Money is strange, right? It literally doesn't exist yet it can run out and cause entire nations to go into chaos. Since it is literally a sociological experiment, are we going to get to the point where we fine tune the allotment such that we disable down-turns? It's almost as if we simply just get angsty all at once, see a global therapist and the economy recovers.
I'm sure someone has come up with a better analogy, but dollars are like electrons, they only do work when they move.
I was looking at some other HN thread a while back and there was someone talking about how a subscription model works much better for investors because the regularity of returns worked best with expectations from the investors. And it occurred to me at that time that this electric analogy might extend to impedance matching between investor and investee...with the best matched networks operating the most efficiently. (And of course, if you can develop an investment model that matches underserved opportunities you might find a way to make some money.)
Upvoting because, to be honest, the moving electrons/moving dollars analogy works really well for me, and especially I think that's a useful analogy. For a society, in general, dollars sitting idle in a bank account instead of being spent on something constructive or services where someone is getting paid for work or something of utility is being built/created are not, from my perspective, useful to that society. Sure, someone's balance sheet might be achieving larger-and-larger numbers, and that serves their own purposes, but not those of greater society.
If you think money is just sitting in a bank account then you misunderstand how the economy works. Money in a bank gets reinvested by the bank and funds loans, mortgages, and credit. The only money that isn't moving is dollars literally stuffed under a mattress and what the bank keeps on hand to fulfill reserve requirements.
Sort of. Banks want to loan out money. But when consumer spending drops, they loan out less. In a recession there is more risk, so it’s harder to find profitable loans to make. The money does get stuck.
It is not possible to disable downturns. It sounds different if framed as the longest economic bender in history. The hangover is likely to be brutal.
Alternatively one might argue that what is happening is a kind of bifurcation. The wealthy and well measured get an ongoing expansion while the poor, shiftless, and unrecorded fall through the cracks at alarming rates. We didn't have homeless families in significant numbers when I grew up and now they are pervasive. That is pretty poor real performance for a best ever economy.
By that same logic, you might also argue it's not possible to stifle success. The very formation of the central bank was (besides self enrichment) made to stabilize the economy. So in that sense you're quite wrong.
it was the government that caused this in the first place. I always wonder why people suggest this, when the "cure" to the ailment is more of the disease.
All this "growth" is largely driven by the debt and grand wisdom of the Fed's monetary policy. Those closest to the money printing press get undiluted gains and by the time that money circulates back down to the general population, they are robbed from their wealth by devaluing the currency. Furthermore, looking at the money supply, the banks aren't actually distributing and lending out that capital like they should. Long story short this is a direct causation of government policy.
Let's pick EPA for a second here. It's a bit rich to claim they have no idea what they are doing and should be abolished because the free market would fix the world around it.
For example, let's cherry-pick the Clean Air Act and its effects: "In addition, because air quality across the United States improved; it is estimated 205,000 premature deaths and millions of other respiratory complications were prevented which resulted in an economic savings of $50 trillion versus the $523 billion invested to meet the Clean Air Act standard."
By doing stuff like "guaranteeing" student loans, encouraging policies of buying homes with high credit, getting the Fed to lower interest rests too much (making credit so cheap and easy companies don't even use their profits to buy/invest in stuff anymore; they even use credit to buy back their stock. Insanity), etc
All of that distorts the market and makes everyone spend money they don't actually have. Eventually all of this catches up with everyone, on a country-wide scale.
==makes everyone spend money they don't actually have.==
So much for all that personal responsibility we used to hear so much about. Far easier to blame the government for everything.
Companies use credit to buy back stock because we deregulated that activity. It used to be that the government didn’t allow it. This point is actually a counter-point to your theory.
Huh? The homeless rate has been going down across the country over the past few years. Maybe you're just in one of the few states where it has been increasing, like New York, California, or Massachusetts.
Totally depends on definition of "homeless". Some use a definition based on whether someone has a roof over their head most nights, the narrowest definition possible. I prefer a definition based on legal rights: Does the person have property rights (owners/renters/housing benefits etc) in a stable domicile. That means those couch surfing, in shelters and illegal residences are counted as homeless alongside the people literally sleeping in the open air.
