and market still down 1%. I guess still not priced in despite a 10% drop over the past month and the fed widely expected to rase rates by 3/4 of a basis point . Goes to show how bad things have become. In early 2021 it seemed like things were going to be ok, and then suddenly inflation goes from 2% to 10%.
The meeting notes are going to be important. We have another 5 minutes before the press release comes out.
Things were "mostly" priced in yesterday, or really last Tuesday when CPI / inflation numbers came out. They basically confirmed .75% because if core-inflation was still a problem, then rates have to go up to fix that.
> In early 2021 it seemed like things were going to be ok
People have been increasingly concerned about the impacts of quantitate easing long before 2020. The only people that thought things looked okay in 2021 are people who didn't want to pay attention to the Everything bubble [0] we were (and still very much are) in because they were too busy making money.
A large part of the market has been very slow to accept reality. At every Fed announcement, you see more people coming around. The Fed is struggling with how to slap people in the face without actually crashing the economy. This time JP kept to the planned increase and instead used stronger language about the future hikes.
The market is down to the forward guidance. The previous expectation was that the rate will go to about 3% by the end of 2022. The current estimation is 4.25%.
hmm but unemployment rate is rock bottom. Under a rational expectations framework, the layoffs in anticipation of higher interest rates should have occurred 3-6 months ago. Also, unemployment was low in the 90s despite high interest rates.
seems like the issue might be the economy is more active than ever and there just arent enough employable people to go around (I say employable because there seems to be a growing class of people unable or unwilling to be employed, for whatever reason).
In a way it kind of looks to me like we have reached peak population, at least in the US. Every generation hereafter will have a workforce equal or less than the current in size. That is, unless birth rates change or immigration is allowed on a larger scale.
oh wow let me find any of JPOW’s speeches on behalf of the The Fed
I’ll link when I do but basically for the past 8 months he’s been explicitly saying he wants to get unemployment up, that he doesn’t mind risking the labor market in his efforts of “demand destruction”, never seen an appointed official say this before so he’s going hard
but he has some speeches where he’s basically like “we’re going to raise unemployment” not “could”, not a “maybe a soft landing is possible but here are the risks”, just pain
"Restoring price stability will take some time and requires using our tools forcefully to bring demand and supply into better balance. Reducing inflation is likely to require a sustained period of below-trend growth. Moreover, there will very likely be some softening of labor market conditions. While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses."
"The labor market is particularly strong, but it is clearly out of balance, with demand for workers substantially exceeding the supply of available workers."
He is deliberately engineering a recession to reduce aggregate demand. With luck, the recession will be soft. The goals are reducing labour cost inflation via reduced hiring and increased layoffs, which then leads to reduced consumer price inflation via reduced consumer spending due to budget constraints and negative sentiment. Standard macro 102.
I'm sure if he could increase labour supply via monetary policy, he would. But he can't, so reducing labour demand is the plan.
Low unemployment causes inflation. Low employment is bad for rich people (employers). Inflation is also bad for rich people since their wealth decreases. No wonder high inflation is the worst thing that The Economy can experience.
This generalization is incorrect. With high inflation hard assets and commodities appreciate. Payroll goes down relative to price of goods (revenue) so many sectors benefit. And it's a fire-sale for people with savings waiting for a big dip.
Source, I lived through high/hyper inflation and was educated on this topic by rich people there.
Is it good for low income earners to have their food and shelter prices go up due to inflation?
Inflation is considered bad because it affects everyone, though the poorer you are the more it affects you.
Job losses affect those who lose their jobs and indirectly the economy due to less spending. Inflation affects everyone and run away inflation is one of the worst thing a country can experience.
If the alternative is mass unemployment I would rather pay 10% more for eggs
Job losses affect the entire economy: the rich don't care since they do not rely employment and wages.
In contrast the wealthy are hit enormously by inflation as they start losing in real terms.
The fed prioritizing inflation over unemployment is a massive hit to the working classes. Doesn't matter if eggs only increased by 2% if you lost your home because there are no more jobs.
> In contrast the wealthy are hit enormously by inflation as they start losing in real terms.
Umm, the poor are hit far harder by inflation than the rich. And it hits everyone in a way unemployment does not, that's why its far more important to fight inflation.
Ask your self this question. If inflation keeps going and interest rates go up to 10%. Who will buy the houses that come available on the market that people can no longer afford?
The key is that wages also rise (not proportionately) in step with inflation but investment returns don't.
It matters very little if eggs go up by 10% each year if wages go up by 10% each year.
Of course what we have is stagflation: wage growth is not keeping up with inflation. Even then, raising interest rates to cause a recession is a really awful way to hack down a metric. Again: lose a job or lose 3% in real income a year?
In contrast the billionaire losing 10% a year in real terms looks at inflation as a catastrophic outcome and would gladly sacrifice everyone else's well being to keep his numbers up.
Best case scenario we end up in late 2008 with 10% unemployment but with a 10% rate. Place your bets on which drug problem will destroy the working class: opioids again?
Just to note the rich almost never suffer in real terms, like food or housing. They have enough cash on hand to survive any recession or depression even if they lose their businees.
Also bankruptcy laws if someone is going to mention black friday
Low unemployment doesn't cause inflation, money supply vs supply of goods and services causes inflation. Inflation doesn't necessarily hurt the wealthy, especially asset inflation. The wealthy don't generally hold a ton of currency which is most vulnerable to inflation.
The unemployment rate was at multi decade lows in 2019 but we did not have high inflation. We also had very low unemployment in the 90s and high labor participation rates and had relatively low 2-3% inflation.
We only saw high inflation after a year of worldwide Covid insanity, driven by cheap and abundant liquidity coupled with peak globalism (that is now in decline on an absolute basis, exacerbated by the Russia sanctions) coupled with global supply chain & labor shortages (some of which is generational demographics catching up to us)
Sadly, this proves that the economy is ultimately run on debt.
Someday, maybe we, as a society, will realize that debt, credit, and lending is the way bankers scam money out of everyone else, and we collectively won't put up with it anymore. Banks often have some of the biggest and shiniest towers in downtowns all around the world. How did they get them? Interest, fees, and charges. I can't count how many times people (even on this very site!) have said something like "don't buy things with cash, invest it and get a loan for it instead because interest." It's no mystery as to why you don't have a tower, because you're paying for someone else's.
Normal people figured this out such a long time ago, that a verse in the Bible says that the borrower is slave to the lender. I'm no slave.
And don't be fooled by the cash and airline miles that your credit card throws at you. You're paying for those "rewards" by fees that the banks and networks charge merchants, and they're ultimately built into increased prices that everyone pays. No one got rich from those crumbs, except the bankers.
Unfortunately debt is a part of our society. How would any business that requires a large capital investment start if not for debt? Taking on smart debt and making money off it is a way to better one's own situation. Without the ability to take on debt our social classes would stratify into the haves and have nots even greater than it is today.
I don't like debt, and it has truly gotten crazy, but I don't know a way around debt.
Except that you only live once. If I can buy a house with a mortgage and live in my own place for years of my finite existence versus trying to save money while paying for someone else's mortgage and living in a basement, what seems more rational? You only have a few dozen years left.
taking on debt for an appreciating (or incoming earning) asset, is generally OK - taking on debt for a depreciating asset is never a good idea if you can avoid it.
Taking on debt to pay your daily living expenses is a recipe for disaster - and that is what the US govt. has been doing (and many individuals as well)
> taking on debt for a depreciating asset is never a good idea if you can avoid it.
Even that isn't necessarily true - if one is broke but one needs a car for a better job they need to take on debt for the car. The debt definitely isn't an appreciating or incoming earning asset, but it is a good choice.
Yea but the US Government isn't a person. It's repayment timespan is, in theory, infinite. And inflation actually devalues any debt the government holds, making it easier to 'pay back.'
Unpopular opinion, and maybe I'm wrong here and I've just been lucky, but I've stopped seeing debt as a bad thing. You have to use it smartly of course, but I don't think there's a one-size-fits-all answer for what that means. Use it for daily living expenses? Sure, as long as you can pay it off every month. Never take out a loan and spend years saving for a car? Nah, or at least not when that interest rate was 2-3%. And I suppose that's where increasing interest rates come in: Get the 99% to stop buying.
If debt was not so widespread, then the cost of assets would be correlated to salary.
Now with immediate injection of cash, assets are at prices which require money that an ordinary person will never have. They have to jump on the debt treadmill to acquire necessities.
excellent point - buying a new car is a good example, allowing someone to take out a 7 year loan to payoff a new car, allows the car companies to simply charge more for them - as a large portion of people make their decisions based on being able to afford the monthly payment, not the total price.
That does not seem like a good example. The car industry is extremely competitive and capital intensive. Margins are so thin on the lower prices sedans that some companies (GM, Ford) have just given up on the segment.
> Taking on debt to pay your daily living expenses is a recipe for disaster
Taking on unsecured debt is a bad idea. But if you are going to spend $100,000 on living this year and have $100,000 in the bank, you have two choices. Spend the $100,000 and have nothing. Or use the $100,000 to buy bonds or another income producing asset, then take a loan using that as collateral. As long as the interest you earn from your collateral is more than the rate you pay, you come out ahead.
Instead of having a bank account with $0, you have an investment account with $100,000, debt of $100,000, and you're earning interest on the investment account each month that hopefully covers the interest on the debt plus provides some extra income.
Eh, this is an especially terrible take on your part.
The 'asset' that the government is taking dept on to pay for its living expense is YOU. On the averaged timeline YOU are an income earning asset. The government takes some expenses (roads, education, water, safety) and out comes a taxpayer that has an average income earning lifespan.
You as an individual don't get to play the averages game quite as well. If you are borrowing money today to pay for your daily expenses it is highly likely that will be true tomorrow. You as an individual have risks like getting fired and not getting a new job, or getting smooshed in a car accident. These are risks your lenders take on when figuring out the rate your loans will have, if you even get a loan at all.
> taking on debt for an appreciating (or incoming earning) asset, is generally OK - taking on debt for a depreciating asset is never a good idea if you can avoid it.
this is a good rule of thumb, but there are exceptions. say I want to buy something that costs much less than my net worth, but more than I typically keep in my checking account. I have the choice between a) selling investments, b) taking out a loan, or c) deferring new investments until I've accumulated enough cash.
there are pros and cons to each. with a), I'm paying capital gains tax that I could otherwise defer. with b), I'm taking the risk that my cash flow dries up and I need to sell assets anyway on top of paying interest. and with c), I'm taking the risk that my cash inflates away while I'm saving up.
you can't know with certainty which is best, but b) is usually optimal with a sufficiently low rate.
That is the reason why all the monotheistic religions had fatwa on debt. And you can see how countries that are further moving away from the religious values at different points in histories also immediately adopt a debt based economy.
I use to think this too, but now I believe debt and interest is right up there with energy in terms of economic growth.
Without debt, economic growth nearly zero sum. Waiting for the money to exist and then spending it is just slow and inefficient most of the time. Show me a country that is under-banked and has little access to loans and I will show you a poor country.
Yup. I too used to think the same way as the GP. But then I realized that most of society’s advancements in the west started with two things. Technological advancements, and fiat currency. No one takes any risks when you’re risking a finite resource like gold. And having that money available has been put the great use for technological advancements that pay everyone back down the road.
If, and when the system collapses, who cares? Advancements gained through technology will be with us.
