Author Topic: Econ Nerds: could lower interest rates / QE be disinflationary?  (Read 3078 times)

ChpBstrd

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Econ Nerds: could lower interest rates / QE be disinflationary?
« on: November 11, 2019, 09:41:14 AM »
If you took Econ 101 in the last several decades, your learned a simple relationship: Lower interest rates = inflationary. Higher interest rates = disinflationary. The proof was when Paul Volker raised interest on treasuries to double-digits in the early 80's, ending a decade of high inflation.

However, I came across the following quote in Investor's Business Daily from Charles Tan, global fixed income co-chief investment officer at American Century Investments:

Quote
"the Fed has been misplaced in terms (of acting on the principle) that more credit will always generate higher inflation. We think that's probably been true over the past 20 years for the world, when debt level was low. But now, the world debt is a whopping 250% of GDP and when there's too much debt in the system, the increment to credit that you put into the system can actually be deflationary."

He explains that by doing that, central banks are prolonging the lives of companies that don't deserve to exist or are creating overcapacity in some sectors, which has no economic value. As a result, companies come back to the market depressing prices. "I think you see that in Europe, Japan and China to some degree," he said. "So, more credit is not always inflationary. That is the reason why we see, after years and years of easier credit and lower rates, inflation is still missing in action, particularly in Japan and in Europe."

Mr. Tan's perspective fits with what happened in Japan as well as the lack of inflation since the GFC. If this is true, and QE / lower rates are just creating oversupply and zombie companies in the current environment, then I think the conclusions are profound. First, central banks in the U.S. and elsewhere are leading us right into the same debt trap Japan fell into during the 1990s. Second, if the next demand shock (e.g. a recession caused by rising unemployment, tariffs, taxes, or an energy price shock) is accompanied by stimulus to the supply side as the textbook calls for, the imbalance between supply and demand will widen, and deflation could surprise us. Third, QE and low rates will indirectly reduce corporate net margins due to oversupply/over-competition, rather than increasing margins due to lower debt costs. Fourth, attempting to prevent recessions per the Fed's current mandate might not be the best way to drive long-term economic growth.

What do you think about the idea that QE/rate cutting could be deflationary?

Source: https://www.investors.com/etfs-and-funds/mutual-funds/federal-reserve-cut-interest-rates-experts-see-investing-opportunities/

ysette9

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Re: Econ Nerds: could lower interest rates / QE be disinflationary?
« Reply #1 on: November 11, 2019, 10:05:31 AM »
Iím not smart enough to have an opinion, but posting to follow

tarheeldan

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Re: Econ Nerds: could lower interest rates / QE be disinflationary?
« Reply #2 on: November 11, 2019, 10:13:17 AM »
Quote
As a result, companies come back to the market depressing prices

This makes no sense, and it's the crux of their deflationary argument. More economic activity means more demand for scarce resources as inputs for that activity, which is inflationary.

The terrifying thing about deflation is that it provides incentives to hoard money and delay consumption, all else equal, because things will be cheaper later. The opposite is true for inflation. It also makes real wages increase, and it's very hard for companies to push nominal pay decreases. Much easier to allow real wages to fall by holding nominal wages steady in an inflationary environment.

I would say there is an argument that the expansionary monetary mechanism is less effective when credit markets aren't operating normally - like right after the crash. I'm not sure if there are figures that say lenders are reticent right now though.

Anyway, the Core PCE has been +1.7%, +1.8%, and +1.7% year-on-year in the past three months. This is the Fed's preferred measure of inflation.

vand

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Re: Econ Nerds: could lower interest rates / QE be disinflationary?
« Reply #3 on: November 11, 2019, 10:21:46 AM »
More currency is not necessarily inflationary at the time of its issue moment because half the equation is velocity of money, which has been slowing for quite a few years now.  However, monetary velocity cannot go to zero, and at some point it will trend higher. If the central banks continue to issue debt without then contracting the supply to coincide with the eventual increase in velocity then at that point it will become inflationary.  However there can be big lags in this happening. Some monetarists believe the inflation of the 1970s was because of the expansion of the monetary supply in the previous decade.

bwall

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Re: Econ Nerds: could lower interest rates / QE be disinflationary?
« Reply #4 on: November 11, 2019, 10:45:14 AM »
Econ nerd here.

Some caveats before I provide any comments:
1) Like in coaching in the locker room, the guy with the chalk last always 'wins'. There's always another idea to cancel out the one just proposed.
2) Japan is a special case. They are literally dying off. There are now two million (!) fewer Japanese in Japan than in .... 2012. Next year there will be 400,000 some odd fewer, and the year after that, ever more will die out so that 40 years from now, in 2060 there are projected to be 40 million fewer Japanese alive in Japan than today. So, for Japan, keeping the economy at zero represents greater productivity per worker at the same time there is less aggregate demand due to a lower population.
3) China is rising now and wasn't a factor when Volker raised rates in March, 1980.
4) I define inflation as an increase in the nominal price level, deflation as a drop in the nominal price level and disinflation as a drop in the rate of inflation (from, say, 5% to 2%).

Now, to inflation:

Inflation is caused by one thing, and one thing only-- an increase in the velocity of money through the economy.

Now, people like to read the tea leaves and try and get ahead of the curve and say, 'what could increase the velocity of money in the economy?'--well, a decrease in interest rates would lead to greater borrowing, and therefore greater spending, thus, lower interest rates will spur inflation (i.e. the logic behind your first paragraph) and higher rates will reign in borrowing, thus leading to disinflation.