Few would doubt the rise of the "working homeless" across the western world. The concept of someone having a fulltime job and still not able to afford rent is new. It is today's sharecropping imho.
And then there is the other modern phenomena: the legally mandated homeless. Every large city in the US now seems to have a bridge or overpass filled with people who are not legally allowed to live anywhere else. Stringent limitations on where certain convicts may live is also new.
I'm nowhere near SF and the cheapest rent in town is 1400/month. That's a one-room basement, quasi-legal, basement suite under a house beside the airport. So ... ya.
Persuasion is the most powerful force in the world. You can literally create money out of nothing, if you can persuade the masses of an optimistic future.
Sure, it’s a herd effect. Investors pull their money and consumers spend less. This reinforces itself until the govt injects money via a stimulus or bailout.
Money is just a promise. You promise that you do something for somebody and in exchange you get money which you can convert to another promise. In the end it depends on the reliability of the people who use it whether money exists or dissolves into a broken promise.
At the moment the promises are high. We will see whether they can be fulfilled.
Money is strange, indeed. But disabling downturns might be something we don’t want.
From the article: “Recessions are a healthy, necessary part of the economic cycle. They keep investors, businesses, and households disciplined. They remove overcapacity and make room for innovation and evolution. The US has endured 42 recessions and five depressions since the 1780s. The US economy recovered from every single one, returning to growth within an average of roughly one and a half years. That includes the 39 recessions and depressions that proceeded the establishment of the Federal Reserve in 1913, and the 20 that occurred when the US had no central bank at all. The eras of the most robust growth in American history have been punctuated by frequent recessions, not long stretches without them.”
I like the analogy of getting ansgty all at once and seeing the therapist. I probably wouldn’t characterize down-turns as money running out, though. This might be what you meant, but the money doesn’t run out per se, recessions are more like angst leading to shyness, it’s less activity rather than less money. If the money actually ran out, I imagine the chaos might be a lot bigger than we’ve ever seen.
Yes Japan is a perfect example. Having low rates for a long time has given rise to a lot of companies that are frankly non-competitive and would fail immediately if interest rates were raised. Consumers do not win because the quality of these companies are low.
This is idiotic. We don't need a recession to clear detritus from the economy, that should be the result of routine investment. We get recessions because the economy as a whole overcommits to speculation because investors have too much money and too little sense. This is unnecessary, as thw Great Moderation shows. https://en.m.wikipedia.org/wiki/Great_Moderation
Money is quite simple - it is the accumulation of value of individual work. The same way batteries store electricity - money store value of work. The same way batteries exchange stored electricity to perform work, money is exchanging stored value to work of others that we desire.
Yeah even putting aside demand (just because someone spent 50 years making one really good vase doesn't mean 50 years of pottery wouldn't be better even if the potter had to dredge all of the clay themselves instead of using apprentices or hired servants) it has been obviously broken since the Industrial revolution at least but had predecessor cases that pointed out it wasn't true. Aquaducts or irrigation canals alone snap it in half.
It goes from "effort to haul X ammount of water Y distance by N people" to "and it just flows after this constant work".
Why? A 100 dollar bill, is a reciept that promises to buy you 100 dollars worth of value. Previously that value was tied to gold, but now it’s a more flexible notion.
What do you mean? It has been proven empirically, see work done by Paul Cockshott. Coming from pure reason, the theory is pretty sensible as well, and provides a good model to understand the origin of value in the economy. It is especially useful when trying to understand the effects of massive automation on society.
>>it is the accumulation of value of individual work
But it's not though is it? When money itself can do the work (investing) then this whole thing sort of falls apart. A battery can't create a larger battery by itself. Also plenty of people inherit their "batteries" or find them through random chance (lotteries, sweepstakes, etc.)
This all sounds good in theory but I don't think it really holds up when examined closely.