Usurious debt enables explosive economic growth, no question about that. However in my opinion it is more just to have an economy that steadily grows over time rather than a boom and bust cycle which causes horrendous and frankly distressing situations to a large part of the most vulnerable people in society. Heck, even the middle class is affected as quality of life goes down as well.
"Someday, maybe we, as a society, will realize" is one of those sentences that never delivers what it promises. It's always some cockamamie partisan hack job oversimplified nonsense that calls for wholesale revisions of the entire system based on one semiserious concern.
This is why interest is harshly condemned in Islam. One of the major major sins with servere punishment. Is it an evil which keeps the rich richer and the poor poorer (and miserable).
Islamic finance is the solution to a balanced and fair economy.
1. It prohibit interest to outlaw debt based exploitation and instead replaces it with loans of generosity (pay back exact amount, no interest ) or fund raising through investment. Whereby the risk of the person receiving investment is shared with the lender. This is in contrast with a conventional loan where if your property or business burns down, you still have to pay off the loan to the bank.
2. Zakat - a wealth tax on every Muslim. The value of 2.5% of cash, stocks, investment each year is given to the most needy of society.
Implement these systems and you will have a just economy that prevents hoarding and exploitation. Literally money is forced to move down societal class and acquiring more wealth is with increased risk. Islamic finance is the solution.
None. There is no Muslim majority country on Earth at this moment which fully abides by Sharia. There are some Islamic laws here and there mixed with secular rulings. As such Muslim countries of today unfortunately engage with interest.
The thing with interest, there is very little in terms of going back. As mentioned in this thread the entire modern global economy is built on usurious financial instruments. This was not really the case a few hundred years ago where the level and extent of debt was not to the extremes of today.
Abu Huraira reported: The Messenger of Allah, peace and blessings be upon him, said, “A time will come upon people in which they will consume usury.” It was said, “All of the people?” The Prophet said, “Whoever does not consume it will be affected by its dust.”
I know I look back a thousand years when I look for reliable ways to operate a modern global financial economy. Their insights are just filled with relevant information on how to run my business, and treat my concubines and slaves.
While conveniently ignoring the messes of the past.
When this system was made 2500 years ago it worked, because it was new and adapted to the conditions then. Then guess what, the world changed and those systems stopped working because the assumptions they are built on no longer exist.
If you brought a lifeform from 2500 years ago to the world today it would get sick and die. It's defense system would not be adapted to the threats it would experience. Yet this is the first thing people try to do with the complex systems we create and they will suffer the same fate.
Insurance doesn’t cover all possible ways for an asset to lose value, and personal recourse loans exist.
Amusingly enough, California mortgages for purchase are non-usurious and compatible with this definition, because the lender can only go after the property in case of default, not the borrower.
They pay thousands on monthly mortgage, if they are late, they are charged a penalty (more interest). If they fail to pay all together, then the property is gone. All the money the borrower dedicated to paying off the mortgage gives them nothing in return. Essentially robbery.
> All the money the borrower dedicated to paying off the mortgage gives them nothing in return. Essentially robbery.
This is exaggerated to the point of nonsense. I.e. it's literally not clear whether you are hyperbolising for effect, or have no idea what you're talking about.
You pay the bank for the use of the money. After 1 fully-paid year of your 30 year mortgage, you own 1.2% of the property. Or more precisely, your debt obligation is reduced by 1.2%.
After 15 years, you own 32%. After 20 years, 50%. After 30 years, 100%. It's not linear, which upsets people, but it makes perfect sense if you do the math.
In the mean time, if the property appreciates in value, all of that extra value belongs to you.
If you stop paying the mortgage at any time, yes the bank will repossess the house to get the money you still owe them. Not all of your future payments, just the remaining debt. If the sale price is in excess of your remaining debt, they send you a check.
Moral of the story: Do not mortgage short-term housing, except in rapidly increasing markets. And even/especially then, beware.
Corollary: Rental property is a necessary thing, and landpeople provide an essential service.
There is risk, but it is not as risky as an investment where you sink and swim together.
With a conventional loan, if your borrower sinks, they still owe you the money. Lender would have collateral to possess. There is still an outstanding amount of debt that needs to be paid.
Insurance is not permitted under Islamic finance as it falls under transactions that have excessive uncertainty. There is no guarantee what the outcome is for an insurance transaction. It is like gambling, you make a bet with the insurance company such that you pay $xxx a month. If the contracted event happens (or never occurs), there is a financial winner and a loser. If in total I pay less premiums than the cost of the event, I "win". If I pay more in total for an event, I stand to make a loss and the insurance company benefits.
Interest seeks to empower people who have money by making them more and more richer. It exacerbates price of essentials such that the only way to acquire is through a usurious loan. House price are in the hundreds of thousands because people have been "temporarily" handed have hundreds of thousands. If interest loans didn't exist, then houses would be at prices which people can afford through their salary.
With a mortgage, you are usually paying for an asset for 20+ years because the cost of the house is really high. It is "bondage" in a sense.
Without a mortgage system, at most a few years of saving to fully buy a house.
I understand what you are saying when you think it is a similar thing, just the scale of numbers is different. Debt is a responsibility, and a really serious one.
At all costs avoid it because there is no guarantee you will have the capabilities to pay it back + interest . If we can champion a system whereby buying assets does not involve an individual taking on a life destroying risk and instead they can use their normal income to save up in a reasonable amount of time, then this would be the best way.
Yes there will always be people and entities that are richer than the rest. The aim is not to squash every class into the same income bracket, rather stop the propogation of abuse that rich companies inflict by extracting wealth from the poor.
Stoping usurious interest loans means the economic interaction of rich with the poor. If they want to make money from their hoard, then they have to engage with the lower class on a level playing field (in terms of risk) with investing. In stark contrast to sitting on a throne and receiving guaranteed wealth from poor people who have no choice but to take on soul crushing debt.
An endless treadmill of debt which failing to pay substantially speeds it up until an individual can not sustain themselves.
Thanks for the explanation. Do you think humans will find creative ways to make non-usurious interest loans usurious? I am doubting that the line will be as clear as you describe. It sounds good in theory but the reality will be far more complex.
Perhaps the solution to such a complex problem isn’t as simple as a “do this and don’t do that”. Perhaps a complex problem should be looked at more multi-dimensionally.
Like most things, loans can be good and loans can be bad. Context matters. The rule of law is meant to protect people and keep the economy healthy. The law is ever-evolving. Sometimes it comes up short but in a healthy nation it can adapt itself to the times.
Regarding mortgage, most people in the west use their home as their retirement fund. After 10-15 years of ownership, the house is often worth twice as much as their total mortgage. The difference between what the outstanding debt and the value of the asset is called equity, and this can be quite substantial.
> Without a mortgage system, at most a few years of saving to fully buy a house.
Bizarre statement.
You should look at the cost to build a house. And the cost of maintenance.
Builders don't make obscene profits. You can cherry pick good years, but you need to average over 10-20 years.
You can buy an older/used house for significantly less than its replacement cost.
Are you arguing that without the mortgage system, skilled trades would work for lower wages? Labor is 70% of the cost of building a house. Materials are 25%, Paperwork is 5%.
Would lower wages for skilled trades be a good thing? For whom?
Land cost varies from almost 0% to more than 100% of the build cost, depending on location.
There's nothing intrinsically wrong with debt. It just needs to be handled (regulated) appropriately -- no easy task, to be sure -- but consider that debt is traditionally what has enabled people with good ideas to make big bets that paid off for both them and their employees. Most small businesses (most of Americans work for small business) are founded on debt.
I think the problem is not the debt, because credit allows for growth to people that don't have enough capital. Maybe problem here is the source of this money, now banks basically create money from nothing, so you can pump a lot of empty money into economy that was not created by being productive. Before that you basically were lending to someone else what you earned yourself.
>Sadly, this proves that the economy is ultimately run on debt.
Its much worse than that. Without a 'gold standard' or really any standard. Money = debt.
For anyone to have any money, others have to have debt. For 50 million retirees to have millions of $ means there is more than that of people in debt.
For a politician to 'forgive debt' means the value must come from someone else, primarily retirees.
>Someday, maybe we, as a society, will realize that debt, credit, and lending is the way bankers scam money out of everyone else, and we collectively won't put up with it anymore.
That's kind of the problem. Lets say we won't put up with it anymore. It ends. No more debt akin to many other empires in antiquity. How do we go about it? Mainly you want to adjust the fractional bank ratio and reserves. Currently 13% or so depending on lots of factors.
So has anyone tried this? Moldova post-USSR has been trying this. It basically destroyed their economy. They never got there, they were close to 2:1 which is crazy good but it ended up just stagnating and wrecking them. Yes lots of confounders here but imagine you can't take on debt. You never have a mortgage. You must buy cash. Guess you're starting to work very early to save enough money to move out of your parents home? homes wont be a good bet neither, without mortgages. Safe investments in retirement funds have to be attracted elsewhere. House prices will be constantly pressured downward but suppliers and construction people want to get paid.
>How did they get them? Interest, fees, and charges. I can't count how many times people (even on this very site!) have said something like "don't buy things with cash, invest it and get a loan for it instead because interest." It's no mystery as to why you don't have a tower, because you're paying for someone else's.
They take their cut of the transaction and take no risks or liabilities on. Smart business.
>Normal people figured this out such a long time ago, that a verse in the Bible says that the borrower is slave to the lender. I'm no slave.
Without debt though, how do you live in a house? You rent? Rent is about the same price as the mortgage. You're paying someone else tower as it were. You should virtually never rent.
It's interesting how the whole system is designed around debt and yet there's only 1 proposed system that might fix this.
This argument is tiring. The massive unprecedented drop in unemployment was the result of loose monetary policy. In order to properly control the economy there is a certain level of unemployment (something like 6-8% iirc) that is expected at at any given time.
People aren't really "employed" (in a gainful sense) if the money printer keeps printing. Achieving the lowest possible unemployment results in rising inflation because the necessary availability of surplus capital to allow such a thing to happen.
At any rate, 0.75% won't work. The rate changes need to be more aggressive if the goal is to actually avoid a 2023/2024 catastrophe. It takes upwards of 10 years for inflation to cool off after the process of reducing it begins. We're in for a long ride.
It's all too little too late. Considering the scale of monetary easing in the last 2+ years, this is like pissing in desert. Quite frankly, I can't blame the market for being skeptical of Powell's "resolve." He did an about face in 2019 with the taper tantrum.
With massive deficits and public/private debt, raising more would cause a chain reaction of defaults. I wouldn't like to be in Powell's shoes. Can't control spending, can't control war, can't control commodities, can only raise rates but not too much. And will be the scapegoat, for sure.
As he should be, in my opinion. We should've entered a mild recession in 2018 but because of TPTB he went whole hog on cutting rates as low as possible. We didn't enter the recession, and as luck would have it a global catastrophe happened. This resulted in more rate cutting to the point the rates could not be cut anymore.
He could've avoided some of this by just intelligently working the market. It is, in my eyes, entirely his fault.
TPTB was discussing firing Powell following the rate hikes. Not clear if it would have been possible, not clear that it wouldn't. "Entirely [Powell's] fault" may be the right diagnosis, but I'd say political leadership matters a lot here.
The 10 year breakeven inflation rate is below 2.5%, showing the market does not agree with you on how one successfully fights inflation and expects inflation to plumit.
