I thought inflation was a bad thing? From this article it seems everyone is avoiding the dangers of inflation, and instead opining that everything will just....work itself out. The Fed has become too politicized, so I'm deeply suspect. I have the impression, perhaps not entirely correct, that this is the same fed that has missed and bungled many of our recent financial crisis.
(without expressing my own opinion on it:) most policy folks seem to want a few percent of inflation. it motivates you to spend or invest your money instead of just stuffing cash into a mattress.
The reason why this is important is that deflation can lead to a vicious cycle that you cannot get out of so the preference is controlled inflation over time.
Yeah a vicious cycle of human beings actually needing to work less, rather than the surplus from technological progress being chewed by up the rent treadmill and spit out into an overgrown financial sector. We certainly can't have that!
If you actually care and aren’t here to simply be a contrarian, the term is “deflationary spiral” and it exists because interest rates cannot be held below zero indefinitely. It’s very similar in concept to why potential losses on shorting a stock are infinite.
I'm not being a contrarian - I support deflation. The supposed problem with deflation is that economic activity slows down and enough stuff won't be produced. But we're presently drowning in stuff!
I agree it is a concern for a non-developed economy not meeting human needs, especially when price signals travel slowly (high system momentum). But we're in a well developed economy with a near-instantaneous global network.
Witness, we've had four decades of deflation in the technology sector. Inflation advocates would tell you that everybody should have put off their technology purchases until computers stop(ped) getting better and cheaper. But yet people were buying new devices the whole time.
If we're concerned with natural resource depletion and sustainability, we really need to stop pumping the gas pedal.
BTW I don't see your parallel to shorting a stock. Care to explain?
The issue with deflation (on a macro level, one sector isn’t relevant here) is that encourages hording money. To counter that, interest rates have to be lowered. Otherwise you have what’s called a liquidity trap. There comes a point where this lowering of interest rates isn’t sustainable and the economy collapses.
The comparison to shorting a stock is that you can never have enough capital to cover the rise in price. Capital is a limited resource while there is no upper bound on the stock. So there comes a point where you can no longer cover and you lose big time.
Price decreases in a specific area due to productivity gains or advancing technology are an entirely different thing from systemic, economy-wide deflation.
The last round of significant deflation we had was during the Great Recession of 2008-2009. The last round of serious deflation we had was the Great Depression.
Those weren't fun times to live in. Few personal economic events are more catastrophic than getting stuck with an underwater mortgage (it's probably worse than anything beyond major uninsured medical bills).
Few large-scale phenomena are uglier than farmers dumping produce (because prices have collapsed to the point that it's no longer is worth the cost of shipping) while, at the same time, people are going hungry.
While it's true that people worked less during those deflationary periods, they didn't actually find it quite as enjoyable as you seem to think it is.
>The supposed problem with deflation is that economic activity slows down and enough stuff won't be produced. But we're presently drowning in stuff!
The entire point behind deflation is getting rid of that surplus. It's about trimming everything except basic cost of living. If you are a company and your profit is going down every year you are going to cut production. Cutting production also means cutting jobs. It's that simple.
The savings utopia also doesn't exist because the 0% lower bound for interest rates prevents money creation to catch up with savings. If everyone saves there literally won't be any money left to save.
Deflation is an economic dead end. People believe that money is infallible and the perfect risk free asset, especially if it's value is going up via deflation. The risk free assumption is just an approximation given a properly functioning economy and deflation doesn't reward a properly functioning economy.
Yeah, that's the consensus among most prominent economists and by extension politicians. It's based on the flawed assumption that consumption is automatically good and savings is automatically bad. Saving money isn't just going scrooge mcduck and holding it in a vault. Saving money is investing it, which funds innovations and investments. That could be via stocks, bonds, bank deposits (which get loaned out), etc.
I have yet to see a single compelling argument as to why an arbitrary 2% target is superior to say just a 0% target. Macroeconomics is basically a pseudo science anyways.
> Saving money is investing it, which funds innovations and investments. That could be via stocks, bonds, bank deposits (which get loaned out), etc.
I'm not an economist, but I think the Fed distinguishes between these activities: "saving" means holding money in accounts that are subject to the FDIC's reserve requirements, which in turn means that banks can't use (all of) that money for investments. "Investing" means circulating money in instruments that aren't generally subject to reserve or similar requirements, meaning that it's supplying liquidity to the larger market.
I agree with your broader point about consumption (we really need to correct our infinite-growth mindset), but an economy that encourages excessive savings is about as bad long-term as one that encourages people to shove all of their money into the market.
Yeah. My operating assumption was that the 0% rate was an emergency maneuver by the Fed to increase liquidity at the very beginning of COVID, but it's not clear when (if at all) they plan on returning to a nonzero reserve rate.
