year after. Especially since there is an awful lot of kindling laying around right now in the form of record high corporate debt.

People thought that sub-prime mortgage bubble caused a lot of pain, the current corporate debt landscape could turn out to be much worse. A decade of low interest rates caused a lot of malinvestment and a lot of zombie companies. Every debt bubble in history has always popped, there has never truly been a such thing as a "soft landing". If we stay in our current anemic growth and inflation environment I see no way we make it through the next decade without another large scale crisis/deleveraging caused by corporate debt. The weakness of the central bank system is that they don't look forward at all, they look at a few indicators and ignore the bubbles that they cause. If nothing changes there will be a large scale purge, with massive corporate debt defaults and a lot of businesses failing, and the Fed will not have the firepower to generate another V bottom like they did in 2008. This time it will be a long, painful, drawn out affair. This is what causes me to lose sleep at night, haha.
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