Other people, beginning with Milton Friedman and now carried on by Libertarians, say that an increase in the money supply is what will presage an increase in inflation, as more money can only mean more money coursing faster through the economy. And they decry QE as tantamount to the death of the nation. Clearly, QE did not lead to inflation despite almost 10 years of Libertarian hand-wringing and crying wolf. The main reason that QE did not lead to inflation is because the banks did not lend out the money ('injecting it into the money supply'), but instead hoarded it for a rainy day. Thus, money supply was increased, but not the velocity of money in the economy, therefore no inflation.

So, to the extent that there has been no inflation at the time of QE, one could argue that QE is disinflationary. But, correlation is not causality, IMHO.

Here's why: What's ailing us is a lack of demand, and thus the appearance of Japanese-style overcapacity. China's additional industrial capacity joining the world's stage exacerbates this issue.

There has been almost zero increase in domestic government spending to go along with QE. No big infrastructure projects went with QE. No big Wall St. projects that vacuum up USD like in the past (except for Tesla--thank god they need and spend billions!). The biggest companies of the past ten-twenty years; Netflix, Facebook, Amazon, rise of Apple, Google, Microsoft (I know some existed earlier, but their huge jump in market capitalization is in the last ten years or so), all did so with very little need for massive investment. Sure, they hired tens of thousands and bought servers for the cloud, but that's not the same as Tesla building out the entire supercharging network across the USA, or the US building the highway system across the entire nation.

BobTheBuilder

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Re: Econ Nerds: could lower interest rates / QE be disinflationary?
« Reply #5 on: November 11, 2019, 10:53:58 AM »
Econ nerd here.

Some caveats before I provide any comments:
1) Like in coaching in the locker room, the guy with the chalk last always 'wins'. There's always another idea to cancel out the one just proposed.
2) Japan is a special case. They are literally dying off. There are now two million (!) fewer Japanese in Japan than in .... 2012. Next year there will be 400,000 some odd fewer, and the year after that, ever more will die out so that 40 years from now, in 2060 there are projected to be 40 million fewer Japanese alive in Japan than today. So, for Japan, keeping the economy at zero represents greater productivity per worker at the same time there is less aggregate demand due to a lower population.
3) China is rising now and wasn't a factor when Volker raised rates in March, 1980.
4) I define inflation as an increase in the nominal price level, deflation as a drop in the nominal price level and disinflation as a drop in the rate of inflation (from, say, 5% to 2%).

Now, to inflation:

Inflation is caused by one thing, and one thing only-- an increase in the velocity of money through the economy.

Now, people like to read the tea leaves and try and get ahead of the curve and say, 'what could increase the velocity of money in the economy?'--well, a decrease in interest rates would lead to greater borrowing, and therefore greater spending, thus, lower interest rates will spur inflation (i.e. the logic behind your first paragraph) and higher rates will reign in borrowing, thus leading to disinflation.

Other people, beginning with Milton Friedman and now carried on by Libertarians, say that an increase in the money supply is what will presage an increase in inflation, as more money can only mean more money coursing faster through the economy. And they decry QE as tantamount to the death of the nation. Clearly, QE did not lead to inflation despite almost 10 years of Libertarian hand-wringing and crying wolf. The main reason that QE did not lead to inflation is because the banks did not lend out the money ('injecting it into the money supply'), but instead hoarded it for a rainy day. Thus, money supply was increased, but not the velocity of money in the economy, therefore no inflation.

So, to the extent that there has been no inflation at the time of QE, one could argue that QE is disinflationary. But, correlation is not causality, IMHO.

Here's why: What's ailing us is a lack of demand, and thus the appearance of Japanese-style overcapacity. China's additional industrial capacity joining the world's stage exacerbates this issue.

There has been almost zero increase in domestic government spending to go along with QE. No big infrastructure projects went with QE. No big Wall St. projects that vacuum up USD like in the past (except for Tesla--thank god they need and spend billions!). The biggest companies of the past ten-twenty years; Netflix, Facebook, Amazon, rise of Apple, Google, Microsoft (I know some existed earlier, but their huge jump in market capitalization is in the last ten years or so), all did so with very little need for massive investment. Sure, they hired tens of thousands and bought servers for the cloud, but that's not the same as Tesla building out the entire supercharging network across the USA, or the US building the highway system across the entire nation.

Great post, thanks! Like one guy said: Reading is using another person's brain. Makes sense to me.

ChpBstrd

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Re: Econ Nerds: could lower interest rates / QE be disinflationary?
« Reply #6 on: November 11, 2019, 01:57:18 PM »
@bwall, I generally agree with most of what you said - but not all.

I think the next step Tan is taking in his quote (stop me if I'm reading too much into too little) is that if the economy / monetary velocity is slowing due to a reduction in demand, doing things to increase supply is like pushing on a string. This is why the QE after the GFC did not increase inflation as predicted. It was a subsidy for supply more so than demand, creating an imbalance that suppressed prices.

Imagine if everyone in the U.S. had a car that was 1-2 years old, or maybe tens of millions of people retire at once, or maybe young people become indifferent to cars (the specific reason doesn't really matter for this illustration). Demand for new cars declines. In an attempt to stimulate demand, the interest rate for car loans is cut, the interest rate automakers pay on their debt is reduced, and taxes are reduced for automakers, in theory allowing them to charge lower base prices. Does this supply stimulation mean more people will buy new cars?