Powell has repeatedly, and explicitly stated that softening the labor market is required for fighting inflation and that, while this is not good, it is preferable to the consequences of not fighting it.
> “My main message has not changed since Jackson Hole,” Powell said in his post-meeting news conference, referring to his policy speech at the Fed’s annual symposium in August. “The FOMC is strongly resolved to bring inflation down to 2%, and we will keep at it until the job is done.”
That earlier speech was far more direct and succinct than usual. Market participants should have gotten the same message then as they are now. The Fed intents to break inflation, with all the likely consequences that brings.
Whether the Fed actually has the technical tools to do this is another question. Most of what it does is mass psychology - trying to convince the markets of its resolve one way or another. Bank reserves haven't mattered for years as money, but that's pretty much the only lever the Fed holds. It holds another - margin stock trading requirements, but that path has all but been forsaken. Treasuries are the fuel for the financial system. But to the US Treasury, they're just a mechanism to fund the deficit. The contrast has led to some things that are hard to explain otherwise, and more things like this will no doubt arise in the future.
> It holds another - margin stock trading requirements, but that path has all but been forsaken
I didn’t know this, could you explain when it’s last been used, if ever? Could they theoretically drastically raise margin requirements for some stocks and lower it for others to encourage sectors to be rebalanced?
>The recent rise in margin credit has focused attention on the Federal Reserve’s margin requirements for purchasing equities with borrowed funds, which has been at 50% since 1974. In November and December of 1999, margin credit grew very rapidly, outpacing the sizable appreciation in the overall stock market. And in January 2000, it grew further while the stock market’s valuation dropped, leaving the ratio of margin credit to market capitalization at its highest level in the past 29 years. This Economic Letter discusses the recent trend in margin credit and the merits of using margin requirements as a policy tool.
> ...
> The Securities Exchange Act of 1934 mandated federal regulation of purchasing securities on margin. The margin requirement was motivated by the concern that credit-financed securities speculation helped fuel the run-up in stock prices prior to the stock market crash of 1929. The act viewed the Federal Reserve as responsible for managing the availability of credit in the economy, so the Fed was charged with setting margin requirements for securities purchases. The Securities Exchange Commission was directed to enforce those regulations.
According to Wikipedia, the rate hasn't been changed since the 1970s:
> Regulation T governs the extension of credit by securities brokers and dealers in the United States.[1] Its best-known function is the control of margin requirements for stocks bought on margin. The initial margin requirement for such margin stock purchases has been 50%[2] since 1974,[3] but Regulation T gives the Federal Reserve the authority to change this percentage. Raising the margin requirement ostensibly reduces risk in the financial system by reducing the potential leverage and total buying power of investors. Conversely, lowering the margin requirement increases systemic risk by expanding the buying power and leverage available to investors. Since 1974, the Federal Reserve has not deemed it necessary to adjust the margin requirement despite periodic extremes of price volatility in the equities markets.[4]
Given the absolute neglect of the mandate it was given on this, I suspect the Fed views even mere talk of increasing margin rates as the nuclear option. But if the usual roll call of psyops fail to deliver, this thing is there in its back pocket. I imagine the mere threat would cut 20% off the S&P overnight.
Not really. A consequence of doing so would be breaking the inter-bank payment system, which is to say crashing the economy with no survivors. The Fed simply must provide adequate reserves to support the payment system. The so-called "dual mandate" of controlling employment and inflation rates is necessarily secondary to that. I mean theoretically sure they could do whatever, but the end result would be the dissolution or restructuring of the Fed by Congress, or worse.
> Whether the Fed actually has the technical tools to do this is another question. Most of what it does is mass psychology - trying to convince the markets of its resolve one way or another.
Who else can buy up trillions of t-bills and mortgages at a moments notice? When they do this, it drops rates. The Fed offered up historically cheap money to borrowers to keep the economy rolling during the pandemic and housing crisis.
> But to the US Treasury, they're just a mechanism to fund the deficit.
The deficit doesn't get funded as well when the Fed is not buying. It's not merely a technicality. Someone else will have to fill the hole left behind by the Fed leaving the market, and that usually means higher rates to draw in money from elsewhere to feed the t-bill and mortgage market.
>Whether the Fed actually has the technical tools to do this is another question.
its unlikely the fed is reactive enough in the short term to have any real effect on inflation presuming its tooling is effective. the interest rate hike took six months to implement, and began with a quarter of one percent increase. this was before earnings reports for the prior christmas holiday but november itself was a sobering enough red flag that Powell should have immediately pushed for 1% or more. its taken us nearly a year to arrive at the 3% we're at now, but in my opinion this inflation wont stop for another year, and it wont stop even at clinton-era interest rates of almost 6%. Quantitative easing --and the feds decade long addiction to it-- make this thoroughly uncharted territory. the interest rate push will likely be the straw that breaks corporate real estate, no matter how hard Bloomberg pounds his fists and demands a return to cubicles in his newspaper. this will likely tumble back into another residential housing or auto lending crisis. The student loan forgiveness push and reforms on wage garnishment also send a clear signal that our nations 1.73 trillion dollar nickelodeon of perpetual youth debt is becoming a serious threat as well.
I agree on this thesis, the crux of the problem and I have told many people about this, was the handouts given during covid. It was totally scattershot and should have been more targeted. In addition states like California and others extended payouts way longer than they should have(and had way over-generous unemployment) which led to entire industries being completely short staffed. This led to extreme raises in wages and started a spiral of inflation that started at the bottom of the economic tiers and has worked its way up. Couple that with China doing zero tolerance covid lockdowns our supply chain is completely strangled which is also adding fuel to the fire, and making prices shoot up even further. Real estate sales have completely frozen as prices for all houses are priced in at a 3% interest rate and buyers will not entertain 25-30% cuts in price.
Against this backdrop California plans on distributing $9.5B to any family who makes under a certain amount of money($1k each), I expect this huge infusion of cash to make inflation even worse and I do not know where this will go except that it will not be pretty.
The empirical evidence for wage rises causing inflation is so weak, few economists take it seriously as an argument against wage rises.
The evidence for supply chain issues - as you mention - and price gouging being contributory causes is much more convincing. If you are not convinced that price gouging is going on, consider profit levels in energy companies in recent months.
Please don't blame this on workers who if anything need to be paid more, and paying them more will not impact inflation, only make it easier to cope with. It may even bring inflation down if jobs in supply chains become more attractive and force profiteers to become more competitive.
Blaming inflation on price gouging seems way too facile and subjective. What is price gouging anyway? In the years that energy companies lost money were they doing the reverse of gouging?
Why is it more facile and subjective to blame the real visible increases in consumer product and material supply prices than to blame "extreme raises in wages starting a spiral of inflation that started at the bottom of the economic tiers and has worked its way up?"
I just don't see there being any more reasonable objective cause and effect to that claim than the claim made by the commenter you are replying to. On the other hand in my own industry, prices for materials like lumber and steel have shot up massively causing major follow-on effects, and nobody at the steel mills are blaming worker salary for it. They're blaming the costs of the raw materials. And the people on the job site aren't blaming the tradespeople wages for the project going over budget, they're blaming the high cost of the steel showing up on site, late.
When workers are an issue for project delivery or budget it's usually not what they're charging, it's just availability. There are simply not enough field workers out there who can drive steel rivets or manage a punchlist. In fact, I hear rising wages brought up as a potential way to attract more people to the those field roles, because right now there are not enough people entering those roles.
When price increases exceed the increases in costs/raw-goods... then it's "greedflation", not "price gouging". Increasing profit margins are also a good signal of it.
I think they are suggesting that profit margins should be zero (if not negative)… and in my experience most people taking these kinds of positions would prefer if your takehome pay was just a little bit less than theirs.
So pretty much doubling down on the point: it’s gouging when I say it is.
It seems a bit too on the nose for the literati on HN to have determined the definitive cause of inflation today is in-demand workers requesting fair compensation, as of the last 2 years.
Software engineer salaries have skyrocketed unbelievably over the last 20 years. What crisis is that responsible for?
housing affordability crises around IT hubs? (sure, the ultimate cause is fear of density, but the proximate cause was a lot of income concentrating in so relatively few people's hands in relatively small areas.)
notice that the real problem is the supply-demand inequality, not that real wages went up for a sector. (and to have a crisis it's almost always necessary for some other conditions to be present to make this one particular imbalance a very significant one that then drives other markets, eg. in case of housing that condition is the artificially very limited supply.)
the COVID stimulus checks were big, but not that big individually compared to the US economy, sectors, regions. people who needed it spent it, who did not put it into meme stocks, or bought something, inflating the price of luxury stuff like high end GPUs. that's most of it. (around 2020 July)
what put the whole economy into a freefall was ~1M excess dead and the rising energy prices giving a big speedup to the already falling supply-side dominos.
Agree. It’s important to look at retirement rates and numbers, too. It’s the end of the boomer generations workforce participation (except in the senate?). The following generations really are smaller.
Couple that with actual crackdowns on immigrations, and you get actual labor supply problems for some roles and industries. This has knock on effects that raise wages.
Couple this with inflation in CPI, and you get workers in a good place to negotiate raises to cancel out inflation and then actually increase real salaries commensurate with contribution.
Net, labor price increases are a symptom of labor supply and cpi. Labor is not driving inflation.
More generous unemployment was blamed heavily for the worker shortage, but that has been pretty thoroughly debunked by the data. Those benefits have long expired and worker shortages remain. Not to mention, states that ended unemployment extensions early saw very little improvement. Something like just a 3-4% reduction. (not 3-4 percentage points reduction, a reduction of 3-4% compared to states that kept extended unemployment benefits.
IIRC, Powell compared the Feds current efforts to tame inflation similar efforts in the 70s/80s, so fast in that context is over a few years instead of over a decade or more.
Money is just a different word for credit. Credit comes from credibility, or trust.
If a bank trusts a company that they can repay a loan, they'll extend the loan. But if there's a credibility problem, they won't. At the margin, when interest rates go up some companies will cease to be profitable. Banks know intimately how profitable their borrowers are. Even if they have doubts, the income statements will show. So, when the times comes to refinance the loan, the rate may be increased, or the credit line decreased, or new covenants may be put in place, or some collateral required, or various combinations of these.
Corporations (and especially those rated "high yield", or non-investment grade) will see a double-whammy: not only interest rates will have gone up significantly (by 4% early next year), but also their credit spread will go up (see [1], on average it has gone from 3% at the beginning of 2022 to 5% now, and it will keep going up).
That creates the start of a feedback loop: with the increased burden of servicing debt, companies will become less profitable, some will start cutting headcount (just look at the HN posts lately and see how often layoffs are mentioned).
Of course, there's the other feedback loop: higher interest rates means higher discounting of future corporate dividends, dividends which will be smaller anyway, so that means lower stock prices. People will see their savings taking a hit.
And then, a combination of lower savings and higher job uncertainty will lead to lower consumer spending. Or demand destruction.
Which is what the Fed wants.
Make no mistake: the Fed is still the most powerful actor in the financial markets. By far. It has all the tools needed to fight the inflation, and then some.
> Most of what it does is mass psychology - trying to convince the markets of its resolve one way or another.
Inflation isn't the result of mass psychology. It's the result of too much money sloshing around in the economy, thanks to trillions in deficit spending.