OTOH, the Fed has other mechanisms for encouraging bank reserves -- I believe they still pay interest on any excess reserves that banks hold at the end of each day. That rate (the "IOER rate") is (still) significantly higher[1] than the federal funds rate[2], so banks can essentially collect free money by keeping any reserves at all.
Saving is investing only from the accounting perspective. In finance and economics we also care about how capital is invested, not merely that it is invested.
>I have yet to see a single compelling argument as to why an arbitrary 2% target is superior to say just a 0% target. Macroeconomics is basically a pseudo science anyways.
Because deflation is horrible and inflation targets are just targets, it's impossible for the central bank to know exactly what will happen. If they target 0 there will be some years with deflation which destroys liquidity.
>It's based on the flawed assumption that consumption is automatically good and savings is automatically bad.
There is no such assumption. We have interest rates that moderate the imbalance between saving and investing. Low interest rates indicate a lack of investments. If there were investments, companies would scoop up 0% interest loans until rates must rise again.
If there were too many investments interest rates have to cut funding for the least worthwhile investments.
>Saving money is investing it
As I said above, the interest rates indicate otherwise. 0% interest rates only happen because people aren't investing the savings.
>That could be via stocks, bonds, bank deposits (which get loaned out), etc.
Those are not savings.
>I have yet to see a single compelling argument as to why an arbitrary 2% target is superior to say just a 0% target.
Because people age and die. Gold is just a shiny token representing an imagined ledger. If you have gold from 1000 years ago someone in 2021 owes you a debt. For the sake of the argument lets say the economy today was still the same as 1000 years ago. You decide to "save" your gold and spend it 1000 years later via a time machine. The person that owes you one ounce worth of work is long dead and he stayed unemployed for a month because of you. The physical asset that is represented by the ledger is gone but there are still workers alive in 2021. Even though they have nothing to do with the old dude 1000 years ago, they are the ones who owe you a debt now.
It's absurd. One month of work was lost to unemployment but gold is supposed to keep its value by demanding one month of work from an unrelated person.
The reason is more technical than that. For a long time the Fed has had a target of 2% PCE inflation (which is a bit higher than 2% CPI inflation), but in the past decade it’s averaged 1.5% or so. This damages central bank credibility, a very important asset for monetary policy. Thus, policymakers are comfortable running 3% or so PCE inflation for a while to try and bring up the long run average to the 2% stated target.
It's not like the banks and lenders aren't wise to the idea of mortgage's getting reduced by inflation. They calculate and compensate for inflation and make offers accordingly.
I think this has cause and effect somewhat backwards.
Often mortgage rates are based on the interest rate set by the central bank ("prime"). So if inflation is rampant and the central bank increases the prime rate to try to reduce inflation, variable mortgage interest rates will also increase. In the US, however, it's possible to get 25 year fixed rate mortgages. With the prime rate being so low, these can be had for 2-3%. This is very low! If many on HN are to be believed regarding a coming inflationary crisis this kind of mortgage will be hugely advantageous to those that have one because the debt will be massively devalued by rampant inflation.
The banks take the current interest rate from the Fed into account and base the mortgage rate on that. They can try to project out and add some percentage for risk + inflation but if they add too much then there are 100 other banks ready to undercut them.
So you get a fixed-rate mortgage based on the current interest rate from the central bank. And the amount of money that your mortgage covers (basically the price of your house) doesn't change. Which means that every year, as inflation causes wages to go up, you are paying for a house that cost whatever it cost when you bought it.
But! Most people shop for houses based on what they can afford as an all-in payment. To put it another way, people can afford $x/month on housing, and it doesn't matter to them really how much is going to the price of the house and how much is going to interest. If interest rates rise (which happens along with inflation) then that means the percentage of someone's monthly payment that goes to the price of the house goes down, which has a depressing effect on housing prices. So your house payment becomes more affordable but the amount you can expect to get when you sell your house goes down (or rises more slowly).
wages rarely keep up with inflation, real inflation, most companies are till running on 1-2% COLA annually, that is far far lower than actual inflation was, and much lower than inflation is now
This is on the back of many companies having a wage freeze in 2020 due to the pandemic
This is also why you will see alot of companies having a turn over crisis as switching employers will not be more profitable for employee's than every before. I see every limited signs that the HR dept's at most companies even recognize this problem currently, and the few that due are powerless to stop it because it seems many companies just refuse to give large annual raises to current staff but will happily replace them at high rates.
This is with out even getting started on the Time bomb of SocSec, as they also have not kept payments up to meet inflation largely because they can not. there is no money to fund it. So if your retired depending on SocSec income for your survival you are screwed, better hope you have family you can live with
>If you hold a mortgage, it can potentially be good...