Some will, but most won't - for the big reasons described above. Automakers, however, may produce more cars because they expect a linear relationship between price and demand and don't want to lose market share to competitors. If consumer demand comes out lower then expected, inventory will pile up and have to go on clearance in order to cover automakers' interest obligations, reducing automakers' margins. Yet these low margins are acceptable because they are equal to or higher than the borrowing rate. Thus the borrow/overproduce cycle continues until margins approach the borrowing rate. The remaining consumers wise up and learn to expect lower costs next year. This is an illustration of a disinflationary cycle.

Here's the part I don't agree with:

Quote
2) Japan is a special case. They are literally dying off. There are now two million (!) fewer Japanese in Japan than in .... 2012. Next year there will be 400,000 some odd fewer, and the year after that, ever more will die out so that 40 years from now, in 2060 there are projected to be 40 million fewer Japanese alive in Japan than today. So, for Japan, keeping the economy at zero represents greater productivity per worker at the same time there is less aggregate demand due to a lower population.

We can't just dismiss Japan as a "special case" that could never happen elsewhere. If demographics influence aggregate demand, with older populations demanding less than younger generations, then it's relevant and the U.S. is on the path - perhaps more so because the US is less dependent on exports than Japan was. U.S. population growth fell to 0.62% last year (first graph) and the fertility rate hit 1.8 - below the rate of replacement and about where Japan was in the mid-1980s, only a few years before the lost decades started (second graph). The percentage of the population 65 or older was about 12% in Japan in 1990. In the US today it is about 16%*. So demographically, Japan's past is the U.S.'s future. The U.S. is currently at about the demographic levels that were a turning point for Japan.. Europe is a similar story.

According to the emerging narrative, we are focused on stimulating supply in the face of declining demand just like Japan.




*https://data.worldbank.org/indicator/SP.POP.65UP.TO.ZS?locations=JP-US

bwall

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Re: Econ Nerds: could lower interest rates / QE be disinflationary?
« Reply #7 on: November 11, 2019, 02:48:09 PM »
@ChpBstrd : You make some very good points. Along time ago I stopped debating economics with people because while most of them had an opinion, none of them knew what they were talking about. Somehow, I get the impression that you have had training in the dismal science. Very refreshing.

I like the example of the structural shift in quantity of vehicles demanded. I think that we are describing two sides of the same coin--that being lack of demand. The policymakers have the problem to solve of how to increase quantity demand across the economy? Is the lack of demand a result of the sharing society? Structural improvements in technology that allow us to wring more productivity from existing investments? Or an aging population? etc.

Japan hasn't accepted immigrants and this will be their demographic undoing. The entire history of the USA (until 2017) was about accepting immigrants. Net immigration is not included in the second graph, just fertility rate. For example, in the early 1990's, Japan tried to import labor from other Asian countries, but it didn't go over very well. The thought was that the failure was because Japanese were not willing to accept ethnic/genetics 'non-Japanese'. So, they went to Brazil and Peru, countries that had accepted a lot of Japanese emmigrants in the late 19th Century. They'd stayed in largely Japanese areas, rarely intermixing with the locals. Japan recruited about 250k (or so) of them to work for much higher wages in Japan, even at menial jobs. Problem solved, right? Still not accepted b/c they were programed like South Americans, not Japanese. At the end of the day Japan prefers to close schools and factories than to accept immigration. For comparison, in that same time we've accepted around 20 million immigrants (both legal and illegal).

Europe is more willing to accept immigrants than Japan, but less able to integrate them than the USA. Reference: 1 million immigrants in 2015 into the EU from N. Africa/Middle East/Af.-Pak.

ChpBstrd

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Re: Econ Nerds: could lower interest rates / QE be disinflationary?
« Reply #8 on: November 11, 2019, 07:57:53 PM »
@bwall I took one econ course in grad school in 2008. I remember having an urgency to study because the economic world was falling apart at the time! Economics is hard to separate from politics, and I've lived in interesting times as the proverb goes.

It's hard to solve a demand problem in an affluent society without doing stupid, destructive things like creating a car culture instead of public transit, or subsidizing loans for coastal real estate that gets destroyed during hurricanes, increasing the amount of packaging used for everything, or running ads to remind seniors to ask their doctors for the non-generic brand name version of a drug they might not need. In other words, U.S. policy and culture are already pushing us to do many things more wastefully because somebody else's paycheck depends on it. The Anti-mustachain Wall of Shame has more examples. I don't think the Japanese were willing to subsidize stupidly excessive consumption/waste.

Consumers might consume even more if their take-home pay was increased, but to accomplish that we'd have to 1) lower their retirement savings rate which just borrows from future demand, 2) reduce their taxes, which requires the future monetization of government spending, 3) reduce their healthcare expenses, which will cost jobs and campaign donations, 4) have them unionize and bargain for higher wages, which can drive non-service industry work to other locales, or 5) increase productivity, which is easier said than done. So not many choices other than borrowing from the future or redistribution of wealth to spendier hands.

Immigration, legal and illegal, has helped the US not be quite the demographic basketcase it would be otherwise. This is arguably more important than a low birthrate or aging citizenry, because as long as the population keeps growing, the economy/monetary base will likely keep growing in the long run.