Regardless of the starting point, inflation can persist due to mass psychology. See the mass psychology experiment in the mid-1990s that worked!() to constrain inflation in Brazil. They did have to introduce a new currency that was pegged against the dollar (essentially). See: https://www.bcb.gov.br/en/monetarypolicy/realplan
Inflation has many causes and psychology is one of them. If you think prices are going to keep rising, you will be more likely to spend your money to "lock in" the price right now. If enough people do this, it adds demand to the system which keeps prices high and prolongs inflation. If too much money in the economy alone caused inflation it would been apparent between 2008-2020.
There is: that is the ECON101 feedback model of deflation causing money under the mattress reducing money supply causing deflation. That doesn’t occur because modern money systems don’t have a fixed supply of printed money; also governments actively prevent deflation so it isn’t seen.
“Opposite effects occur when the supply of money falls or when its rate of growth declines. Economic activity declines and either disinflation (reduced inflation) or deflation (falling prices) results”.
Rate of growth can decline due to consumer sentiment (psychology).
> BTW, you cannot imagine yourself into having more money.
Strawman.
Consumer sentiment (psychology) can become more positive, people borrow more (increase mortgages or buy a “better” house) and spend more (increasing the money supply).
> Whether the Fed actually has the technical tools to do this is another question.
Short term interest rates being higher means that loans which roll over and refi on a scheduled basis (ARMs being one example) will have their interest payments move much higher. That will create delinquencies and stress in the financial markets eventually, but it will take some time for those loans to wind up getting refinanced at higher rates and for the loans to go delinquent. Watch for CMBS delinquencies to start climbing.
When the Fed says that they need to hold rates through 2023 and not cut people should also believe them. That's how they force the weak hands to capitulate and be liquidated. Everyone will naturally try to kick their cans down the road as long as they can, so it won't happen overnight.
ARMs make up a tiny percentage of mortgages. They are also usually fixed rate for the first 7 or 10 years. How many other types of revolving loans are there?
Auto loans are not normally thought of as revolving lines of credit, but many consumers treat them as such. As soon as one car is paid off (or even before), they trade it in for a new one with a new loan (sometimes rolling over negative equity).
The used auto market has been hot the last couple years, so it’s hard to predict what happens. But since most consumers buy based on the monthly payment, higher rates mean smaller, less luxurious car, which has implications for the profitability of auto manufacturers.
Also, some consumers have been using their homes as piggy banks, refinancing each time the value increases. When happens to consumer spending when they can’t do that?
I am baffled at the Fed messaging. A year ago Powell's keynote said the inflation is a supply side problem due to "transitory" issues. How does raising interest rates with "demand destruction" help supply side inflation due to war and chip shortages?
That's kind of laughable. Most people who know the very basics of economics knew this was coming after printing and dumping that much money into the economy early in the pandemic. They increased the supply of money with nothing of value backing it, which diluted the total supply's value.
Those guys have been calling for runaway inflation since 2011 though. So we ignore those permabears.
Calling "inflation" for 10 years in a row is basically boy-who-cried wolf. No one believes you, and when you're finally "correct" about it, its not because you had any analysis, its because inflation inevitably occurs in a boom/bust cycle.
Broken clock correct twice a day + Boy who cried wolf syndrome. I still won't be listening to the permabears / runaway inflation guys even with today's market conditions.
Is the doctor who tells you for 30 years in a row that you should stop smoking because you will get lung cancer, only right in the year when you actually develop the cancer? Was the doctor 'crying wolf' for 29 years?
When the Fed printed a Trillion dollars in November 2008 through QE1, and those permabears think crazy hyperinflation will occur immediately, yes, we ignore them.
When they say inflation will occur in QE2 in 2010, and those permabears think crazy hyperinflation will occur immediately, then yes, we ignore them.
When they say inflation will occur in QE3 in 2012, and those permabears think crazy hyperinflation will occur immediately, then yes, we ignore them.
When they say inflation will occur in QE4 in 2020, and those permabears think crazy hyperinflation will occur immediately, then yes, we ignore them.
Now its 2022, the Fed has been Quantitative Tightening for a year to deal with the inflation signals we're finally seeing. Hundreds of billions of dollars are being effectively destroyed by these policies.
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So yes, the Fed is finally acting on the inflation issue. But only because the data shows it is finally a problem. We don't just take the permabear crowd word immediately, we move when the data shows an issue. Not before.
There's some people who are just noise and are irrelevant to the discussion, unfortunately. You figure these things out over the years.
> We don't just take the permabear crowd word immediately, we move when the data shows an issue. Not before.
Following the data means you're inevitably running after the facts. Running after the facts inevitably causes feedback loops. I'm sure those feedback loops were tuned correctly to not blow the whole thing up, right. Right? RIGHT??
This just isn't true. https://www.igmchicago.org/surveys/inflation/ is a poll of the top economists in the country and they certainly didn't all agree that the level of inflation we now see was a certainty.
Fortunately, we can rely on continued immigration to increase the labor supply and control wage inflation and that's a good thing. The price spiral with flat wages will result in a generally reduced quality of life for the American worker though. I think that's a bad thing, but nobody in power has cared about that for the past fifty years[1] so why start now?
A simple example: If your mortgage or credit cards debt or car loans cost more due to higher interest rates, you are going to have less money left over to purchase other products.
This will make you less likely to want the new expensive Iphone, especially if you were going to finance the purchase, so as Iphone sales plumit, there will be less of a chip shortage since supply now meets demand.
OK so what happens if the chip shortage lasts longer (due to war and commodity prices)and with plummeting sales and corporate earning (which will reduce tax receipts as well) the economy will enter recession? So then what is the game? Do Fed keep the economy in recession? Or do they start QE again?
Why would they start QE? Fed rate is at 4% right now, there's more than enough room to drop rates if an issue occurs.
Given the data however, its unlikely to happen. We're currently at record employment levels. The expectation is for the rate to keep going up to maybe 4.5% next year, and finally that's when inflation is quelled, and we taper off rates sometime next year.
Of course, we need to keep up with economic data and see if these rate hikes have the desired effects.
> Why would they start QE? Fed rate is at 4% right now, there's more than enough room to drop rates if an issue occurs.
Right but that will also increase demand and induce more inflation, no? So Fed will be perpetually stuck, in theory at least, to find a balance in their dual mandates.
Its like monetary policy is only a tiny piece of overall policy.
The big guns is Congress, not the Fed. Possibly the President if you consider things like averting the big Railroad Union strike last week (which would have certainly caused more inflation as shipping costs could have gone up).
Lots of little fires happening around the country. The fed has one lever: interest rates. Congress / President has the other levers.
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Still though: we watch the Fed because the prime rate has a large effect on the value of investments, especially in the question of stocks vs bonds. Its important for the individual investor to follow.
The goal is equalize the demand with the supply. Keeping with the example, the hope is to see just as many iPhones sold, already limited by how many chips are available, but not with people fighting over them outbidding each other with higher and higher offers to obtain one.
A recession will occur if they overshoot, however.
There is too much demand. If we could make all the stuff we can afford to buy, then we wouldn't have inflation. But it is how we get $12 for a medium #1 at Burger King, which is flipping insane.
You're incentivized to put your money in savings because of the interest you can accrue in a savings account since interest rates are up for those accounts.
Eh, not really. Because you're buying the house on a loan but not buying iphones on the loan.
When you choose to get a loan you're pumping a few hundred thousand that was leveraged into existence into multiple industries that gets distributed into the economy, that gets distributed to hundreds of people working.
When you choose just to just buy an iphone, that's $1000ish your spending of your own money.
Most people spend more money on cars and houses than Iphones. If interest rates cause you to you buy an Iphone instead of a new house or car you've probably contributed to lowering inflation more than increasing inflation because there's one less person bidding up the cost of houses and cars, plus cars have chips in them.
" A year ago Powell's keynote said the inflation is a supply side problem due to "transitory" issues."
This reminds me a lot of the 2008 crisis when Bernanke told us that everything was just fine until banks started collapsing. Personally I think the Fed has turned into a political institution that keeps inflating bubbles until there is no way out. I can't see much wisdom or foresight in their moves. They seem constantly behind the curve and instead of smoothing out business cycles they make them more extreme.
There have been very few “swings” at all. This response is case in point for “so measured it is probably not enough”. Policy has been incredibly stable in the last decade, and then we had a crazy pandemic and the fiscal policy response, in hindsight, was wrong.
I don't even think it was wrong, it just went on too long. The US had an excellent recovery, but because Congress didn't want to pass automatic stabilizers, and they had a hard time passing laws, they set long expiration times- and the last stimulus bill went on too long in retrospect.
Isn't that one thing rising interest rates is meant to achieve? Stopping anyone from borrowing quite so enthusiastically, be they government, corporate or personal.
Why do they have to care about the consequences? Corporations have the market. Persons have their families, lives etc... Why do elected government officials need to care; especially in this polarized, 2 party, ~~world~~ country.
I'm pretty sure the closest thing we have to accountability in government are blue checkmarks twitter dunking on politicians from the opposite party and then being ignored by all the followers of that party.
Walter, you regularly state opinions as fact, and usually don’t seem to bother to add any analysis to shore up your opinion. You have clear skills at creating the D language, however the creator of the HolyC[1] compiler had some opinions too ;p
I am not actually disagreeing with your point. I am just saying 10 out of your 10 most recent comments lack any external links or analysis, and 5 out of 10 comments are low value (IMHO) one-liners...
Disclaimer: I admit I am completely ignorant of macro-economics (even though I helped create and develop a sizeable business that mostly depended on macro-economics!)
Glad someone said it. Nearly every day I see Walter spouting off at the mouth on shit, asserting ideological opinions and viewpoints as fact with little support. Probably the most high profile and technically competent user that regularly contributes absolute drivel. It's now to the point I often don't even bother to read what he writes unless it's on a technical topic.
Neither of us mentioned free-markets, nor what we think of them.
Why are you trying to put words in our mouths?
Why are you diverting from the original point I made?
Why does it look to me like you are trolling?
Edit: trying to be on topic, and trying to follow your diversión: By definition, a fiat currency like the USD is not a free market. In fact a “free market” is an oxymoron - it needs strict rules to be free (the inherent contradiction). Cryptocurrency is the closest we have to a “free market” currency at present. Context: I am a capitalist hippy. Let them eat Tether. I would summarise rjbwork’s comment as (void)WalterBright; | is not a pipe. Free market for pres (meme that)!
> Neither of us mentioned free-markets, nor what we think of them.
I mostly post about free markets, and you had a general complaint about me, which is what I responded to.
> Why does it look to me like you are trolling?
I would be trolling if I didn't believe what I was posting. But I do, so there. If you look at my post history, I'm completely consistent in what I see as true. I don't berate others, call them names, call them stupid. For me, it's friendly conversation. I also like the sport of debate, like others enjoy a friendly pickup game of football. If you don't like it, please ignore me.
> I mostly post about free markets, and you had a general complaint about me, which is what I responded to.
As I said, your comment did not come across as a response.
I certainly haven’t noticed that you majority post about free market. A quick sample of your last 20 comments shows 1 low value comment about the free market.
~Half of your Your last ten comments are one-liner comments. Also plenty of opinion, some of which are stated as “facts” by you and could really do with some reference to supporting information. Your last ten comments are: 2x one-liner “facts” on inflation, a one-liner joke, 2 opinions on James Webb, a one-liner on ebooks, a two liner against magazine apps, a comment against government subsidies (with low-value political overtones IMHO), an opinion on Rocky & Android TV, one-liner “The telegraph network was the true origin of the internet”, one-liner “I'm sad that free markets are viewed as an ‘extreme’ position” (you derailed the article topic here).