Hold debt is only good if you wages go up more than inflation. While sure you may pay less for the home itself, you repair and maintenance expenses are going up... Right now, some repair and maintenance cost for home ownership are leading inflation by ALOT
For your 1 year old, it's not a problem if that $1000 is invested in say an S&P fund
In the 1970's when the US had stagflation, S&P inflation adjusted returns from ~1968 to 1982. If you bought in 1968 you wouldn't really show gains until the early 1990s.
The US government could tax the population at 100% of GDP and it wouldn't make a dent in the national debt. Also the US government can print it's own money.
Inflation is going to make that $1000 worth less unless your 1 yr old is a great investor. If they have any tips, pass them on. I some cash and no freaking idea how to protect the value.
To a college kid with savings from teenage jobs, it is.
See above inflation is tough on savings. Might be good for a young adult with college debt that can be paid back with inflated dollars.
To people who's wages didn't go up, it is.
Only if wages rise faster than prices. Wages often trail prices in high inflation environments. In extreme scenarios, prices can go up in restaurants and stores every day, but wages may only go up after a pay period, or after yearly review.
Inflation is absolutely a "bad" thing in the same way that gaining weight from eating ice cream is "bad". It is the consequence of indulgence. An increase in the cost of living is generally never a "good" thing.
The question is if it is controlled and the tradeoffs worthwhile.
No, inflation is more like the weight gain of a child growing to an adult. The metaphor breaks down at adulthood.
> An increase in the cost of living is generally never a "good" thing.
Inflation is only an increase in nominal, not real cost. If I give you a dollar more and charge you a dollar extra, then you haven't lost any purchasing power.
That's been true since the 70s, but it's not an intrinsic feature of inflation. In fact, this time it may be different, and that's what all the CEOs are complaining about.
But I'm not getting a dollar more, I'm just getting charged a dollar extra. Wages will never actually keep up with inflation, they certainly haven't thus far. In part because government inflation statistics are not trustworthy
There's this weird dichotomy in Economics where what's good for "The Economy" is often bad for you, the individual. And vice versa. This isn't true for everything, of course, but I've definitely noticed it whenever you hear stories about inflation, the price of gas, wages going up, the dollar being 'strong', etc.
Yes, economically it likely is. Its your stagnating wages that are a bad thing. If wages had increased like they should've, then a few dollar increase in your groceries wouldn't be the issue that it is.
Inflation means that wages go up along with the prices of groceries, so it's a wash. The only thing that suffers with inflation is a big pile of cash, which poor people don't have (they generally owe a big pile of cash, which inflation shrinks for them).
The people trying to scare everyone about inflation are the ones who the poor people owe the big pile of cash, and they have a very large megaphone.
Poor people don't have standing debts but rather revolving ones, and so their debt scales with inflation. The rich don't have piles of cash, they buy assets instead. Inflation hoses the middle class who wants to save in cash, which is part of why the middle class is vanishing - extreme monetary inflation to counteract the ever-growing deflation inherent to technological progress.
> Inflation hoses the middle class who wants to save in cash
Can you point me to some middle class people who are just sitting on a huge pile of cash? I'm a pretty standard middle class person and the vast majority of my net worth is tied up in a 401k, and if it wasn't there it'd be in a house that would be seriously outpacing inflation.
A house and 401k are both illiquid and thus irrelevant to your economic bargaining power. If you're upper-middle class then sure your liquid funds might be in a brokerage account, but if you're lower-middle it's likely just a savings account where you're working on building an emergency fund.
I can get liquidity out of my 401k trivially by borrowing against it. A home equity loan takes a bit more time but it's also simple to do. If you're lower middle class you most likely don't have any money in your savings account at all[1], but you do have debt which gets diluted by inflation.
Also, to your earlier point:
> Poor people don't have standing debts but rather revolving ones, and so their debt scales with inflation.
Nope, this has been brought up before and it's wrong. The data shows wages are not keeping up with productivity gains, they are actually flat with inflation.
Now I agree having all the benefits from productivity gains going to the people who aren't working for them is some bullshit, but that's not the same as wages going down when you account for inflation.
If inflation is good or bad depends on where you are in life.
If you just bought a house that is just barely affordable, then you want massive inflation because your house payments won't go up with time, while inflation means you get large raises. Even if your raises don't keep pace with inflation, (they often don't catch up for a few years), after just a couple years you are still way ahead because your largest cost of living is staying still.
By contrast, if you are retired your probably get a lot of your income from fixed incomes that won't go up over time. As such you end up having less and less worth to spend every month.
There are a lot more situations, and everyone is in a different situation.