All that said,
1) The U.S. is cracking down on immigrants. If this effort succeeds at deterring immigration at any significant level (debatable), expect an accompanying drop in aggregate demand growth.
2) The taxpayer defunding of public universities over the past 2-3 decades plus bureaucratic bloat means young people now typically graduate with debt the size of a small mortgage. The service of this debt by itself means money is no longer available for purchases. The thin margins earned by student lenders hardly make up for the lost economic multiplier effect of people who are postponing large purchases like cars and houses, or even postponing household formation.
3) Housing loan subsidies and zoning rules have pushed up home prices to absurd levels in many metro areas. Sellers who leave HCOL areas earn a profit that is probably spent quickly, but buyers must make higher payments for decades which reduces their purchasing power for other things. The next buyer will have to spend an even greater percentage of their income. This reduced spending capacity is probably only partially offset by the seller's spending or profits earned by lenders.
4) Young people today are different than the boomers or generation X, who valued big houses, big cars, and a generally high-consumption lifestyle. What young people are consuming more of is data and electronics, which even if you buy the latest iPhone every year and use Verizon for your data plan comes out to a lot less than the operating costs of an SUV or the bills for a house. Student debt is part of this story, but living through the GFC might have had a similar effect on Millennials as living through the Depression had on the WW2 generation. They might be cheapskates for life, which would have disastrous effects on the economy, regardless of what the supply side does. Cell phone obsession is a relatively cheap hobby, although Apple is working hard to change that. If they fail, what new industry will make up for the collapsing demand for McMansions and Range Rovers?
5) Digital addiction is about to become a big deal, economically speaking. As Salesforce CEO Marc Benioff said, Facebook is the new cigarette. Yet smokers wouldn't spend an average of 7 hours per day* looking at their packs of cigarettes and being distracted from productive pursuits for longer than a few 10 minute smoke breaks. What would it mean if an entire generation passed through the economy whose education, social skills, ability to focus, and perhaps IQ** were worse than the previous generations? The productivity gains from work applications like email, spreadsheets, and databases are behind us, and it is not clear how employees using Instagram or watching YouTube videos at home and work are increasing their productivity.

My best ideas to increase aggregate demand are:
1) Subsidize the treatment of addicts: Once recovered, their productivity soars, they pay back the costs of rehab through taxes, and societal costs (prisons, blight, crime) are reduced. Do this for a few million people and the economic needle moves.
2) Steepen the tax brackets: It's a well known fact that poor people spend their entire paycheck, while billionaires hoard all they can (Trump even shorts his contractors!). If the tax burden was shifted upward, productive activities like infrastructure projects, college scholarships, basic research, and public health initiatives could boost the velocity of money and aggregate demand. 
3) De-subsidize housing and deregulate zoning: The experiment failed. Implicit government guarantees for mortgages improved affordability for a while, but eventually raised the price of housing to the point that ridiculous amounts of capital are required to buy in most large metro areas. This bubble has already delivered one financial crisis and is set to do so again. Also, force places that have used zoning as a way to constrain local real estate supply like California and New York City to allow construction of affordable high-rise housing units.

*https://www.cnn.com/2019/10/29/health/common-sense-kids-media-use-report-wellness/index.html
**https://www.journals.uchicago.edu/doi/pdfplus/10.1086/691462

vand

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Re: Econ Nerds: could lower interest rates / QE be disinflationary?
« Reply #9 on: November 12, 2019, 02:41:37 AM »
Of course, you could argue that all this QE has been massively inflationary... to asset prices. And you would have a fair point.

chasesfish

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Re: Econ Nerds: could lower interest rates / QE be disinflationary?
« Reply #10 on: November 12, 2019, 05:22:16 AM »
I love reading this commentary. 

The most recent memo from Howard Marks of Oaktree talks about all the unknowns around negative interest rates.

I'm on the side of we'll eventually have a downward cycle and the central bank will respond by dropping rates and buying long term bonds as politicians continue to be gridlocked.

The most concerning graphs of all to me are the slowing of population growth.  Politics has always been nasty and gridlocked (and at almost any point in time you could argue "its never been this bad"), but from an economic standpoint there are so many obvious solutions that require legislation to be passed but no one will do it.  A lot of this is fixable with some adult leadership instead of everyone immediately starting a new election cycle in hopes of gaining complete control.

- Immigration:  We need more immigrants.  One side decries low income illegals while the other says its terrible when a merit based system (like the EU has) gets proposed.  This cap has to go up with a combination of skills/unskilled labor.  The decline in birth rate is what it is, it can only be overcome with more people.  The US has the unique advantage of so many people wanting to come here its economy can grow while the world shrinks.

- Medicare/Social Security:  The payroll taxes have to go up and some means testing/benefit reductions need to happen on the SS side.  This drives substantially all the deficit spending.

- This trade stuff needs a clear plan.  Tariffs are only short-term pain in exchange for a long-term better deal. 

Now instead of honest leadership, now all I see is wild promises on new programs with unrealistic funding.  Both sides refused to enforce an individual mandate on the ACA and now people are promising medicare for all without the corresponding doubling of a payroll tax and national sales tax/VAT that other countries use.

All of this stuff should be wildly inflationary, but here the US sits as the reserve currency and can just turn around and have the federal reserve by the debt up and drive the rates to zero.  Others have nowhere to go.  It works for a long time until it doesn't any more.  Eventually structural changes happen or deflation hits.