Modern money is more debt and promise rather than fruits of labor. Most money is created by loans which are 90% invented money (10% deposit to loan ratio, Federal Reserve "funding", etc). So 90% of all loan money is just a marker of debt and a promise to repay rather than the fruit of anyone's labor. But you pay massive amounts of compounded interest on that invention, and many/most people work most of their lives to pay off their mortgages. So we must churn out grain our entire lives for basic necessities because people have access to this marker, and they will price you out of a home if you won't get on the treadmill with them.
There is a social/historical commentary and a philosophical/political science discussion to be had here, but unfortunately I don't have the time right now...
That's not entirely it. Money is a generic and nigh-universally honored claim on future production.
It is the "pay it forward" method of splitting full barter trades into two time-separated half-trades. Instead of giving you a chicken for a bag of milled chicken feed, I can buy the feed for money now, and you can spend that money on a chicken later. Or on something else. It presumes that there will be a chicken to buy later, and that other people won't end up wanting the chicken more than you.
In order to accumulate value from individual work, that value has to be rolled into something durable, or it decays and is lost.
When labor produces a consumable good or service, the value exists only until the good or service is consumed. Why would anyone work on consumables? Because we live on consumables. We eat; we drink; we drive; we set thermostats; we end-user-license IP.
When labor produces a capital improvement, future labor output is multiplied. That's a permanent increase in value, provided that there is some useful purpose for that multiplied labor to work toward. The fisherman can trade fish for a net, or trolling motor, or ice-chest, and thus have more future fish to trade per unit of labor.
The stream of consumables is created by labor, multiplied by capital, and then annihilated by consumption shortly thereafter. That value can be stored for some amount of time in stockpiles and warehouses, but then entropy eats some of it, rather than making it to the consumers.
Money allows the holder to bid for some fraction of the stream of consumables. Divert a tiny stream toward your personal cup for a fraction of a second, and then drink it.
When you hold money, its value is the flow rate of the consumption stream, divided across the quantity of all money.
It's not a battery. It's a voucher for a quantity of grid power. As long as the grid operates reliably, it works the same in practice. But if you really want to store the value of your work, you need to buy goods that multiply the consumable output of your work, or stockpile consumables whose values decay more slowly over time than most.
So it's not quite that simple, especially when some people start issuing themselves claims on future production when they are not actually producing anything now, or planning on producing anything in the future.
I’m not sure all types of money have this characteristic, but debt-based money in a fractional reserve banking system certainly seems to. The banks are perpetually insolvent because the time structure of their assets (loans) doesn’t match the time structure of their liabilities (“deposits”). At any time a bank run can bring them and the entire economy down. Sure, the government guarantees their deposits, but AFAIK they don’t provide anywhere near enough insurance. Not to mention the moral hazard it creates for banks to act recklessly.
It’s been a while since I read up on the topic, but the origins of fractional-reserve banking sound a lot like fraud that got blamed on the hard money that exposed it. (https://www.amazon.com/dp/1933550287)
> It literally doesn't exist yet it can run out and cause entire nations to go into chaos. Since it is literally a sociological experiment, are we going to get to the point where we fine tune the allotment such that we disable down-turns?
The idea isn't to disable them but make them less drastic. There will always be misallocations of resources that need to be corrected.
Think of the economy like a forest and downturns like a forest fire. The downturns (fires) are a necessary part of the lifecycle of the economy (forest) since they remove inefficient or incompetent companies and reallocate their resources for better uses (burn away the driest and dead wood and fertilize the ground for new saplings)
> yet it can run out and cause entire nations to go into chaos. Since it is literally a sociological experiment, are we going to get to the point where we fine tune the allotment such that we disable down-turns?
Yes. Money comes into existence ex nihilo. There are trillions of USD in existence today, but the dollar has only existed since 1792. They came into existence by the power of the government printing press. We can "run out" in the sense that we don't have sufficient dollars in circulation, which is a very severe problem, but the solution can be summarized in a simple way: have the government create more money.
And how does the government create more money? By spending it into existence.