> I'm curious why you believe free markets are absolute drivel.
rjbwork did NOT say that. You said that. I think that captures a perfect example of a one-liner comment of negative value to the HN community.
“absolute drivel” is inflammatory, but it is only their opinion on the quality of your comments, and I suspect the intention wasn’t to be a personal attack.
> I don't berate others, call them names, call them stupid.
Why introduce that? An implication that we do? I don’t think either of us are suggesting you do those things. I don’t think either of us have done that. We could both choose to be politer, but the risk is a tone of passive-aggressive condescension. Personally I think we are positively engaging with you because we have enough respect for you to do so. My time, your time, and the time of others is extremely valuable (and difficult to own).
> I also like the sport of debate
Let’s imagine there are two forms of debate:
1) the political/lawyer form where the game is to win, any tactic that works is valid, facts are often irrelevant, and competitive behaviours are everything.
2) the scientific/engineering form where the game is a search for answers, discovering one is wrong is fantastic (learning), and cooperation is critical.
I think you say you do (2). However you come across to me as doing (1). I have given you plenty of reasons in this thread backing up why your comments come across as disingenuous.
Sorry that this is a meta-discussion. I really do want to encourage conversation on HN to be curious and positive, and not snarky. I am not a mod (ugggh). I sincerely try to write high quality comments and improve my commenting, not that I am necessarily succeeding ;p. My original comment got 10 upvotes (in a slow thread), so I am not alone with my opinion about your commenting style.
Your comment “I'm completely consistent in what I see as true” is a possible signal that you are dogmatically sticking to your beliefs, and not allowing your beliefs to be changed by learning from others. To quote Jim Keller talking about himself: "Imagine 99% of your thought process is protecting your self-conception, and 98% of that is wrong.” — context @1:23:00 of https://www.youtube.com/watch?v=Nb2tebYAaOA
That is the end of this thread for me. I hope you have gained something from our comments.
For the same reason I don't drive my car as if it were a frictionless and spherical point mass. It's an idealized and fictional construct that is useful only insofar as a model by which to derive principals that can be applied to reality.
Much as we do not have a theory of everything in physics because, despite our incredible talent as a species for constructing models and deriving principals, we have yet to come to a coherent model that directly maps to reality fully, we do not yet have some kind of economic theory of everything. Your repeated assertions of "belief in the free market" read to me much as a a religious belief, in that they are assertions of the mechanisms by which things work, despite repeatedly clashing with ground state reality. In my view they are, at best, simplistic representations of some other mechanism.
I am actually quite a big fan of markets, and am interested in finance, trading, business, etc. But I am not a market ideologue, nor am I naive enough to think that someone has come up with a perfect economic system - especially when it is claimed to somehow harness for good and neutralize humanity's near infinite capacity for greed and evil.
One doesn't need to believe in the free market in order for it to work, and it doesn't need to be a perfect free market to work. The more free market it is, the better it works.
It's not religion, it's borne out by history. Countries that move towards free markets grow more prosperous, those that move away, less. The ones that do the worst are full on communism.
> despite repeatedly clashing with ground state reality
I've replied to all those claims of it clashing with reality. Most of them are based on the notion that free markets do not proscribe the use of fraud and force against others. The rest are often claims that free markets tend directly to monopolies, although the proponents are never able to identify any free market monopolies.
Want a cite? Here's one. The US, in its first century, excluding the slave south. Was it an ideal free market? Nope. It's hard to argue with its resounding success. Compare it to the South American countries, which had no such success.
Want another? The German Miracle, 1946 or so to 1970. Japan, post war to around 1990. Hong Kong in the 1960s turned to free markets, look at the results - GDP grew 18,000% from 1961-1987 https://en.wikipedia.org/wiki/Economy_of_Hong_Kong
If free markets are a religion, they certainly are a religion that delivers results whether or not the participants believe in it.
> especially when it is claimed to somehow harness for good and neutralize humanity's near infinite capacity for greed and evil.
It harnesses the selfishness in all of us. As for "somehow", the how is straightforward. To make money (a selfish motive) one has to provide a good or service that others find worth their money. If one tries to make money by stealing, cheating, defrauding, enslaving, extortion, blackmail, or murdering, one goes to jail.
Unfortunately, it's a bit of a tough slog, it's not written for the popular press. But it's worth it if you're really interested in understanding what's really going on.
I've posted many historical cases of inflation being the result of runaway spending.
For example, the inflation in the US gold currency during the California and Yukon gold rushes.
"Because precious metals were at the base of the monetary system, rushes increased the money supply which resulted in inflation. Soaring gold output from the California and Australia gold rushes is linked with a thirty percent increase in wholesale prices between 1850 and 1855."
None of this stuff is hard to find. There's no difference in inflation from a flood of gold entering circulation from a flood of fiat money helicoptered into the economy.
Incidentally it looks like they have decided not to reduce and simply flatten. So it'll likely push closer to 4 years of inflation? Well no, an election will arrive before that.
I want to see double digit mortgage rates, everyone with an adjustable rate mortgage blown tf out
Then lets look further at how people that have mortgages and build home equity make money: they need 5-30 years of zero disruption in their income, whatever employs the majority of them needs to feel cash strapped and unoptomistic so then the people with mortgages get blown tf out too, within a year
There are a huge number of ways to fight inflation. You can do wage and price controls. You spend money to increase supply. You mandate this and create a law that does that. You could reduce the money supply with tax increases. All of those things are politically tricky. Each has a constituent that likes it and one that opposes it.
Here's the thing though - none of those ways works. The way that works isn't politically tricky it's politically toxic. Raising interest rates works. It will ultimately piss off just about everyone but if you really want to cut inflation it's the only way to do it everything else is just politicians doing politics.
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[ 2.6 ms ] story [ 238 ms ] threadThings were "mostly" priced in yesterday, or really last Tuesday when CPI / inflation numbers came out. They basically confirmed .75% because if core-inflation was still a problem, then rates have to go up to fix that.
People have been increasingly concerned about the impacts of quantitate easing long before 2020. The only people that thought things looked okay in 2021 are people who didn't want to pay attention to the Everything bubble [0] we were (and still very much are) in because they were too busy making money.
0. https://en.wikipedia.org/wiki/Everything_bubble
In a way it kind of looks to me like we have reached peak population, at least in the US. Every generation hereafter will have a workforce equal or less than the current in size. That is, unless birth rates change or immigration is allowed on a larger scale.
I’ll link when I do but basically for the past 8 months he’s been explicitly saying he wants to get unemployment up, that he doesn’t mind risking the labor market in his efforts of “demand destruction”, never seen an appointed official say this before so he’s going hard
Here is him being a little tame to Congress https://www.cnn.com/2022/06/23/economy/fed-jerome-powell-hou...
but he has some speeches where he’s basically like “we’re going to raise unemployment” not “could”, not a “maybe a soft landing is possible but here are the risks”, just pain
https://www.bloomberg.com/news/articles/2022-08-26/read-fed-...
"Restoring price stability will take some time and requires using our tools forcefully to bring demand and supply into better balance. Reducing inflation is likely to require a sustained period of below-trend growth. Moreover, there will very likely be some softening of labor market conditions. While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses."
"The labor market is particularly strong, but it is clearly out of balance, with demand for workers substantially exceeding the supply of available workers."
He is deliberately engineering a recession to reduce aggregate demand. With luck, the recession will be soft. The goals are reducing labour cost inflation via reduced hiring and increased layoffs, which then leads to reduced consumer price inflation via reduced consumer spending due to budget constraints and negative sentiment. Standard macro 102.
I'm sure if he could increase labour supply via monetary policy, he would. But he can't, so reducing labour demand is the plan.
Source, I lived through high/hyper inflation and was educated on this topic by rich people there.
Inflation is considered bad because it affects everyone, though the poorer you are the more it affects you.
Job losses affect those who lose their jobs and indirectly the economy due to less spending. Inflation affects everyone and run away inflation is one of the worst thing a country can experience.
Job losses affect the entire economy: the rich don't care since they do not rely employment and wages.
In contrast the wealthy are hit enormously by inflation as they start losing in real terms.
The fed prioritizing inflation over unemployment is a massive hit to the working classes. Doesn't matter if eggs only increased by 2% if you lost your home because there are no more jobs.
Umm, the poor are hit far harder by inflation than the rich. And it hits everyone in a way unemployment does not, that's why its far more important to fight inflation.
Ask your self this question. If inflation keeps going and interest rates go up to 10%. Who will buy the houses that come available on the market that people can no longer afford?
The rich or the poor?
And who will be the main sellers of those homes?
The rich or the poor?
https://www.brookings.edu/blog/future-development/2022/03/18...
https://www.deccanherald.com/opinion/comment/does-inflation-...
https://goldcountrymedia.com/news/135064/how-inflation-makes....
It matters very little if eggs go up by 10% each year if wages go up by 10% each year.
Of course what we have is stagflation: wage growth is not keeping up with inflation. Even then, raising interest rates to cause a recession is a really awful way to hack down a metric. Again: lose a job or lose 3% in real income a year?
In contrast the billionaire losing 10% a year in real terms looks at inflation as a catastrophic outcome and would gladly sacrifice everyone else's well being to keep his numbers up.
Best case scenario we end up in late 2008 with 10% unemployment but with a 10% rate. Place your bets on which drug problem will destroy the working class: opioids again?
Also bankruptcy laws if someone is going to mention black friday
We only saw high inflation after a year of worldwide Covid insanity, driven by cheap and abundant liquidity coupled with peak globalism (that is now in decline on an absolute basis, exacerbated by the Russia sanctions) coupled with global supply chain & labor shortages (some of which is generational demographics catching up to us)
Someday, maybe we, as a society, will realize that debt, credit, and lending is the way bankers scam money out of everyone else, and we collectively won't put up with it anymore. Banks often have some of the biggest and shiniest towers in downtowns all around the world. How did they get them? Interest, fees, and charges. I can't count how many times people (even on this very site!) have said something like "don't buy things with cash, invest it and get a loan for it instead because interest." It's no mystery as to why you don't have a tower, because you're paying for someone else's.
Normal people figured this out such a long time ago, that a verse in the Bible says that the borrower is slave to the lender. I'm no slave.
And don't be fooled by the cash and airline miles that your credit card throws at you. You're paying for those "rewards" by fees that the banks and networks charge merchants, and they're ultimately built into increased prices that everyone pays. No one got rich from those crumbs, except the bankers.
I don't like debt, and it has truly gotten crazy, but I don't know a way around debt.
It's no utopia, but it works well enough.
Taking on debt to pay your daily living expenses is a recipe for disaster - and that is what the US govt. has been doing (and many individuals as well)
Even that isn't necessarily true - if one is broke but one needs a car for a better job they need to take on debt for the car. The debt definitely isn't an appreciating or incoming earning asset, but it is a good choice.
Unpopular opinion, and maybe I'm wrong here and I've just been lucky, but I've stopped seeing debt as a bad thing. You have to use it smartly of course, but I don't think there's a one-size-fits-all answer for what that means. Use it for daily living expenses? Sure, as long as you can pay it off every month. Never take out a loan and spend years saving for a car? Nah, or at least not when that interest rate was 2-3%. And I suppose that's where increasing interest rates come in: Get the 99% to stop buying.