It'll be interesting.  I try not to stay too close to the politics, but I can't even turn on investing news without it being everywhere.




bwall

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Re: Econ Nerds: could lower interest rates / QE be disinflationary?
« Reply #11 on: November 12, 2019, 12:27:13 PM »
More currency is not necessarily inflationary at the time of its issue moment because half the equation is velocity of money, which has been slowing for quite a few years now.  However, monetary velocity cannot go to zero, and at some point it will trend higher. If the central banks continue to issue debt without then contracting the supply to coincide with the eventual increase in velocity then at that point it will become inflationary.  However there can be big lags in this happening. Some monetarists believe the inflation of the 1970s was because of the expansion of the monetary supply in the previous decade.

Good comments by @ChpBstrd and @chasesfish. There is a lot to think about there (especially in the article by Marks at Oaktree), I'll be posting a reply to those comments, but I do need to ruminate a bit before doing so. Just like I did with @vand 's above comment.

Bold mine--I think it's quite a fascinating possibility that QE didn't lead to inflation when it happened, or after it stopped or even after QT began. Since the money was kept on the banks' balance sheet/lent out to the FED, or whatever the banks do with 'reserves' ( @chasesfish ) when they're not loaning out the money, then the day may come when banks decide to lend out this money. At this point, I  suppose that the increased lending would lead to higher inflation. Exacerbating this future inflation problem would be the Fed's limited ability to quickly drain money from the system. I thought that QT at $50 billion/month was a good idea, btw. We'll need a lot more of it in the future, IMHO.

But, as long as the USA has saturated markets in every conceivable good or service available on the planet, it's hard to see where the future demand for funds will come from. Once China's vast domestic market is also saturated . . . . . .

Buffalo Chip

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Re: Econ Nerds: could lower interest rates / QE be disinflationary?
« Reply #12 on: November 12, 2019, 01:04:44 PM »
Great thread. And I find it interesting how many of the posts address the underlying problem of low birthrates. Long term, that is THE economic problem.

Economies that effectively address declining birthrates will prosper. Those that donít, wonít.


marty998

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Re: Econ Nerds: could lower interest rates / QE be disinflationary?
« Reply #13 on: November 12, 2019, 01:36:50 PM »
Great thread. And I find it interesting how many of the posts address the underlying problem of low birthrates. Long term, that is THE economic problem.

Economies that effectively address declining birthrates will prosper. Those that donít, wonít.

GDP overall may fall, but I'd be interested to see what has happened to GDP per capita in Japan. I'll bet it is still rising.

ChpBstrd

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Re: Econ Nerds: could lower interest rates / QE be disinflationary?
« Reply #14 on: November 12, 2019, 02:51:07 PM »
Great thread. And I find it interesting how many of the posts address the underlying problem of low birthrates. Long term, that is THE economic problem.

Economies that effectively address declining birthrates will prosper. Those that donít, wonít.

GDP overall may fall, but I'd be interested to see what has happened to GDP per capita in Japan. I'll bet it is still rising.

Sort of. It kept rising for years after the first lost decade started and has gotten strangely volatile since.



https://www-ceicdata-com.cdn.ampproject.org/i/s/www.ceicdata.com/datapage/charts/ipc_japan_gdp-per-capita.svg

chasesfish

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Re: Econ Nerds: could lower interest rates / QE be disinflationary?
« Reply #15 on: November 12, 2019, 03:19:19 PM »
@bwall - We have a long way to go in the US before we get to peak "need to lend".  There's still so much fat in the US banking system compared to our other developed nation peers.  They have a handful of large banks and thats it.

Banks can make their profits for years by consolidating and we'll have a barbell style system, a bunch of large banks and a handful of smaller banks in each market.   You get to a point (and I'd argue we're already there in the US and in most of the developed world) where the lending capacity exceeds the supply of creditworthy loans.

Buffalo Chip

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Re: Econ Nerds: could lower interest rates / QE be disinflationary?
« Reply #16 on: November 12, 2019, 07:55:30 PM »
Great thread. And I find it interesting how many of the posts address the underlying problem of low birthrates. Long term, that is THE economic problem.

Economies that effectively address declining birthrates will prosper. Those that donít, wonít.

GDP overall may fall, but I'd be interested to see what has happened to GDP per capita in Japan. I'll bet it is still rising.

It may well be. Kind of anticlimactic, though, with far fewer Japanese to enjoy it.

By way of comparison, the Shakers were known for their egalitarian and progressive ways. And for their frugality. Not to mention the furniture. Theirs was a small culture worth preserving in my estimation. Too bad about that celibacy thing. Just 2 Shakers left now.

vand

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Re: Econ Nerds: could lower interest rates / QE be disinflationary?
« Reply #17 on: November 13, 2019, 04:41:06 AM »
Ray Dalio talks about the critical "Beautiful Deleveraging" stage of the economic cycle in his video
https://www.youtube.com/watch?v=wI0bUuQJN3s

"People ask if printing money will create inflation... it won't if it is offset by falling credit."

I'm not sure that I agree with this... or at least I don't think that the Fed or anyone can possibly accurately calculate the offset required.