They’re only starting to rise because of labor pool constraints from the pandemic. Inflation would be very bad for most low to median wage workers, especially those in urban center where housing crises are rampant, especially if business interests continue to succeed at putting downward pressure on them by blocking things like minimum wage hikes.
Investment is up since the pandemic. It was going down beforehand.
Real wages are stagnating because that is how macro economics works. When everyone has a saving preference and only spends the bare minimum the economy is optimizing for "efficiency" while staying the same or shrinking. More efficiency primarily means squeezing out low wages out of workers. Given enough inflation there will be an decrease in the saving preference and the problem will resolve itself.
This is generally true - inflation punishes savings and bails out debt (the new homeowner in your example), but it really is more complicated. Hopefully the barely affordable house has a fixed rate mortgage, not variable. Hopefully they don't lose their job in a stagflation scenario. Massive inflation = more volatility = more unpredictability.
The Fed only did the things that the US government forced it to do. It happens very indirectly through inaction.
Loans are pull based money creation. QE is push based money creation.
If the private sector, public sector and consumers aren't doing anything then the central bank has to pull us out of the clown world we desperately want to live in.
How are they pulling us out of a clown world? If they use QE but the money goes towards assets / consumption instead of business development, all we end up with is more inflation without improving the economy. Window guidance could likely fix this but that is taboo
So we keep the lower inflation that's making housing prohibitively expensive and we'll churn up higher interest rates when folks have recovered from this years' abuse and might actually be able to buy something.
I think it's silly for them to announce what they're going to do in 2023. There will be a new Fed chair by then. The economic situation is impossible to predict in 2 years. The inflation / employment numbers are impossible to know precisely.
The projected rate increase is the result of the dot plots, which is the assessment of both governors and regional members of the FOMC. It is not binding and it serves merely as a projection.
If you watch the press conference, you can tell how annoyed Powell is at constantly having to answer questions stemming from what the dots show.
Millennials were born with better timing than early genx for example. They were hardly put under the gun, and shouldn't elicit any particular amount of concern. Given their propensity for voting for the greatest threat to Middle class status (expansion of immigration both legal and illegal), I'd say they have themselves to blame for their circumstances.
There are more important factors like the unwillingness to increase the government deficit to compensate for the increased savings preference. It's ruining the Eurozone. The US is pretty much the only country that is doing something.
Unlike boomers immigrants spend money and take on new loans. Also, what are you going to do once you have hit 0 immigration? Are you going to deport people?
>Housing prices are kept in check when mortgages are more expensive.
Housing prices are kept in check when it is expensive to buy housing? This isn't necessarily false, but it is an obvious contradiction that highlights how complicated these issues end up being in reality.
It’s not that complicated really. House prices tend towards the level where a mortgage payment roughly equals a rent payment (since they’re substitutable). So when mortgage rates go down house prices go up commensurately.
>House prices tend towards the level where a mortgage payment roughly equals a rent payment (since they’re substitutable).
No these two are not direct financial substitutions. You are ignoring a down payment (or mortgage insurance), property taxes, maintenance, and the general risk that comes with home ownership. Monthly mortgage payments should be a decent amount cheaper then rent payments on an equivalent property.
Renters are paying all the same things you are, and are usually paying through the rent much higher taxes and mortgage interest. The only difference is they don't have variability in expenses (AC goes out) -- but neither does a large landlord.
Definitely worth properly modelling out both buy and rent scenarios including all related costs, the substantial tax benefits of the mortgage interest deduction, remembering you are paying down principal in the mortgage payment, and the opportunity cost of the down payment. But when I've done this the cutover point is usually fairly close to where mortgage payment = rent.
The other thing that's notable when you model the scenarios is how much of a difference it makes how long you stay in a house given the absurdly high transaction costs of selling in a house in the US. 5% realtor fees! $50k on an SF condo, $75-100k on an SF house.
When mortgages are expensive, down payments buy more. Except in the short-term it appears that falling interest rates simply raises the nominal price of housing until it reaches the buyers ability to pay the monthly price + down payment.
Increasing interest rates erodes buyers ability to borrow, which will require prices to fall.
True, but higher housing prices also impede people who save their money instead of taking on 30 year debt. I would definitely prefer higher interest rates and cheaper housing for that reason.
agreed, at the margin there are buyers with a virtually unlimited ability to borrow. If interest rates stay low for long enough I'd expect the majority of housing to be owned by hedge funds and investment banks.
Gotta minimize the generational transfer of wealth as much as possible, and consolidate in groups of entrenched power as much as possible. It's fine that millennials graduated college in debt, into a recession, a decade after the dot-com bust, and a decade before the covid crash. Take a decade to recover, and as soon as middle-class momentum builds they get slapped and put back in their place again. All while China is 996'ing us into irrelevance and eating our lunch.