Now with immediate injection of cash, assets are at prices which require money that an ordinary person will never have. They have to jump on the debt treadmill to acquire necessities.
Taking on unsecured debt is a bad idea. But if you are going to spend $100,000 on living this year and have $100,000 in the bank, you have two choices. Spend the $100,000 and have nothing. Or use the $100,000 to buy bonds or another income producing asset, then take a loan using that as collateral. As long as the interest you earn from your collateral is more than the rate you pay, you come out ahead.
Instead of having a bank account with $0, you have an investment account with $100,000, debt of $100,000, and you're earning interest on the investment account each month that hopefully covers the interest on the debt plus provides some extra income.
The 'asset' that the government is taking dept on to pay for its living expense is YOU. On the averaged timeline YOU are an income earning asset. The government takes some expenses (roads, education, water, safety) and out comes a taxpayer that has an average income earning lifespan.
You as an individual don't get to play the averages game quite as well. If you are borrowing money today to pay for your daily expenses it is highly likely that will be true tomorrow. You as an individual have risks like getting fired and not getting a new job, or getting smooshed in a car accident. These are risks your lenders take on when figuring out the rate your loans will have, if you even get a loan at all.
this is a good rule of thumb, but there are exceptions. say I want to buy something that costs much less than my net worth, but more than I typically keep in my checking account. I have the choice between a) selling investments, b) taking out a loan, or c) deferring new investments until I've accumulated enough cash.
there are pros and cons to each. with a), I'm paying capital gains tax that I could otherwise defer. with b), I'm taking the risk that my cash flow dries up and I need to sell assets anyway on top of paying interest. and with c), I'm taking the risk that my cash inflates away while I'm saving up.
you can't know with certainty which is best, but b) is usually optimal with a sufficiently low rate.
All economies are run on debt [0]
[0] https://en.wikipedia.org/wiki/Debt:_The_First_5000_Years
Without debt, economic growth nearly zero sum. Waiting for the money to exist and then spending it is just slow and inefficient most of the time. Show me a country that is under-banked and has little access to loans and I will show you a poor country.
If, and when the system collapses, who cares? Advancements gained through technology will be with us.
Islamic finance is the solution to a balanced and fair economy.
1. It prohibit interest to outlaw debt based exploitation and instead replaces it with loans of generosity (pay back exact amount, no interest ) or fund raising through investment. Whereby the risk of the person receiving investment is shared with the lender. This is in contrast with a conventional loan where if your property or business burns down, you still have to pay off the loan to the bank.
2. Zakat - a wealth tax on every Muslim. The value of 2.5% of cash, stocks, investment each year is given to the most needy of society.
Implement these systems and you will have a just economy that prevents hoarding and exploitation. Literally money is forced to move down societal class and acquiring more wealth is with increased risk. Islamic finance is the solution.
The thing with interest, there is very little in terms of going back. As mentioned in this thread the entire modern global economy is built on usurious financial instruments. This was not really the case a few hundred years ago where the level and extent of debt was not to the extremes of today.
Abu Huraira reported: The Messenger of Allah, peace and blessings be upon him, said, “A time will come upon people in which they will consume usury.” It was said, “All of the people?” The Prophet said, “Whoever does not consume it will be affected by its dust.”
Source: Musnad Aḥmad 10191
Grade: Sahih (authentic) according to Ahmad Shaki
Maybe we would not be in this mess in the first place if we sustained insights of the past.
When this system was made 2500 years ago it worked, because it was new and adapted to the conditions then. Then guess what, the world changed and those systems stopped working because the assumptions they are built on no longer exist.
If you brought a lifeform from 2500 years ago to the world today it would get sick and die. It's defense system would not be adapted to the threats it would experience. Yet this is the first thing people try to do with the complex systems we create and they will suffer the same fate.
Is this not already the case?
> This is in contrast with a conventional loan where if your property or business burns down, you still have to pay off the loan to the bank.
Isn’t this what insurance is for?
Interest seems like it can be both good and bad. Condemning it completely seems a bit harsh
Amusingly enough, California mortgages for purchase are non-usurious and compatible with this definition, because the lender can only go after the property in case of default, not the borrower.
They pay thousands on monthly mortgage, if they are late, they are charged a penalty (more interest). If they fail to pay all together, then the property is gone. All the money the borrower dedicated to paying off the mortgage gives them nothing in return. Essentially robbery.
This is exaggerated to the point of nonsense. I.e. it's literally not clear whether you are hyperbolising for effect, or have no idea what you're talking about.
You pay the bank for the use of the money. After 1 fully-paid year of your 30 year mortgage, you own 1.2% of the property. Or more precisely, your debt obligation is reduced by 1.2%.
After 15 years, you own 32%. After 20 years, 50%. After 30 years, 100%. It's not linear, which upsets people, but it makes perfect sense if you do the math.
In the mean time, if the property appreciates in value, all of that extra value belongs to you.
If you stop paying the mortgage at any time, yes the bank will repossess the house to get the money you still owe them. Not all of your future payments, just the remaining debt. If the sale price is in excess of your remaining debt, they send you a check.
Moral of the story: Do not mortgage short-term housing, except in rapidly increasing markets. And even/especially then, beware.
Corollary: Rental property is a necessary thing, and landpeople provide an essential service.
Reality: Some landthings suck.
With a conventional loan, if your borrower sinks, they still owe you the money. Lender would have collateral to possess. There is still an outstanding amount of debt that needs to be paid.
Insurance is not permitted under Islamic finance as it falls under transactions that have excessive uncertainty. There is no guarantee what the outcome is for an insurance transaction. It is like gambling, you make a bet with the insurance company such that you pay $xxx a month. If the contracted event happens (or never occurs), there is a financial winner and a loser. If in total I pay less premiums than the cost of the event, I "win". If I pay more in total for an event, I stand to make a loss and the insurance company benefits.
Interest seeks to empower people who have money by making them more and more richer. It exacerbates price of essentials such that the only way to acquire is through a usurious loan. House price are in the hundreds of thousands because people have been "temporarily" handed have hundreds of thousands. If interest loans didn't exist, then houses would be at prices which people can afford through their salary.
Isn’t this how a mortgage works? Put some money down, and allocate a portion of your monthly salary to pay the remainder.
> Interest seeks to empower people who have money by making them more and more richer.
The largest and most profitable companies in the world are oil/gas and technology. Wealth inequality would definitely still exist
Without a mortgage system, at most a few years of saving to fully buy a house.
I understand what you are saying when you think it is a similar thing, just the scale of numbers is different. Debt is a responsibility, and a really serious one. At all costs avoid it because there is no guarantee you will have the capabilities to pay it back + interest . If we can champion a system whereby buying assets does not involve an individual taking on a life destroying risk and instead they can use their normal income to save up in a reasonable amount of time, then this would be the best way.
Yes there will always be people and entities that are richer than the rest. The aim is not to squash every class into the same income bracket, rather stop the propogation of abuse that rich companies inflict by extracting wealth from the poor.
Stoping usurious interest loans means the economic interaction of rich with the poor. If they want to make money from their hoard, then they have to engage with the lower class on a level playing field (in terms of risk) with investing. In stark contrast to sitting on a throne and receiving guaranteed wealth from poor people who have no choice but to take on soul crushing debt.
An endless treadmill of debt which failing to pay substantially speeds it up until an individual can not sustain themselves.
Perhaps the solution to such a complex problem isn’t as simple as a “do this and don’t do that”. Perhaps a complex problem should be looked at more multi-dimensionally.
Like most things, loans can be good and loans can be bad. Context matters. The rule of law is meant to protect people and keep the economy healthy. The law is ever-evolving. Sometimes it comes up short but in a healthy nation it can adapt itself to the times.
Regarding mortgage, most people in the west use their home as their retirement fund. After 10-15 years of ownership, the house is often worth twice as much as their total mortgage. The difference between what the outstanding debt and the value of the asset is called equity, and this can be quite substantial.
Bizarre statement.
You should look at the cost to build a house. And the cost of maintenance.
Builders don't make obscene profits. You can cherry pick good years, but you need to average over 10-20 years.
You can buy an older/used house for significantly less than its replacement cost.
Are you arguing that without the mortgage system, skilled trades would work for lower wages? Labor is 70% of the cost of building a house. Materials are 25%, Paperwork is 5%.
Would lower wages for skilled trades be a good thing? For whom?
Land cost varies from almost 0% to more than 100% of the build cost, depending on location.
Its much worse than that. Without a 'gold standard' or really any standard. Money = debt.
For anyone to have any money, others have to have debt. For 50 million retirees to have millions of $ means there is more than that of people in debt.
For a politician to 'forgive debt' means the value must come from someone else, primarily retirees.
>Someday, maybe we, as a society, will realize that debt, credit, and lending is the way bankers scam money out of everyone else, and we collectively won't put up with it anymore.
That's kind of the problem. Lets say we won't put up with it anymore. It ends. No more debt akin to many other empires in antiquity. How do we go about it? Mainly you want to adjust the fractional bank ratio and reserves. Currently 13% or so depending on lots of factors.
So has anyone tried this? Moldova post-USSR has been trying this. It basically destroyed their economy. They never got there, they were close to 2:1 which is crazy good but it ended up just stagnating and wrecking them. Yes lots of confounders here but imagine you can't take on debt. You never have a mortgage. You must buy cash. Guess you're starting to work very early to save enough money to move out of your parents home? homes wont be a good bet neither, without mortgages. Safe investments in retirement funds have to be attracted elsewhere. House prices will be constantly pressured downward but suppliers and construction people want to get paid.
>How did they get them? Interest, fees, and charges. I can't count how many times people (even on this very site!) have said something like "don't buy things with cash, invest it and get a loan for it instead because interest." It's no mystery as to why you don't have a tower, because you're paying for someone else's.
They take their cut of the transaction and take no risks or liabilities on. Smart business.
>Normal people figured this out such a long time ago, that a verse in the Bible says that the borrower is slave to the lender. I'm no slave.
Without debt though, how do you live in a house? You rent? Rent is about the same price as the mortgage. You're paying someone else tower as it were. You should virtually never rent.
It's interesting how the whole system is designed around debt and yet there's only 1 proposed system that might fix this.
Social credit. https://en.wikipedia.org/wiki/Social_credit
People aren't really "employed" (in a gainful sense) if the money printer keeps printing. Achieving the lowest possible unemployment results in rising inflation because the necessary availability of surplus capital to allow such a thing to happen.
At any rate, 0.75% won't work. The rate changes need to be more aggressive if the goal is to actually avoid a 2023/2024 catastrophe. It takes upwards of 10 years for inflation to cool off after the process of reducing it begins. We're in for a long ride.
He could've avoided some of this by just intelligently working the market. It is, in my eyes, entirely his fault.
That earlier speech was far more direct and succinct than usual. Market participants should have gotten the same message then as they are now. The Fed intents to break inflation, with all the likely consequences that brings.
Whether the Fed actually has the technical tools to do this is another question. Most of what it does is mass psychology - trying to convince the markets of its resolve one way or another. Bank reserves haven't mattered for years as money, but that's pretty much the only lever the Fed holds. It holds another - margin stock trading requirements, but that path has all but been forsaken. Treasuries are the fuel for the financial system. But to the US Treasury, they're just a mechanism to fund the deficit. The contrast has led to some things that are hard to explain otherwise, and more things like this will no doubt arise in the future.