The real world is much more complicated than that, and the USD's role as the reserve currency means that, uniquely, it has an mechanism that allows it to export inflationary dollars to the rest of the world, allowing it to get away with much more fiscal loosening that it otherwise could.

bwall

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Re: Econ Nerds: could lower interest rates / QE be disinflationary?
« Reply #18 on: November 13, 2019, 06:30:02 AM »
@bwall I took one econ course in grad school in 2008. I remember having an urgency to study because the economic world was falling apart at the time! Economics is hard to separate from politics, and I've lived in interesting times as the proverb goes.

It's hard to solve a demand problem in an affluent society without doing stupid, destructive things like creating a car culture instead of public transit, or subsidizing loans for coastal real estate that gets destroyed during hurricanes, increasing the amount of packaging used for everything, or running ads to remind seniors to ask their doctors for the non-generic brand name version of a drug they might not need. In other words, U.S. policy and culture are already pushing us to do many things more wastefully because somebody else's paycheck depends on it. The Anti-mustachain Wall of Shame has more examples. I don't think the Japanese were willing to subsidize stupidly excessive consumption/waste.

Consumers might consume even more if their take-home pay was increased, but to accomplish that we'd have to 1) lower their retirement savings rate which just borrows from future demand, 2) reduce their taxes, which requires the future monetization of government spending, 3) reduce their healthcare expenses, which will cost jobs and campaign donations, 4) have them unionize and bargain for higher wages, which can drive non-service industry work to other locales, or 5) increase productivity, which is easier said than done. So not many choices other than borrowing from the future or redistribution of wealth to spendier hands.

Immigration, legal and illegal, has helped the US not be quite the demographic basketcase it would be otherwise. This is arguably more important than a low birthrate or aging citizenry, because as long as the population keeps growing, the economy/monetary base will likely keep growing in the long run.

All that said,
1) The U.S. is cracking down on immigrants. If this effort succeeds at deterring immigration at any significant level (debatable), expect an accompanying drop in aggregate demand growth.
2) The taxpayer defunding of public universities over the past 2-3 decades plus bureaucratic bloat means young people now typically graduate with debt the size of a small mortgage. The service of this debt by itself means money is no longer available for purchases. The thin margins earned by student lenders hardly make up for the lost economic multiplier effect of people who are postponing large purchases like cars and houses, or even postponing household formation.
3) Housing loan subsidies and zoning rules have pushed up home prices to absurd levels in many metro areas. Sellers who leave HCOL areas earn a profit that is probably spent quickly, but buyers must make higher payments for decades which reduces their purchasing power for other things. The next buyer will have to spend an even greater percentage of their income. This reduced spending capacity is probably only partially offset by the seller's spending or profits earned by lenders.
4) Young people today are different than the boomers or generation X, who valued big houses, big cars, and a generally high-consumption lifestyle. What young people are consuming more of is data and electronics, which even if you buy the latest iPhone every year and use Verizon for your data plan comes out to a lot less than the operating costs of an SUV or the bills for a house. Student debt is part of this story, but living through the GFC might have had a similar effect on Millennials as living through the Depression had on the WW2 generation. They might be cheapskates for life, which would have disastrous effects on the economy, regardless of what the supply side does. Cell phone obsession is a relatively cheap hobby, although Apple is working hard to change that. If they fail, what new industry will make up for the collapsing demand for McMansions and Range Rovers?
5) Digital addiction is about to become a big deal, economically speaking. As Salesforce CEO Marc Benioff said, Facebook is the new cigarette. Yet smokers wouldn't spend an average of 7 hours per day* looking at their packs of cigarettes and being distracted from productive pursuits for longer than a few 10 minute smoke breaks. What would it mean if an entire generation passed through the economy whose education, social skills, ability to focus, and perhaps IQ** were worse than the previous generations? The productivity gains from work applications like email, spreadsheets, and databases are behind us, and it is not clear how employees using Instagram or watching YouTube videos at home and work are increasing their productivity.

My best ideas to increase aggregate demand are:
1) Subsidize the treatment of addicts: Once recovered, their productivity soars, they pay back the costs of rehab through taxes, and societal costs (prisons, blight, crime) are reduced. Do this for a few million people and the economic needle moves.
2) Steepen the tax brackets: It's a well known fact that poor people spend their entire paycheck, while billionaires hoard all they can (Trump even shorts his contractors!). If the tax burden was shifted upward, productive activities like infrastructure projects, college scholarships, basic research, and public health initiatives could boost the velocity of money and aggregate demand. 
3) De-subsidize housing and deregulate zoning: The experiment failed. Implicit government guarantees for mortgages improved affordability for a while, but eventually raised the price of housing to the point that ridiculous amounts of capital are required to buy in most large metro areas. This bubble has already delivered one financial crisis and is set to do so again. Also, force places that have used zoning as a way to constrain local real estate supply like California and New York City to allow construction of affordable high-rise housing units.

*https://www.cnn.com/2019/10/29/health/common-sense-kids-media-use-report-wellness/index.html
**https://www.journals.uchicago.edu/doi/pdfplus/10.1086/691462

Solving a demand problem... I agree with your analysis--we as a society could be much smarter about how we spend money . . . I also think that your three ideas on how to increase aggregate demand are very sound; treat addicts, steepen the tax curve and stop subsidizing housing/deregulate in HCOL areas (get rid of the NIMBYs!). The first proposal is benign and should be acceptable to all but the hardest of hearts, the last two will require breaking some eggs to make that omelette. This election cycle I do see some politicians making bold suggestions of change. Most likely these suggestions will be misconstrued and/or scare the shit out of everyone, so that nothing will change.