Traditionally whenever anyone pointed out that it was the just priest speaking and not actually the word of god(s), they were horrifically tortured to death. I guess this is progress.
They set monetary policy based on their forecasts of the economy. In principle, they could set their monetary policy target at whatever level they choose, but in practice they're just responding to the economy, so they have a great deal of uncertainty about their own decisions.[1]
[1] There's also the matter of changes in the voting members of the FOMC over time.
"Projects" because nobody knows what's going to happen between now and 2023. If things develop the way the Fed currently projects that they will, then they will raise rates in 2023.
This is a very naive viewpoint IMO. The fed doesn't just pick the rates they want. The fed definitely does not "want" rate at rock bottom where they are now in a perfect world.
The market dictates to the fed the range of rates which are feasible and the the fed chooses from within that range. They don't know exactly what the allowable range is and if they get it wrong the markets react strongly.
And the record is very clear on this point. For example the Powell pivot when Powell told everyone that he was going to taper and the market told him that that was off the table. He quickly conceded.
The rates depend on saving/spending preference. There is a "market rate" where the interest rate hits the equilibrium and therefore savings = investments becomes balanced again. Too far away in either direction will upset the savings = investments identity. Turkey is a good example. However, an aging population in the US is stacking the cards in favor saving preference.
When rates hit 0% you basically hit the "limit". The last dollar that can be saved has been saved. From this point on more savings just dilute the pool of existing savings. You then get banks that sell AAA rated CDOs filled with subprime mortgages. It's because that's what the market wants. Old people want zero risk savings/investments and when you tell them that is impossible they will keep believing the lies instead.
The rates don't depend on a single thing. They depend on literally everything. I said the market "dictates" the rates to the fed, not that it sets them. The markets are just an information conveyance mechanism.
Also again, we can very clearly empirically say that there is not a 0% floor on rates.
Blackrock is buying homes to rent, right? If 90% of home buyers can afford $x per month, sure higher interest rates mean that the $x will have to include more interest, and the home prices drop.
However, that only matters if you sell a house. If you are buying houses to decrease housing supply, and increase the rental prices you shouldn't care about the interest rates.
So waiting a year and a half, buying in at a much lower price and then earning a much larger ongoing return on capital would be the smart play. You are arguing that Blackrock is stupid. Which is fine, but I don't believe that.
Only if the rise in interest rates is offset by the price drop. With interest rates so low, that's almost certainly not the case: home prices will crater. End of the day, home cost matters and blackrock isn't stupid. They are paying a 20% premium over today's insane market. Think about that. They either expect hyperinflation and/or low rates forever or they are being told to buy the homes.
Another option is that Black rock believes the government, when push comes to shove, won't let housing prices fall dramatically, since a large portion of the electorate has nearly all their net worth tied up in their homes.
Knows vs believes. For an investor, belief with an estimation of confidence is sufficient. There's never really a "knows for sure" even with insider trading.
For what it's worth, I'm of the same belief. I think it's politically infeasible to allow house prices to decrease significantly throughout the whole United States.
Blackrock? Look it's way simpler than that. Interest rates aren't going up, and will not be going up appreciably in 2023 or any other year, because we simply can not afford to pay higher interest on the debt.
Wouldn't housing be a safe place to put assets in case negative interest rates are put in place like some countries? In Switzerland you will pay negative interest already on savings of 100k.
possibly but also irrelevant to splitstud's point.
if rates on the ten year note even rose to the historical average, we would be paying over 25% of the Federal budget on the national debt interest alone. The interest, not the principal
I'm sorry but the problem is the exact opposite...
Governments must increase their deficits so that the private sector can save more.
A lot of countries just export the responsibility to take on debt to other countries. Germany refuses to take on debt and expects the rest of the Eurozone and the US to go into debt so it can pretend to be financially responsible.
As long as the private sector has a preference to increase its net savings, interest rates will be at 0%. If it suddenly decides to spend all that money (to call this a good thing is an understatement) the resulting inflation would make the raise in interest rates irrelevant.
There seems to be a built in assumption here that people / companies / countries are wrong for not spending money. I haven't seen sufficient historical evidence this is absolutely necessary for a healthy economy.
Also, I'm not sure how Germany is forcing anything on anyone here. Care to explain?
My macro economic understanding is that real estate is a debt that hedge against inflation. Since inflation will cause raising cost, your mortgage is locked in while cost of everything is going up. Inflation punishes savings but help debtors.
They don't protect against a war though. The importance of this is a bit difficult to understand because political inaction can cause a situation where there are no good solutions left but the population is angry and wants to take that anger out on someone. Prominent example: The nazis came up with an anti semitic conspiracy.