Is it real growth or just inflation showing up primarily in asset prices?
At the street level it looks as if some recovery has occurred, but you certainly can't compare it to the "roaring 90s." The average person has not felt much of this.
I think that GDP (and therefore inflation) don't actually measure what they used to.
You can measure the number of cars being produced and houses built. It doesn't really matter how you quantity value the value of a 1999 vw golf relative to the 2019 model. Once iphones, Google, Spotify & such get thrown into the mix... GDP just doesn't tell us much about how economic output has changed over the last 20 years.
For the average person, I think we need to think in different terms. Housing, education, transport, consumables and manufactured goods & services.
Generally I feel the trend (in Europe, at least) has been to big gains in the latter categories and stagnation/negative growth in the former. Housing affordability has gotten worse. Transport has gotten more expensive. Education has gotten more expensive (both for students and in total) and is "worse" in terms of leading to predictable career/income outcomes... a key decision-driver of education choices.
Meanwhile consumables (food, washing detergent) have gotten cheaper. Manufactured goods (furniture/iphones) have gotten way better/cheaper. Services are a mixed bag (financial services dragging the whole category down).
These categories are generally not fungible. No reductions in the price of food or iPhones (not even free) will help make housing more affordable.
GDP... I'm not sure what it really measures anymore. It's become totally abstract. Meaningful within models but not indicative of anything about the world.
I think it had meaning 40 years ago, but the etherealization of the economy ate it.
All that said... Uniquely low GDP growth relative to high S&P returns. Picketty is probably going nuts.. in soft spoken French.
..the stuff it measured. Deltas in manufacturing volume. More steel = more GDP. More refrigerators = more GDP.
There were always ambiguities. More lawyer fees = more GDP? Questionable. But... The portion of simple more=more economic outputs has really shrunk relative to the ambiguous ones where more<>more or price=0 or whatnot.
This problem is supposed to be solved by the "basket" structure of inflation calculation. The basket is a collection of spending by a typical family, and inflation is the measure of the cost increase of that basket. If iPhone goes down X and rent goes up X then inflation is zero.
But the composition of the basket is not easy, varies and is prone to gaming.
Though to be even more pessimistic, the finance wizards have finally rediscovered how to create a permanent recession at the bottom of the economy, and a permanent expansion at the top, so as to multiplex the business cycle over the class gradient, rather than over time.
Quantitative easing is a powerful drug. During the 2008 crisis, most observers didn't even seriously consider the possibility that the Fed could buy long-term treasuries and mortgage securities. Those who did vastly underestimated the scale on which the Fed would eventually do so.
But QE is also highly addictive. The next downturn will most likely take place within the next 18 months. It's going to catch a lot of dumb money flat-footed, and that means big declines in the stock market - something that has now become simply not acceptable politically.
There's one more piece of candy in the jar though: negative interest rates.
Where the Fed decides to go with short term rates isn't really that important anymore. Far more important is how it begins to lay the groundwork for negative rates.
Because negative interest rates will transform the grossly distorted world economy into something completely unrecognizable.
Negative rates are nothing other than a complete failure of the financial system. If we go there it's the beginning of a very dark, very oppressive era. Crypto and metals will shoot the moon. And shadow economies will sprout under every rock.
Between the stock market going much higher than the actual growth, the post-2008 inequality issues, the student debt disaster, the high risk from oil companies being valued trillions of dollars and everyone being in passive investing, I’m fascinated to see what the next crisis will be.
70 comments
[ 3.0 ms ] story [ 141 ms ] threadI was looking at some other HN thread a while back and there was someone talking about how a subscription model works much better for investors because the regularity of returns worked best with expectations from the investors. And it occurred to me at that time that this electric analogy might extend to impedance matching between investor and investee...with the best matched networks operating the most efficiently. (And of course, if you can develop an investment model that matches underserved opportunities you might find a way to make some money.)
Alternatively one might argue that what is happening is a kind of bifurcation. The wealthy and well measured get an ongoing expansion while the poor, shiftless, and unrecorded fall through the cracks at alarming rates. We didn't have homeless families in significant numbers when I grew up and now they are pervasive. That is pretty poor real performance for a best ever economy.