I didn’t know this, could you explain when it’s last been used, if ever? Could they theoretically drastically raise margin requirements for some stocks and lower it for others to encourage sectors to be rebalanced?
>The recent rise in margin credit has focused attention on the Federal Reserve’s margin requirements for purchasing equities with borrowed funds, which has been at 50% since 1974. In November and December of 1999, margin credit grew very rapidly, outpacing the sizable appreciation in the overall stock market. And in January 2000, it grew further while the stock market’s valuation dropped, leaving the ratio of margin credit to market capitalization at its highest level in the past 29 years. This Economic Letter discusses the recent trend in margin credit and the merits of using margin requirements as a policy tool.
> ...
> The Securities Exchange Act of 1934 mandated federal regulation of purchasing securities on margin. The margin requirement was motivated by the concern that credit-financed securities speculation helped fuel the run-up in stock prices prior to the stock market crash of 1929. The act viewed the Federal Reserve as responsible for managing the availability of credit in the economy, so the Fed was charged with setting margin requirements for securities purchases. The Securities Exchange Commission was directed to enforce those regulations.
https://www.frbsf.org/economic-research/publications/economi...
According to Wikipedia, the rate hasn't been changed since the 1970s:
> Regulation T governs the extension of credit by securities brokers and dealers in the United States.[1] Its best-known function is the control of margin requirements for stocks bought on margin. The initial margin requirement for such margin stock purchases has been 50%[2] since 1974,[3] but Regulation T gives the Federal Reserve the authority to change this percentage. Raising the margin requirement ostensibly reduces risk in the financial system by reducing the potential leverage and total buying power of investors. Conversely, lowering the margin requirement increases systemic risk by expanding the buying power and leverage available to investors. Since 1974, the Federal Reserve has not deemed it necessary to adjust the margin requirement despite periodic extremes of price volatility in the equities markets.[4]
https://en.wikipedia.org/wiki/Regulation_T
Given the absolute neglect of the mandate it was given on this, I suspect the Fed views even mere talk of increasing margin rates as the nuclear option. But if the usual roll call of psyops fail to deliver, this thing is there in its back pocket. I imagine the mere threat would cut 20% off the S&P overnight.
The FED can make they matter again with a pen strike. It doesn't matter because they don't want it to matter.
And this is why they aren't raising it more. If they do, and that doesn't work, people will act like the train conductor broke off the handle.
Who else can buy up trillions of t-bills and mortgages at a moments notice? When they do this, it drops rates. The Fed offered up historically cheap money to borrowers to keep the economy rolling during the pandemic and housing crisis.
> But to the US Treasury, they're just a mechanism to fund the deficit.
The deficit doesn't get funded as well when the Fed is not buying. It's not merely a technicality. Someone else will have to fill the hole left behind by the Fed leaving the market, and that usually means higher rates to draw in money from elsewhere to feed the t-bill and mortgage market.
its unlikely the fed is reactive enough in the short term to have any real effect on inflation presuming its tooling is effective. the interest rate hike took six months to implement, and began with a quarter of one percent increase. this was before earnings reports for the prior christmas holiday but november itself was a sobering enough red flag that Powell should have immediately pushed for 1% or more. its taken us nearly a year to arrive at the 3% we're at now, but in my opinion this inflation wont stop for another year, and it wont stop even at clinton-era interest rates of almost 6%. Quantitative easing --and the feds decade long addiction to it-- make this thoroughly uncharted territory. the interest rate push will likely be the straw that breaks corporate real estate, no matter how hard Bloomberg pounds his fists and demands a return to cubicles in his newspaper. this will likely tumble back into another residential housing or auto lending crisis. The student loan forgiveness push and reforms on wage garnishment also send a clear signal that our nations 1.73 trillion dollar nickelodeon of perpetual youth debt is becoming a serious threat as well.
Against this backdrop California plans on distributing $9.5B to any family who makes under a certain amount of money($1k each), I expect this huge infusion of cash to make inflation even worse and I do not know where this will go except that it will not be pretty.
The evidence for supply chain issues - as you mention - and price gouging being contributory causes is much more convincing. If you are not convinced that price gouging is going on, consider profit levels in energy companies in recent months.
Please don't blame this on workers who if anything need to be paid more, and paying them more will not impact inflation, only make it easier to cope with. It may even bring inflation down if jobs in supply chains become more attractive and force profiteers to become more competitive.
I just don't see there being any more reasonable objective cause and effect to that claim than the claim made by the commenter you are replying to. On the other hand in my own industry, prices for materials like lumber and steel have shot up massively causing major follow-on effects, and nobody at the steel mills are blaming worker salary for it. They're blaming the costs of the raw materials. And the people on the job site aren't blaming the tradespeople wages for the project going over budget, they're blaming the high cost of the steel showing up on site, late.
When workers are an issue for project delivery or budget it's usually not what they're charging, it's just availability. There are simply not enough field workers out there who can drive steel rivets or manage a punchlist. In fact, I hear rising wages brought up as a potential way to attract more people to the those field roles, because right now there are not enough people entering those roles.
So you can’t distinguish it without sharing the same morals as the speaker, and you therefore should “know it when you see it”.
When price increases exceed the increases in costs/raw-goods... then it's "greedflation", not "price gouging". Increasing profit margins are also a good signal of it.
Inflation and Price Gouging - https://www.nytimes.com/2022/06/14/briefing/inflation-supply...
Are Large Corporate Profit Margins Causing Inflation? - https://www.nytimes.com/2022/06/22/opinion/inflation-corpora...
I Listened In on Big Business. It’s Profiting From Inflation, and You’re Paying for It. - https://www.nytimes.com/2022/05/05/opinion/us-companies-infl...
So pretty much doubling down on the point: it’s gouging when I say it is.
It seems a bit too on the nose for the literati on HN to have determined the definitive cause of inflation today is in-demand workers requesting fair compensation, as of the last 2 years.
Software engineer salaries have skyrocketed unbelievably over the last 20 years. What crisis is that responsible for?
notice that the real problem is the supply-demand inequality, not that real wages went up for a sector. (and to have a crisis it's almost always necessary for some other conditions to be present to make this one particular imbalance a very significant one that then drives other markets, eg. in case of housing that condition is the artificially very limited supply.)
the COVID stimulus checks were big, but not that big individually compared to the US economy, sectors, regions. people who needed it spent it, who did not put it into meme stocks, or bought something, inflating the price of luxury stuff like high end GPUs. that's most of it. (around 2020 July)
what put the whole economy into a freefall was ~1M excess dead and the rising energy prices giving a big speedup to the already falling supply-side dominos.
Couple that with actual crackdowns on immigrations, and you get actual labor supply problems for some roles and industries. This has knock on effects that raise wages.
Couple this with inflation in CPI, and you get workers in a good place to negotiate raises to cancel out inflation and then actually increase real salaries commensurate with contribution.
Net, labor price increases are a symptom of labor supply and cpi. Labor is not driving inflation.
That's why it's important to stop inflation immediately. It puts the cost of living farther and farther away from those who can't keep up today.
When poor people get even the smallest bit ahead, “they are getting scattershot handouts”.
You are talking about families earning less than 2k/month. In California. I honestly doubt that can cover transportation expenses alone in SF.
9.5bn was what Wework was “worth”. Some poor people getting slightly ahead is not the problem.
If a bank trusts a company that they can repay a loan, they'll extend the loan. But if there's a credibility problem, they won't. At the margin, when interest rates go up some companies will cease to be profitable. Banks know intimately how profitable their borrowers are. Even if they have doubts, the income statements will show. So, when the times comes to refinance the loan, the rate may be increased, or the credit line decreased, or new covenants may be put in place, or some collateral required, or various combinations of these.
Corporations (and especially those rated "high yield", or non-investment grade) will see a double-whammy: not only interest rates will have gone up significantly (by 4% early next year), but also their credit spread will go up (see [1], on average it has gone from 3% at the beginning of 2022 to 5% now, and it will keep going up).
That creates the start of a feedback loop: with the increased burden of servicing debt, companies will become less profitable, some will start cutting headcount (just look at the HN posts lately and see how often layoffs are mentioned).
Of course, there's the other feedback loop: higher interest rates means higher discounting of future corporate dividends, dividends which will be smaller anyway, so that means lower stock prices. People will see their savings taking a hit.
And then, a combination of lower savings and higher job uncertainty will lead to lower consumer spending. Or demand destruction.
Which is what the Fed wants.
Make no mistake: the Fed is still the most powerful actor in the financial markets. By far. It has all the tools needed to fight the inflation, and then some.
[1] https://fred.stlouisfed.org/series/BAMLH0A0HYM2
Inflation isn't the result of mass psychology. It's the result of too much money sloshing around in the economy, thanks to trillions in deficit spending.
BTW, you cannot imagine yourself into having more money.
There is: that is the ECON101 feedback model of deflation causing money under the mattress reducing money supply causing deflation. That doesn’t occur because modern money systems don’t have a fixed supply of printed money; also governments actively prevent deflation so it isn’t seen.
“Opposite effects occur when the supply of money falls or when its rate of growth declines. Economic activity declines and either disinflation (reduced inflation) or deflation (falling prices) results”.
Rate of growth can decline due to consumer sentiment (psychology).
> BTW, you cannot imagine yourself into having more money.
Strawman.
Consumer sentiment (psychology) can become more positive, people borrow more (increase mortgages or buy a “better” house) and spend more (increasing the money supply).
Or it's because of oil suddenly getting expensive:
* https://en.wikipedia.org/wiki/Cost-push_inflation
Short term interest rates being higher means that loans which roll over and refi on a scheduled basis (ARMs being one example) will have their interest payments move much higher. That will create delinquencies and stress in the financial markets eventually, but it will take some time for those loans to wind up getting refinanced at higher rates and for the loans to go delinquent. Watch for CMBS delinquencies to start climbing.
When the Fed says that they need to hold rates through 2023 and not cut people should also believe them. That's how they force the weak hands to capitulate and be liquidated. Everyone will naturally try to kick their cans down the road as long as they can, so it won't happen overnight.
The used auto market has been hot the last couple years, so it’s hard to predict what happens. But since most consumers buy based on the monthly payment, higher rates mean smaller, less luxurious car, which has implications for the profitability of auto manufacturers.
Also, some consumers have been using their homes as piggy banks, refinancing each time the value increases. When happens to consumer spending when they can’t do that?
Calling "inflation" for 10 years in a row is basically boy-who-cried wolf. No one believes you, and when you're finally "correct" about it, its not because you had any analysis, its because inflation inevitably occurs in a boom/bust cycle.
Broken clock correct twice a day + Boy who cried wolf syndrome. I still won't be listening to the permabears / runaway inflation guys even with today's market conditions.
When they say inflation will occur in QE2 in 2010, and those permabears think crazy hyperinflation will occur immediately, then yes, we ignore them.
When they say inflation will occur in QE3 in 2012, and those permabears think crazy hyperinflation will occur immediately, then yes, we ignore them.
When they say inflation will occur in QE4 in 2020, and those permabears think crazy hyperinflation will occur immediately, then yes, we ignore them.
Now its 2022, the Fed has been Quantitative Tightening for a year to deal with the inflation signals we're finally seeing. Hundreds of billions of dollars are being effectively destroyed by these policies.