I mean, nothing protects you from
act of war or act of god. But that’s not what we are talking about here right? Risk of inflation in peacetime is something BlackRock has to considered. I’m not saying they are right or wrong, just that real estate is a hedge play as far as I can tell.
“The role of BlackRock alumni in the Biden administration is the latest chapter in a decadelong rise in both Washington and on Wall Street. BlackRock is the largest asset manager in the world with $7.8 trillion under management as of September. As it has grown, it has both boosted its operations in Washington and hired government officials.”
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[ 5.3 ms ] story [ 166 ms ] threadI agree it is a concern for a non-developed economy not meeting human needs, especially when price signals travel slowly (high system momentum). But we're in a well developed economy with a near-instantaneous global network.
Witness, we've had four decades of deflation in the technology sector. Inflation advocates would tell you that everybody should have put off their technology purchases until computers stop(ped) getting better and cheaper. But yet people were buying new devices the whole time.
If we're concerned with natural resource depletion and sustainability, we really need to stop pumping the gas pedal.
BTW I don't see your parallel to shorting a stock. Care to explain?
The comparison to shorting a stock is that you can never have enough capital to cover the rise in price. Capital is a limited resource while there is no upper bound on the stock. So there comes a point where you can no longer cover and you lose big time.
The last round of significant deflation we had was during the Great Recession of 2008-2009. The last round of serious deflation we had was the Great Depression.
Those weren't fun times to live in. Few personal economic events are more catastrophic than getting stuck with an underwater mortgage (it's probably worse than anything beyond major uninsured medical bills).
Few large-scale phenomena are uglier than farmers dumping produce (because prices have collapsed to the point that it's no longer is worth the cost of shipping) while, at the same time, people are going hungry.
While it's true that people worked less during those deflationary periods, they didn't actually find it quite as enjoyable as you seem to think it is.
The entire point behind deflation is getting rid of that surplus. It's about trimming everything except basic cost of living. If you are a company and your profit is going down every year you are going to cut production. Cutting production also means cutting jobs. It's that simple.
The savings utopia also doesn't exist because the 0% lower bound for interest rates prevents money creation to catch up with savings. If everyone saves there literally won't be any money left to save.
Deflation is an economic dead end. People believe that money is infallible and the perfect risk free asset, especially if it's value is going up via deflation. The risk free assumption is just an approximation given a properly functioning economy and deflation doesn't reward a properly functioning economy.
I have yet to see a single compelling argument as to why an arbitrary 2% target is superior to say just a 0% target. Macroeconomics is basically a pseudo science anyways.
I'm not an economist, but I think the Fed distinguishes between these activities: "saving" means holding money in accounts that are subject to the FDIC's reserve requirements, which in turn means that banks can't use (all of) that money for investments. "Investing" means circulating money in instruments that aren't generally subject to reserve or similar requirements, meaning that it's supplying liquidity to the larger market.
I agree with your broader point about consumption (we really need to correct our infinite-growth mindset), but an economy that encourages excessive savings is about as bad long-term as one that encourages people to shove all of their money into the market.
OTOH, the Fed has other mechanisms for encouraging bank reserves -- I believe they still pay interest on any excess reserves that banks hold at the end of each day. That rate (the "IOER rate") is (still) significantly higher[1] than the federal funds rate[2], so banks can essentially collect free money by keeping any reserves at all.
[1]: https://fred.stlouisfed.org/series/IOER
[2]: https://fred.stlouisfed.org/series/FEDFUNDS
What argument would you find compelling?
Because deflation is horrible and inflation targets are just targets, it's impossible for the central bank to know exactly what will happen. If they target 0 there will be some years with deflation which destroys liquidity.
There is no such assumption. We have interest rates that moderate the imbalance between saving and investing. Low interest rates indicate a lack of investments. If there were investments, companies would scoop up 0% interest loans until rates must rise again.
If there were too many investments interest rates have to cut funding for the least worthwhile investments.
>Saving money is investing it
As I said above, the interest rates indicate otherwise. 0% interest rates only happen because people aren't investing the savings.
>That could be via stocks, bonds, bank deposits (which get loaned out), etc.
Those are not savings.
>I have yet to see a single compelling argument as to why an arbitrary 2% target is superior to say just a 0% target.
Because people age and die. Gold is just a shiny token representing an imagined ledger. If you have gold from 1000 years ago someone in 2021 owes you a debt. For the sake of the argument lets say the economy today was still the same as 1000 years ago. You decide to "save" your gold and spend it 1000 years later via a time machine. The person that owes you one ounce worth of work is long dead and he stayed unemployed for a month because of you. The physical asset that is represented by the ledger is gone but there are still workers alive in 2021. Even though they have nothing to do with the old dude 1000 years ago, they are the ones who owe you a debt now.