IMMIGRATION AND DEMOGRAPHICS:

After making a post upthread about Japanese Brazilians, I did a search and find out more/confirm my info, etc. Turns out they have their own wikipedia page! Here is is if you're interested in reading more. https://en.wikipedia.org/wiki/Brazilians_in_Japan

And, for all of those who find the bit on demographics interesting, I can highly recommend the book, "The Human Tide" by Morland. Here is a link to the amazon page: https://www.amazon.com/Human-Tide-Population-Shaped-Modern/dp/1541788362
Demographics is the beat to the music that we're all dancing to. The politicians of the day might be the lead singers/frontmen of the group, but it's demographics that calls the tune. This book explains the role demographics played in everything, from the 1994 referendum for Quebec independence, Northern Ireland (both creation thereof and conflict around), to mass British migration to the New World and the lack thereof in the colonies held by Spain, WWI & II, Cold War, etc. Lest one think that rise in population = rise in power and/or wealth, note the China had 1 billion people in 1980 and all of them were very very poor and thus not much power to be found in Beijing. I'm still reading the book, so I haven't gotten to the parts about Japan (or modern China), but it is eye opening to say the least. Birth rate, death rate, immigration, emigration, average life expectancy, it's all there and in a well written, entertaining form. As @BobTheBuilder said upthread, reading is like borrowing someone else's brain.

Education:
I do not believe that taxpayers have meaningfully cut back on the funding of higher education. Higher education costs more today because of the building spree that every university has gone on since 1990. They build sports centers, recreation centers, dining halls, campus housing, everything possible to 'enhance the student experience' at a cost of hundreds of millions of dollars, plus maintenance and management costs. And don't even get me started on the NCAA exploitation of the free labor pool while coaches earn millions (!) annually. None of this is going to more classes being offered, professor salaries, more professors, more research, etc, which is the whole purpose of a university's existence. In my opinion, it's all fat that could be cut from the budget, but instead it's passed on to the students in the form of higher tuition and future indenture-ship (-ment?).

I would not recommend that any 18 year old sign up for a massive debt of hundreds of thousands of post-tax dollars in exchange for a university eduction. Take a year off. Travel. See the world. Start a business (and fail! It's ok!), master an instrument (or sport, like running, or chess), or master a subject that interests you by devouring all information possible on that subject. Then, after the year off, you will be in a much better place to decide on how to spend tens of thousands of dollars that your future self must pay back at all costs, as student loan debt is not dischargeable in bankruptcy.

Financial.Velociraptor

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Re: Econ Nerds: could lower interest rates / QE be disinflationary?
« Reply #19 on: November 13, 2019, 07:22:41 AM »
I did Econ for my undergrad.  I've come to believe since then that Smith, Hayek, and Ricardo were spot on but Keynes, Friedman, and Mises had flawed ideas.  Still, I don't buy the arguments in the OP's article. 

We have a new model that explores monetary theory in more depth supported by a greater volume of data, especially in the post commodity money time period.  That would be Modern Monetary Theory (MMT).  MMT is often derided by mainstream economists and I believe they are dismissing some valid science because they don't like the political repercussions of the findings.

A little background.  There is a fella named Warren Mosler that is the founder of MMT.  He's no slouch.  He started with Ginnie Mae at the rate desk and became a student of interest rates and the world's central banks.  He later founded a bond focused hedge fund and went on an incredible streak where for the entire 15 years he ran the fund he never booked a single losing trade!  And he produced 6.5% or thereabouts in "alpha" in the sleepy bond space during that time.  A truly remarkable track record.
 
Mosler had some different and controversial ideas about how monetary policy worked in the fiat currency regime and interest rates.  Those ideas were developed over time and tested in his successful trading.  After leaving the hedge fund world he looked for Ph.D. economists who shared his views.  The only one of any note he could find was in Australia (Bill Mitchell).  They worked together to publish the initial papers that defined MMT. 

They concluded that governments have no more money at their disposal if the budget is in surplus and there is no inherent limit to how much a government can spend.  Creating a monetary liability for the government creates a monetary asset for the private sector.  He further concluded that the true limit to monetary stimulus is not the deficit or interest rate but inflation.  The finding that is controversial is that said limit is an order of magnitude higher than conventional monetary theory has called for. 

My take is that lowering interest rates and QE are still inflationary.  But (and the data since the global QE and NIRP experiment began bear this out) it is far less inflationary than the Chicago school and Austrian school economists would have us believe.

Those who want to learn more without reading some seriously dry peer reviewed journal articles can borrow from their local library Mosler's "Soft Currency Economics".

Buffalo Chip

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Re: Econ Nerds: could lower interest rates / QE be disinflationary?
« Reply #20 on: November 13, 2019, 09:48:38 AM »
@bwall: thanks for the book recommendation.

@Financial.Velociraptor. : thanks for the book recommendation as well. BTW, I do read your website fairly frequently. Thanks for taking the time to put it out there.

Wrenchturner

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Re: Econ Nerds: could lower interest rates / QE be disinflationary?
« Reply #21 on: November 13, 2019, 01:08:24 PM »
Huge swathes of this thread are not rendering on my phone.  Just big blank sections where text should be.  Anyway I just wanted to mention that I think Piketty addressed this in his book.  Maybe someone smarter than me could comment on that?

