Permanently low interest rates

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Kriegsspiel
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Re: Permanently low interest rates

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Post by Kbg » Mon Apr 22, 2019 2:48 pm

Sounds good and really super scary...a perfect news story headline to sell news.

Dig a little deeper and you will find corporate debt is a big fat meh right now.

Hint: If I make $100K a year and my credit card balance goes up by an astounding factor of 10 do I have a problem? Answer: It depends...what is the starting point, what is the interest rate, how do I make my 100K a year.

Also, it goes without saying that high levels are eventually going to be “the peak.” When does 5-6 years of peaking get credit for being darn good? And how much longer are we going to “peak.”

Finally, is it really a “Fed problem” if people are stupid and take on too much debt? Would it be a Fed problem is there was no liquidity in the system. Of the two...which one do they actually directly control. As they say, invert, always invert.
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Re: Permanently low interest rates

Post by pmward » Mon Apr 22, 2019 5:08 pm

Kbg wrote:
Mon Apr 22, 2019 2:48 pm
Sounds good and really super scary...a perfect news story headline to sell news.

Dig a little deeper and you will find corporate debt is a big fat meh right now.

Hint: If I make $100K a year and my credit card balance goes up by an astounding factor of 10 do I have a problem? Answer: It depends...what is the starting point, what is the interest rate, how do I make my 100K a year.

Also, it goes without saying that high levels are eventually going to be “the peak.” When does 5-6 years of peaking get credit for being darn good? And how much longer are we going to “peak.”

Finally, is it really a “Fed problem” if people are stupid and take on too much debt? Would it be a Fed problem is there was no liquidity in the system. Of the two...which one do they actually directly control. As they say, invert, always invert.
Corporate debt rates are very far from "meh" they are the highest they've ever been at 46% of GDP... and if I recall correctly 60%+ is coming to maturity in the next few years, at a current higher interest rate than it was taken out at. Corporate debt is in a bubble right now, and it is not going to end well. Now when does the bubble burst? I have no idea. But it will burst and there will be another large scale deleveraging, with all the pain that comes along with it. At the moment corporate debt to profits level is still in a manageable (though elevated) state. All it will take is a slow down in profits to start triggering some downgrades and defaults, and then we have the start of another nasty deleveraging on our hands. All the kindling is there, all it will take is a spark to start the fire.

And yes it is a fed problem because they created it by keeping interest rates at 0 for a decade. Humans have always been stupid with debt, you can't assume humans will be responsible with debt if they've never proven capable of doing so. This is the whole reason we have the "business cycle". It's not a business cycle it's a debt cycle. Debt is assumed until it gets out of control, then eventually the bill comes due. After the crisis in 2008 households have not levered up again like they were, partly because they are afraid too and partly because of additional regulations and pickiness on banks part to lend to households again after the sub-prime mortgage crisis. But corporations have been a different story. They've been assuming all the debt they can get their hands on over the last 10 years. A lot of that has been malinvestment. They would not have levered up to such a degree if the Fed didn't enable them to by keeping rates low for as long as they did. The kicker is, when the deleveraging happens again, liquidity will once again be drained from the system, requiring the Fed to act in even more aggressive ways to keep liquidity in the system. It's a pretty shit situation we are currently in.
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Re: Permanently low interest rates

Post by Kbg » Mon Apr 22, 2019 9:22 pm

Hint #2: Gross vs. net corporate debt.

Credit card analogy #2: My credit card debt is up 10 fold again, darn it! Going from $100 to 1000 and I have 100K in STTs. Do I have a debt problem?

Have you examined a chart of corporate profits to GDP? Surprise...also at historical highs. Look away folks, no relationship here.

Ok, let’s make this as direct as we can...scroll on down to page 4.

https://www.yardeni.com/pub/fofnfdebt.pdf

You are not ever going to read the headline: “Corporate debt ratios somewhat below 50 year average.”

Finally, the Fed is causing zero interest rates or printing money like crazy which in theory is inflationary...if you are a Fed basher pick one or the other, you don’t get option Both.
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Re: Permanently low interest rates

Post by boglerdude » Mon Apr 22, 2019 11:29 pm

Everyone loves Dalio's video but im not sure yet. How does he come up with "typically 50 years" for a long term cycle. The world changes a lot over 50 year spans. We had a soft landing after the tech bubble. If it was even a "bubble", we didnt know how tech would pan out. Predicting the future is hard.