It's absurd. One month of work was lost to unemployment but gold is supposed to keep its value by demanding one month of work from an unrelated person.
The federal reserve benefits from a long ledger so they are more than happy to let inflation run rampant.
To a college kid with savings from teenage jobs, it is.
To people who's wages didn't go up, it is.
For your 1 year old, it's not a problem if that $1000 is invested in say an S&P fund
If you hold a mortgage, it can potentially be good...
Often mortgage rates are based on the interest rate set by the central bank ("prime"). So if inflation is rampant and the central bank increases the prime rate to try to reduce inflation, variable mortgage interest rates will also increase. In the US, however, it's possible to get 25 year fixed rate mortgages. With the prime rate being so low, these can be had for 2-3%. This is very low! If many on HN are to be believed regarding a coming inflationary crisis this kind of mortgage will be hugely advantageous to those that have one because the debt will be massively devalued by rampant inflation.
The banks take the current interest rate from the Fed into account and base the mortgage rate on that. They can try to project out and add some percentage for risk + inflation but if they add too much then there are 100 other banks ready to undercut them.
So you get a fixed-rate mortgage based on the current interest rate from the central bank. And the amount of money that your mortgage covers (basically the price of your house) doesn't change. Which means that every year, as inflation causes wages to go up, you are paying for a house that cost whatever it cost when you bought it.
But! Most people shop for houses based on what they can afford as an all-in payment. To put it another way, people can afford $x/month on housing, and it doesn't matter to them really how much is going to the price of the house and how much is going to interest. If interest rates rise (which happens along with inflation) then that means the percentage of someone's monthly payment that goes to the price of the house goes down, which has a depressing effect on housing prices. So your house payment becomes more affordable but the amount you can expect to get when you sell your house goes down (or rises more slowly).
This is on the back of many companies having a wage freeze in 2020 due to the pandemic
This is also why you will see alot of companies having a turn over crisis as switching employers will not be more profitable for employee's than every before. I see every limited signs that the HR dept's at most companies even recognize this problem currently, and the few that due are powerless to stop it because it seems many companies just refuse to give large annual raises to current staff but will happily replace them at high rates.
This is with out even getting started on the Time bomb of SocSec, as they also have not kept payments up to meet inflation largely because they can not. there is no money to fund it. So if your retired depending on SocSec income for your survival you are screwed, better hope you have family you can live with
>If you hold a mortgage, it can potentially be good...
Hold debt is only good if you wages go up more than inflation. While sure you may pay less for the home itself, you repair and maintenance expenses are going up... Right now, some repair and maintenance cost for home ownership are leading inflation by ALOT
In the 1970's when the US had stagflation, S&P inflation adjusted returns from ~1968 to 1982. If you bought in 1968 you wouldn't really show gains until the early 1990s.
https://www.macrotrends.net/2324/sp-500-historical-chart-dat...
Actually, it would cause the debt to GDP ratio to go up as taxable income shrinks. See Greece.
Paying off debt while everyone and their dog is saving money like crazy is foolish.
Inflation is going to make that $1000 worth less unless your 1 yr old is a great investor. If they have any tips, pass them on. I some cash and no freaking idea how to protect the value.
To a college kid with savings from teenage jobs, it is.
See above inflation is tough on savings. Might be good for a young adult with college debt that can be paid back with inflated dollars.
To people who's wages didn't go up, it is.
Only if wages rise faster than prices. Wages often trail prices in high inflation environments. In extreme scenarios, prices can go up in restaurants and stores every day, but wages may only go up after a pay period, or after yearly review.
The question is if it is controlled and the tradeoffs worthwhile.
> An increase in the cost of living is generally never a "good" thing.
Inflation is only an increase in nominal, not real cost. If I give you a dollar more and charge you a dollar extra, then you haven't lost any purchasing power.
https://www.pewresearch.org/fact-tank/2018/08/07/for-most-us...
https://www.marketwatch.com/story/despite-wage-growth-the-av...
https://www.forbes.com/sites/patrickwwatson/2018/09/25/real-...
https://ca.finance.yahoo.com/news/aftertax-income-is-barely-...
If you want to talk about consumer price inflation as distinct from wage inflation, do so, but be specific.
The people trying to scare everyone about inflation are the ones who the poor people owe the big pile of cash, and they have a very large megaphone.
Can you point me to some middle class people who are just sitting on a huge pile of cash? I'm a pretty standard middle class person and the vast majority of my net worth is tied up in a 401k, and if it wasn't there it'd be in a house that would be seriously outpacing inflation.
Also, to your earlier point:
> Poor people don't have standing debts but rather revolving ones, and so their debt scales with inflation.
So at worst that's a wash.
[1] https://abcnews.go.com/US/10-americans-struggle-cover-400-em...