/s
For example, let's cherry-pick the Clean Air Act and its effects: "In addition, because air quality across the United States improved; it is estimated 205,000 premature deaths and millions of other respiratory complications were prevented which resulted in an economic savings of $50 trillion versus the $523 billion invested to meet the Clean Air Act standard."
https://en.wikipedia.org/wiki/Clean_Air_Act_(United_States)#...
All of that distorts the market and makes everyone spend money they don't actually have. Eventually all of this catches up with everyone, on a country-wide scale.
So much for all that personal responsibility we used to hear so much about. Far easier to blame the government for everything.
Companies use credit to buy back stock because we deregulated that activity. It used to be that the government didn’t allow it. This point is actually a counter-point to your theory.
https://www.usich.gov/tools-for-action/map/
Few would doubt the rise of the "working homeless" across the western world. The concept of someone having a fulltime job and still not able to afford rent is new. It is today's sharecropping imho.
And then there is the other modern phenomena: the legally mandated homeless. Every large city in the US now seems to have a bridge or overpass filled with people who are not legally allowed to live anywhere else. Stringent limitations on where certain convicts may live is also new.
Does that happen anywhere outside of San Francisco?
At the moment the promises are high. We will see whether they can be fulfilled.
https://www.investopedia.com/terms/t/trumpflation.asp
From the article: “Recessions are a healthy, necessary part of the economic cycle. They keep investors, businesses, and households disciplined. They remove overcapacity and make room for innovation and evolution. The US has endured 42 recessions and five depressions since the 1780s. The US economy recovered from every single one, returning to growth within an average of roughly one and a half years. That includes the 39 recessions and depressions that proceeded the establishment of the Federal Reserve in 1913, and the 20 that occurred when the US had no central bank at all. The eras of the most robust growth in American history have been punctuated by frequent recessions, not long stretches without them.”
I like the analogy of getting ansgty all at once and seeing the therapist. I probably wouldn’t characterize down-turns as money running out, though. This might be what you meant, but the money doesn’t run out per se, recessions are more like angst leading to shyness, it’s less activity rather than less money. If the money actually ran out, I imagine the chaos might be a lot bigger than we’ve ever seen.
https://asia.nikkei.com/Economy/Loose-lending-keeps-Japan-s-...
I'd agree that recessions aren't necessary in theory, under assumptions that everyone can act perfectly, but that's pretty academic.
It goes from "effort to haul X ammount of water Y distance by N people" to "and it just flows after this constant work".
Money behaves more like entropy.
But it's not though is it? When money itself can do the work (investing) then this whole thing sort of falls apart. A battery can't create a larger battery by itself. Also plenty of people inherit their "batteries" or find them through random chance (lotteries, sweepstakes, etc.)
This all sounds good in theory but I don't think it really holds up when examined closely.
There is a social/historical commentary and a philosophical/political science discussion to be had here, but unfortunately I don't have the time right now...
It is the "pay it forward" method of splitting full barter trades into two time-separated half-trades. Instead of giving you a chicken for a bag of milled chicken feed, I can buy the feed for money now, and you can spend that money on a chicken later. Or on something else. It presumes that there will be a chicken to buy later, and that other people won't end up wanting the chicken more than you.
In order to accumulate value from individual work, that value has to be rolled into something durable, or it decays and is lost.
When labor produces a consumable good or service, the value exists only until the good or service is consumed. Why would anyone work on consumables? Because we live on consumables. We eat; we drink; we drive; we set thermostats; we end-user-license IP.
When labor produces a capital improvement, future labor output is multiplied. That's a permanent increase in value, provided that there is some useful purpose for that multiplied labor to work toward. The fisherman can trade fish for a net, or trolling motor, or ice-chest, and thus have more future fish to trade per unit of labor.