In addition to that, very basic research always loses money. People bash Tesla but it's not supposed to be a sure thing. The only sure thing in investing is the necessities (housing, food, car, clothes, education) and all those are driven by population growth.

Australia hasn't had a recession/cycle in 27 years. They've gotten rich selling dirt to China and they haven't done stupid smash n'grab policy like Bush+Greenspan. In 2005 I made $1k/month and had a mortgage of 1k, and Chase directed me to Indymac, who gave me 200k to buy another house in a slum. They knew it wouldn't be my primary residence and they knew I borrowed the down payment. It all went through, the tenants were deadbeats, and in 2013 I barely got it out of foreclosure.

The Fed can create cycles with their rate changes (they change rates by printing or burning cash). Companies shouldn't malinvest but on the other hand they know they'll get bailed out. I wonder if the buybacks are making PE ratios appear more attractive than they are. But people (Bogleheads) more educated than me aren't concerned.
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Re: Permanently low interest rates

Post by Kbg » Tue Apr 23, 2019 8:28 am

Buybacks are a form of corporate resource allocation. Companies can do three things with excess cash.

1. Invest
2. Buybacks
3. Dividends

Due to the US tax code, only stupid companies pay dividends. So most companies chose #1 or #2. It's also a reason why they finance with debt vs. equity now days.

Worth a read if you are interested...https://corporatefinanceinstitute.com/r ... epurchase/
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Re: Permanently low interest rates

Post by pmward » Tue Apr 23, 2019 8:46 am

boglerdude wrote:
Mon Apr 22, 2019 11:29 pm
Everyone loves Dalio's video but im not sure yet. How does he come up with "typically 50 years" for a long term cycle. The world changes a lot over 50 year spans. We had a soft landing after the tech bubble. If it was even a "bubble", we didnt know how tech would pan out. Predicting the future is hard.

In addition to that, very basic research always loses money. People bash Tesla but it's not supposed to be a sure thing. The only sure thing in investing is the necessities (housing, food, car, clothes, education) and all those are driven by population growth.

Australia hasn't had a recession/cycle in 27 years. They've gotten rich selling dirt to China and they haven't done stupid smash n'grab policy like Bush+Greenspan. In 2005 I made $1k/month and had a mortgage of 1k, and Chase directed me to Indymac, who gave me 200k to buy another house in a slum. They knew it wouldn't be my primary residence and they knew I borrowed the down payment. It all went through, the tenants were deadbeats, and in 2013 I barely got it out of foreclosure.

The Fed can create cycles with their rate changes (they change rates by printing or burning cash). Companies shouldn't malinvest but on the other hand they know they'll get bailed out. I wonder if the buybacks are making PE ratios appear more attractive than they are. But people (Bogleheads) more educated than me aren't concerned.
The keyword is "typically". It's basically just looking back at different countries and times and creating a best guess. It's not a hard rule, and could come sooner or later. What we are in now is still in ways an extension of 2008, so if we did hit another recession and went back to 0% interest rates and had more deleveraging on a corporate level, like I think it likely, I would personally consider it still a part of the bottoming process to the cycle that started to come to an end in 2008 just like the late 30's recession was an extension of the Great Depression.

Also, I wouldn't necessarily assume that "Bogleheads" as a whole are smarter than you. I facepalm about something damn near every time I browse that forum, haha. They do a good thing by at least getting people to invest long term in low cost index funds, but there is a lot of misinformation that is spread there as well (mostly in the form of opinion being spread as fact). Of course, with a long enough investing timeframe (like buy and hold) even misinformation tends to not really matter much as assets tend to go up over time.
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Re: Permanently low interest rates

Post by pmward » Tue Apr 23, 2019 9:01 am

Kbg wrote:
Mon Apr 22, 2019 9:22 pm
Hint #2: Gross vs. net corporate debt.

Credit card analogy #2: My credit card debt is up 10 fold again, darn it! Going from $100 to 1000 and I have 100K in STTs. Do I have a debt problem?

Have you examined a chart of corporate profits to GDP? Surprise...also at historical highs. Look away folks, no relationship here.