Now I agree having all the benefits from productivity gains going to the people who aren't working for them is some bullshit, but that's not the same as wages going down when you account for inflation.
If you just bought a house that is just barely affordable, then you want massive inflation because your house payments won't go up with time, while inflation means you get large raises. Even if your raises don't keep pace with inflation, (they often don't catch up for a few years), after just a couple years you are still way ahead because your largest cost of living is staying still.
By contrast, if you are retired your probably get a lot of your income from fixed incomes that won't go up over time. As such you end up having less and less worth to spend every month.
There are a lot more situations, and everyone is in a different situation.
Wages haven’t kept pace with inflation in the US for some time.
https://www.pewresearch.org/fact-tank/2018/08/07/for-most-us...
They’re only starting to rise because of labor pool constraints from the pandemic. Inflation would be very bad for most low to median wage workers, especially those in urban center where housing crises are rampant, especially if business interests continue to succeed at putting downward pressure on them by blocking things like minimum wage hikes.
Real wages are stagnating because that is how macro economics works. When everyone has a saving preference and only spends the bare minimum the economy is optimizing for "efficiency" while staying the same or shrinking. More efficiency primarily means squeezing out low wages out of workers. Given enough inflation there will be an decrease in the saving preference and the problem will resolve itself.
Loans are pull based money creation. QE is push based money creation.
If the private sector, public sector and consumers aren't doing anything then the central bank has to pull us out of the clown world we desperately want to live in.
The projected rate increase is the result of the dot plots, which is the assessment of both governors and regional members of the FOMC. It is not binding and it serves merely as a projection.
If you watch the press conference, you can tell how annoyed Powell is at constantly having to answer questions stemming from what the dots show.
Unlike boomers immigrants spend money and take on new loans. Also, what are you going to do once you have hit 0 immigration? Are you going to deport people?
Housing prices are kept in check when it is expensive to buy housing? This isn't necessarily false, but it is an obvious contradiction that highlights how complicated these issues end up being in reality.
No these two are not direct financial substitutions. You are ignoring a down payment (or mortgage insurance), property taxes, maintenance, and the general risk that comes with home ownership. Monthly mortgage payments should be a decent amount cheaper then rent payments on an equivalent property.
The other thing that's notable when you model the scenarios is how much of a difference it makes how long you stay in a house given the absurdly high transaction costs of selling in a house in the US. 5% realtor fees! $50k on an SF condo, $75-100k on an SF house.
Increasing interest rates erodes buyers ability to borrow, which will require prices to fall.
> After adjusting for inflation and interest rates, monthly mortgage payments are now 30% lower than they were in 1989.
* https://awealthofcommonsense.com/2021/03/what-if-housing-pri...
Of course the price would effect down payment numbers.
[1] There's also the matter of changes in the voting members of the FOMC over time.
The market dictates to the fed the range of rates which are feasible and the the fed chooses from within that range. They don't know exactly what the allowable range is and if they get it wrong the markets react strongly.
And the record is very clear on this point. For example the Powell pivot when Powell told everyone that he was going to taper and the market told him that that was off the table. He quickly conceded.
When rates hit 0% you basically hit the "limit". The last dollar that can be saved has been saved. From this point on more savings just dilute the pool of existing savings. You then get banks that sell AAA rated CDOs filled with subprime mortgages. It's because that's what the market wants. Old people want zero risk savings/investments and when you tell them that is impossible they will keep believing the lies instead.
Also again, we can very clearly empirically say that there is not a 0% floor on rates.
If interest rates go up, home values crash.
So one of three things is true:
- Blackrock knows something you are not being told.
- Blackrock is stupid.
- Blackrock is being told to buy homes and that their losses will be covered.
Whatever else I think of them, I do not think Blackrock is stupid.
However, that only matters if you sell a house. If you are buying houses to decrease housing supply, and increase the rental prices you shouldn't care about the interest rates.
For what it's worth, I'm of the same belief. I think it's politically infeasible to allow house prices to decrease significantly throughout the whole United States.
if rates on the ten year note even rose to the historical average, we would be paying over 25% of the Federal budget on the national debt interest alone. The interest, not the principal
Governments must increase their deficits so that the private sector can save more.
A lot of countries just export the responsibility to take on debt to other countries. Germany refuses to take on debt and expects the rest of the Eurozone and the US to go into debt so it can pretend to be financially responsible.
As long as the private sector has a preference to increase its net savings, interest rates will be at 0%. If it suddenly decides to spend all that money (to call this a good thing is an understatement) the resulting inflation would make the raise in interest rates irrelevant.
Also, I'm not sure how Germany is forcing anything on anyone here. Care to explain?
https://www.wsj.com/amp/articles/blackrock-emerges-as-wall-s...