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So yes, the Fed is finally acting on the inflation issue. But only because the data shows it is finally a problem. We don't just take the permabear crowd word immediately, we move when the data shows an issue. Not before.
There's some people who are just noise and are irrelevant to the discussion, unfortunately. You figure these things out over the years.
Following the data means you're inevitably running after the facts. Running after the facts inevitably causes feedback loops. I'm sure those feedback loops were tuned correctly to not blow the whole thing up, right. Right? RIGHT??
Say ... what happened last time? Oh ... right.
No?
2008 through 2014 had signs of deflation, so the Fed lowered rates and went into QE.
2022 has signs of inflation, so the Fed increased interest rates.
Where is the feedback loop here?
You need protein for cells to work, and you want to grow and grow strong. But most protein has some potential cancer or heart disease correlation.
The fed ¡wanted! 2% inflation since 2008; even with covid fed policy, it took until spring 2022 to catch inflation up to the missed targets.
[1] https://economics.stackexchange.com/questions/15558/producti...
This will make you less likely to want the new expensive Iphone, especially if you were going to finance the purchase, so as Iphone sales plumit, there will be less of a chip shortage since supply now meets demand.
Why would they start QE? Fed rate is at 4% right now, there's more than enough room to drop rates if an issue occurs.
Given the data however, its unlikely to happen. We're currently at record employment levels. The expectation is for the rate to keep going up to maybe 4.5% next year, and finally that's when inflation is quelled, and we taper off rates sometime next year.
Of course, we need to keep up with economic data and see if these rate hikes have the desired effects.
Right but that will also increase demand and induce more inflation, no? So Fed will be perpetually stuck, in theory at least, to find a balance in their dual mandates.
The big guns is Congress, not the Fed. Possibly the President if you consider things like averting the big Railroad Union strike last week (which would have certainly caused more inflation as shipping costs could have gone up).
Lots of little fires happening around the country. The fed has one lever: interest rates. Congress / President has the other levers.
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Still though: we watch the Fed because the prime rate has a large effect on the value of investments, especially in the question of stocks vs bonds. Its important for the individual investor to follow.
A recession will occur if they overshoot, however.
When you choose to get a loan you're pumping a few hundred thousand that was leveraged into existence into multiple industries that gets distributed into the economy, that gets distributed to hundreds of people working.
When you choose just to just buy an iphone, that's $1000ish your spending of your own money.
This reminds me a lot of the 2008 crisis when Bernanke told us that everything was just fine until banks started collapsing. Personally I think the Fed has turned into a political institution that keeps inflating bubbles until there is no way out. I can't see much wisdom or foresight in their moves. They seem constantly behind the curve and instead of smoothing out business cycles they make them more extreme.
Please someone tell me why this is incorrect.
Why do they have to care about the consequences? Corporations have the market. Persons have their families, lives etc... Why do elected government officials need to care; especially in this polarized, 2 party, ~~world~~ country.
I'm pretty sure the closest thing we have to accountability in government are blue checkmarks twitter dunking on politicians from the opposite party and then being ignored by all the followers of that party.
I am not actually disagreeing with your point. I am just saying 10 out of your 10 most recent comments lack any external links or analysis, and 5 out of 10 comments are low value (IMHO) one-liners...
Disclaimer: I admit I am completely ignorant of macro-economics (even though I helped create and develop a sizeable business that mostly depended on macro-economics!)
[1] https://harrison.totty.dev/p/a-lang-design-analysis-of-holyc — I wished he had called it VitaminC - and some of his comments: https://news.ycombinator.com/threads?id=TerryADavis
Why are you trying to put words in our mouths?
Why are you diverting from the original point I made?
Why does it look to me like you are trolling?
Edit: trying to be on topic, and trying to follow your diversión: By definition, a fiat currency like the USD is not a free market. In fact a “free market” is an oxymoron - it needs strict rules to be free (the inherent contradiction). Cryptocurrency is the closest we have to a “free market” currency at present. Context: I am a capitalist hippy. Let them eat Tether. I would summarise rjbwork’s comment as (void)WalterBright; | is not a pipe. Free market for pres (meme that)!
I mostly post about free markets, and you had a general complaint about me, which is what I responded to.
> Why does it look to me like you are trolling?
I would be trolling if I didn't believe what I was posting. But I do, so there. If you look at my post history, I'm completely consistent in what I see as true. I don't berate others, call them names, call them stupid. For me, it's friendly conversation. I also like the sport of debate, like others enjoy a friendly pickup game of football. If you don't like it, please ignore me.
As I said, your comment did not come across as a response.
I certainly haven’t noticed that you majority post about free market. A quick sample of your last 20 comments shows 1 low value comment about the free market.
~Half of your Your last ten comments are one-liner comments. Also plenty of opinion, some of which are stated as “facts” by you and could really do with some reference to supporting information. Your last ten comments are: 2x one-liner “facts” on inflation, a one-liner joke, 2 opinions on James Webb, a one-liner on ebooks, a two liner against magazine apps, a comment against government subsidies (with low-value political overtones IMHO), an opinion on Rocky & Android TV, one-liner “The telegraph network was the true origin of the internet”, one-liner “I'm sad that free markets are viewed as an ‘extreme’ position” (you derailed the article topic here).
> I'm curious why you believe free markets are absolute drivel.
rjbwork did NOT say that. You said that. I think that captures a perfect example of a one-liner comment of negative value to the HN community.
“absolute drivel” is inflammatory, but it is only their opinion on the quality of your comments, and I suspect the intention wasn’t to be a personal attack.
> I don't berate others, call them names, call them stupid.
Why introduce that? An implication that we do? I don’t think either of us are suggesting you do those things. I don’t think either of us have done that. We could both choose to be politer, but the risk is a tone of passive-aggressive condescension. Personally I think we are positively engaging with you because we have enough respect for you to do so. My time, your time, and the time of others is extremely valuable (and difficult to own).
> I also like the sport of debate
Let’s imagine there are two forms of debate:
1) the political/lawyer form where the game is to win, any tactic that works is valid, facts are often irrelevant, and competitive behaviours are everything.
2) the scientific/engineering form where the game is a search for answers, discovering one is wrong is fantastic (learning), and cooperation is critical.
I think you say you do (2). However you come across to me as doing (1). I have given you plenty of reasons in this thread backing up why your comments come across as disingenuous.
Sorry that this is a meta-discussion. I really do want to encourage conversation on HN to be curious and positive, and not snarky. I am not a mod (ugggh). I sincerely try to write high quality comments and improve my commenting, not that I am necessarily succeeding ;p. My original comment got 10 upvotes (in a slow thread), so I am not alone with my opinion about your commenting style.
Your comment “I'm completely consistent in what I see as true” is a possible signal that you are dogmatically sticking to your beliefs, and not allowing your beliefs to be changed by learning from others. To quote Jim Keller talking about himself: "Imagine 99% of your thought process is protecting your self-conception, and 98% of that is wrong.” — context @1:23:00 of https://www.youtube.com/watch?v=Nb2tebYAaOA
That is the end of this thread for me. I hope you have gained something from our comments.
Much as we do not have a theory of everything in physics because, despite our incredible talent as a species for constructing models and deriving principals, we have yet to come to a coherent model that directly maps to reality fully, we do not yet have some kind of economic theory of everything. Your repeated assertions of "belief in the free market" read to me much as a a religious belief, in that they are assertions of the mechanisms by which things work, despite repeatedly clashing with ground state reality. In my view they are, at best, simplistic representations of some other mechanism.
I am actually quite a big fan of markets, and am interested in finance, trading, business, etc. But I am not a market ideologue, nor am I naive enough to think that someone has come up with a perfect economic system - especially when it is claimed to somehow harness for good and neutralize humanity's near infinite capacity for greed and evil.
It's not religion, it's borne out by history. Countries that move towards free markets grow more prosperous, those that move away, less. The ones that do the worst are full on communism.
> despite repeatedly clashing with ground state reality
I've replied to all those claims of it clashing with reality. Most of them are based on the notion that free markets do not proscribe the use of fraud and force against others. The rest are often claims that free markets tend directly to monopolies, although the proponents are never able to identify any free market monopolies.
Want a cite? Here's one. The US, in its first century, excluding the slave south. Was it an ideal free market? Nope. It's hard to argue with its resounding success. Compare it to the South American countries, which had no such success.
Want another? The German Miracle, 1946 or so to 1970. Japan, post war to around 1990. Hong Kong in the 1960s turned to free markets, look at the results - GDP grew 18,000% from 1961-1987 https://en.wikipedia.org/wiki/Economy_of_Hong_Kong
If free markets are a religion, they certainly are a religion that delivers results whether or not the participants believe in it.
> especially when it is claimed to somehow harness for good and neutralize humanity's near infinite capacity for greed and evil.
It harnesses the selfishness in all of us. As for "somehow", the how is straightforward. To make money (a selfish motive) one has to provide a good or service that others find worth their money. If one tries to make money by stealing, cheating, defrauding, enslaving, extortion, blackmail, or murdering, one goes to jail.
https://www.amazon.com/Monetary-History-United-States-1867-1...
Unfortunately, it's a bit of a tough slog, it's not written for the popular press. But it's worth it if you're really interested in understanding what's really going on.
For example, the inflation in the US gold currency during the California and Yukon gold rushes.
"Because precious metals were at the base of the monetary system, rushes increased the money supply which resulted in inflation. Soaring gold output from the California and Australia gold rushes is linked with a thirty percent increase in wholesale prices between 1850 and 1855."
https://eh.net/encyclopedia/california-gold-rush/
How about the inflation in Spain due to the influx of gold from the New World:
"These immediate consequences include the price inflation caused by more gold and silver"
https://theclassicjournal.uga.edu/index.php/2020/05/07/spain...
None of this stuff is hard to find. There's no difference in inflation from a flood of gold entering circulation from a flood of fiat money helicoptered into the economy.
You know after consideration I'll only borrow $50,000.00.
Off to tell the wife I've saved us $50,000.00.
The USA is in recession: https://tradingeconomics.com/united-states/gdp-growth
Inflation is getting better? Relatively speaking? https://tradingeconomics.com/united-states/inflation-cpi
Probably about 1.5-2 years before inflation is controlled again.
Debt to GDP is getting worse and is beyond the limit: https://tradingeconomics.com/united-states/government-debt-t...
They did stop the unfunded deficit spending, obviously still deficit spending: https://tradingeconomics.com/united-states/money-supply-m2
Incidentally it looks like they have decided not to reduce and simply flatten. So it'll likely push closer to 4 years of inflation? Well no, an election will arrive before that.
Private debt climbing: https://tradingeconomics.com/united-states/private-debt-to-g...
So yes, pretty much we know what will happen for the next few years.
Then lets look further at how people that have mortgages and build home equity make money: they need 5-30 years of zero disruption in their income, whatever employs the majority of them needs to feel cash strapped and unoptomistic so then the people with mortgages get blown tf out too, within a year
We’re inching up
Overleveraged investments go bye bye
The financial definition predates the networking definition by centuries.
We're the newcomers here. Literally.
Here's the thing though - none of those ways works. The way that works isn't politically tricky it's politically toxic. Raising interest rates works. It will ultimately piss off just about everyone but if you really want to cut inflation it's the only way to do it everything else is just politicians doing politics.