Ok, let’s make this as direct as we can...scroll on down to page 4.

https://www.yardeni.com/pub/fofnfdebt.pdf

You are not ever going to read the headline: “Corporate debt ratios somewhat below 50 year average.”
The charts on page 4 are interesting. But that's nothing different than what I stated above, that current debt ratios are manageable... but if 60%+ of that debt rolls over in the next few years at higher interest rates, and if we hit an earnings recession, that can cause a squeeze that can take us from manageable to unmanageable in a hurry!
Kbg wrote:
Mon Apr 22, 2019 9:22 pm

Finally, the Fed is causing zero interest rates or printing money like crazy which in theory is inflationary...if you are a Fed basher pick one or the other, you don’t get option Both.
I don't think it's a binary choice, I think it's a spectrum and interest rates can effect different economic climates differently. In the short term low interest rates are inflationary, but on a long term scale they are deflationary. We needed to go to 0% in 2008, we were in a deflation and it did help reflate the economy. The problem is once interest rates are at 0 and you're doing QE, it's very hard to stop. And after enough years of it, it does influence debt levels to rise at an unhealthy rate. And while those debt levels are still serviceable when times are good, when the tides shift they become unmanageable. Case in point, in 2008/2009 even people that had good credit and were quality borrowers were foreclosing on their homes, because the economy turned and their expenditures, while steady in a nominal sense, became unmanageable because their incomes dropped. If their incomes had remained steady then they would have been fine. My parents were in that boat. Everything was great until my father got laid off unexpectedly. Then boom.

If the economy stays at its current levels for another decade with no recession and corporate debt levels also stay steady, sure it won't become a crisis. But is that realistic? If we go through a growth and inflation boom, it won't become a problem. But are there any signs pointing to this growth and inflation boom happening? Both have been quite anemic on the whole. Meanwhile, there is a lot of kindling in place, and more being placed down by the day.
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Re: Permanently low interest rates

Post by boglerdude » Tue Apr 23, 2019 11:44 pm

Companies know rates can go up, they'd deserve to go under. I might agree that BOJ and ECB are keeping bad companies afloat with free money. Unemployed/bored people commit crime tho, another reason to get rid of min wage.

https://seekingalpha.com/article/425075 ... ok-cheaper

^ wrong?
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Re: Permanently low interest rates

Post by pmward » Wed Apr 24, 2019 8:47 am

If the only metric someone looks at is P/E, then yes it does make the market look cheaper than it is. I think an argument could be made that over the last 10 years buybacks alone are the main reason for the U.S. outperformance. I'm not opposed to letting a company buy back their own stock if they have no better ways to allocate their cashflows, but I do think that it is not normal a normal condition when companies are taking on debt to do so.
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Re: Permanently low interest rates

Post by pmward » Wed Apr 24, 2019 3:36 pm

Jesse Felder released a blog post today that in a lot of ways touches on some of the things we've been discussing here: https://thefelderreport.com/2019/04/24/ ... ded4b883a5

"Live by the bubble, die by the bubble"
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Re: Permanently low interest rates

Post by Tortoise » Wed Apr 24, 2019 5:44 pm

pmward wrote:
Wed Apr 24, 2019 8:47 am
I think an argument could be made that over the last 10 years buybacks alone are the main reason for the U.S. outperformance. I'm not opposed to letting a company buy back their own stock if they have no better ways to allocate their cashflows, but I do think that it is not normal a normal condition when companies are taking on debt to do so.
I don't yet quite understand why corporate debt has been on the rise in recent years, and I'm hoping someone here can help to explain.

My understanding is that when companies need more capital, there are a few main ways in which they can raise it:
  • Issue new stock (equity financing)
  • Issue bonds (debt financing)
  • Borrow from banks (?)
And my understanding is that when companies have surplus capital, there are a few different things they can do with it:
  • Invest in the company (R&D, new facilities, higher salaries/bonuses, etc.)
  • Return it to shareholders directly as dividends
  • Return it to shareholders indirectly as share buybacks
Presumably, at any given time, a company either needs more capital or has a surplus of capital, but not both. But unless I'm mistaken, what seems to be happening currently is that corporate debt levels and corporate share buybacks are both rising simultaneously. That seems to suggest that on average, corporations currently both need more capital and have a surplus of it -- an apparent contradiction.

Seems like I may be missing something here?
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Re: Permanently low interest rates

Post by drumminj » Wed Apr 24, 2019 6:20 pm

Tortoise wrote:
Wed Apr 24, 2019 5:44 pm
Seems like I may be missing something here?
They're borrowing money to buy back stock?
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