The stream of consumables is created by labor, multiplied by capital, and then annihilated by consumption shortly thereafter. That value can be stored for some amount of time in stockpiles and warehouses, but then entropy eats some of it, rather than making it to the consumers.
Money allows the holder to bid for some fraction of the stream of consumables. Divert a tiny stream toward your personal cup for a fraction of a second, and then drink it.
When you hold money, its value is the flow rate of the consumption stream, divided across the quantity of all money.
It's not a battery. It's a voucher for a quantity of grid power. As long as the grid operates reliably, it works the same in practice. But if you really want to store the value of your work, you need to buy goods that multiply the consumable output of your work, or stockpile consumables whose values decay more slowly over time than most.
So it's not quite that simple, especially when some people start issuing themselves claims on future production when they are not actually producing anything now, or planning on producing anything in the future.
It’s been a while since I read up on the topic, but the origins of fractional-reserve banking sound a lot like fraud that got blamed on the hard money that exposed it. (https://www.amazon.com/dp/1933550287)
The idea isn't to disable them but make them less drastic. There will always be misallocations of resources that need to be corrected.
Yes. Money comes into existence ex nihilo. There are trillions of USD in existence today, but the dollar has only existed since 1792. They came into existence by the power of the government printing press. We can "run out" in the sense that we don't have sufficient dollars in circulation, which is a very severe problem, but the solution can be summarized in a simple way: have the government create more money.
And how does the government create more money? By spending it into existence.
https://www.vox.com/future-perfect/2019/4/16/18251646/modern...
At the street level it looks as if some recovery has occurred, but you certainly can't compare it to the "roaring 90s." The average person has not felt much of this.
You can measure the number of cars being produced and houses built. It doesn't really matter how you quantity value the value of a 1999 vw golf relative to the 2019 model. Once iphones, Google, Spotify & such get thrown into the mix... GDP just doesn't tell us much about how economic output has changed over the last 20 years.
For the average person, I think we need to think in different terms. Housing, education, transport, consumables and manufactured goods & services.
Generally I feel the trend (in Europe, at least) has been to big gains in the latter categories and stagnation/negative growth in the former. Housing affordability has gotten worse. Transport has gotten more expensive. Education has gotten more expensive (both for students and in total) and is "worse" in terms of leading to predictable career/income outcomes... a key decision-driver of education choices.
Meanwhile consumables (food, washing detergent) have gotten cheaper. Manufactured goods (furniture/iphones) have gotten way better/cheaper. Services are a mixed bag (financial services dragging the whole category down).
These categories are generally not fungible. No reductions in the price of food or iPhones (not even free) will help make housing more affordable.
GDP... I'm not sure what it really measures anymore. It's become totally abstract. Meaningful within models but not indicative of anything about the world.
I think it had meaning 40 years ago, but the etherealization of the economy ate it.
All that said... Uniquely low GDP growth relative to high S&P returns. Picketty is probably going nuts.. in soft spoken French.
There were always ambiguities. More lawyer fees = more GDP? Questionable. But... The portion of simple more=more economic outputs has really shrunk relative to the ambiguous ones where more<>more or price=0 or whatnot.
But the composition of the basket is not easy, varies and is prone to gaming.
https://www.investopedia.com/updates/purchasing-power-parity...
Though to be even more pessimistic, the finance wizards have finally rediscovered how to create a permanent recession at the bottom of the economy, and a permanent expansion at the top, so as to multiplex the business cycle over the class gradient, rather than over time.
Reagan economics yields to Antoinette economics.
But QE is also highly addictive. The next downturn will most likely take place within the next 18 months. It's going to catch a lot of dumb money flat-footed, and that means big declines in the stock market - something that has now become simply not acceptable politically.
There's one more piece of candy in the jar though: negative interest rates.
Where the Fed decides to go with short term rates isn't really that important anymore. Far more important is how it begins to lay the groundwork for negative rates.
Because negative interest rates will transform the grossly distorted world economy into something completely unrecognizable.
Can you elaborate on this? I thought Japan had negative interest rates for quite a while
In that light, the US economy could go quite a while longer. I hope it does.