The rough premise is as follows(wiki):

The book's central thesis is that when the rate of return on capital (r) is greater than the rate of economic growth (g) over the long term, the result is concentration of wealth, and this unequal distribution of wealth causes social and economic instability. Piketty proposes a global system of progressive wealth taxes to help reduce inequality and avoid the vast majority of wealth coming under the control of a tiny minority.

Systems101

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Re: Econ Nerds: could lower interest rates / QE be disinflationary?
« Reply #22 on: November 13, 2019, 01:57:46 PM »
Since the money was kept on the banks' balance sheet/lent out to the FED, or whatever the banks do with 'reserves' when they're not loaning out the money, then the day may come when banks decide to lend out this money.

Pulling this thread: This is about the Bank's future expectations.  Might their expectations matter?

If you took Econ 101 in the last several decades, your learned a simple relationship: Lower interest rates = inflationary. Higher interest rates = disinflationary. The proof was when Paul Volker raised interest on treasuries to double-digits in the early 80's, ending a decade of high inflation.

What if it wasn't the interest rate rise, but Volker's assertion to deliver low inflation basically at any cost?

How would you prove it was the rate change (traditional economics) vs. the expectation change (behavioral economics)?

We haven't delivered inflation from QE, but the current FED is a bit fuzzy (not to mention changing their answer) on if/when QE ends.  They've gone back and forth, even intervening in some things in the last few weeks (which has made few headlines).  Keep in mind the FED in the 70s did the exact same thing... back and forth on how to defeat inflation.  Then Volker came in and basically promised low inflation come heck or high water.

That's not the only possible explanation.  It's also possible Volker's recession destroyed enough demand that producers lost pricing power.  Current QE (here and around the world) has sustained enough shaky businesses that we have excess capacity and thus producers have no pricing power (so why would we expect inflation?).

There are more perspectives.  This article is a fascinating summary of the argument (from 2014!) and may help inform the discussion, as it has a number of very interesting links (and a reference to a member of the St Louis Fed who made the QE->disinflation assertion back in 2013).

Financial.Velociraptor

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Re: Econ Nerds: could lower interest rates / QE be disinflationary?
« Reply #23 on: November 13, 2019, 04:08:03 PM »


@Financial.Velociraptor. : thanks for the book recommendation as well. BTW, I do read your website fairly frequently. Thanks for taking the time to put it out there.

Thanks for reading @Buffalo Chip

ChpBstrd

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Re: Econ Nerds: could lower interest rates / QE be disinflationary?
« Reply #24 on: November 13, 2019, 09:04:16 PM »
The post by Howard Marks from Oaktree gave me an uneasy feeling. I last felt it in the late 90s when the most successful investors at the time informed the old-school value crowd about how the new normal was paying PE's >50 for tech stocks and >25 for plain stocks because the digital revolution was going to continue sending productivity and economic growth sky-high. The current economic climate, they said, justified the change in the rulebook. It meant companies that reported taxable earnings instead of plowing all available capital into growth were being suckers. It seemed counterintuitive, but I still took them just a hair too seriously, because they had an explanation for observed reality that the critics of the tech bubble lacked. Those critics were the ones who seemed irrational, screaming doom from the wilderness and missing out while everyone else made money for years.

Likewise, it was hard to argue with the house-flippers of 2005-2007 because they were making six-figure profits just by trading up their houses each year and snatching up unbuilt beach condos to be flipped before construction ever began. It's hard to call decisions stupid when they are making money like that. Everyone's baseline scenario was that price growth would eventually converge with long-term averages, but if you didn't buy now you'd probably miss out!

Perhaps grasping for rational explanations at irrational periods in market history is what we are bound to do, when in fact the markets are just oscillating between irrational bubbles - a much more boring and traditional story. Sitting in an investment with pricing that has gone irrational - stocks in '99, housing in '07, everything today? - we are motivated to justify ourselves to ourselves.

@vand said:

Quote
Of course, you could argue that all this QE has been massively inflationary... to asset prices. And you would have a fair point.

What if that's all there is to it? Instead of going into productive activity, such as the business expansions imagined by economists, QE went into investments. That simple story explains the everything bubble, the slower-than-expected economic growth of the past decade, and the surprising lack of inflationary pressure for a decade. Those borrowed dollars plowing into stocks, bonds, real estate... fuck, even cryptocurrencies... don't contribute much to monetary velocity or jobs. Occam's razor says this explanation beats a rewriting of everything we know about economics. It's less complex even than a bell curve where QE is deflationary on one side of breakeven and inflationary on the other.

It seems we're stuck choosing between a) "we have no idea what the economic rules are anymore" and b) "the economic rules are unchanged, and also there is a massive worldwide investment bubble."

If a), is it really rational to invest in risky assets?
If b), is it really rational to invest in risky assets?

Yet FIRE does not happen in a savings account, so do we throw in our chips despite it all and come up with a story?
« Last Edit: November 14, 2019, 06:39:21 AM by ChpBstrd »

BicycleB

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Re: Econ Nerds: could lower interest rates / QE be disinflationary?
« Reply #25 on: November 13, 2019, 09:47:09 PM »
Head spinning. Requested that my library purchase the book, though.

bwall

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Re: Econ Nerds: could lower interest rates / QE be disinflationary?
« Reply #26 on: November 14, 2019, 04:42:02 AM »
I think the article by Howard Marks from Oaktree deserves it's own thread ( @chasesfish , @ChpBstrd ) . It's a long read and worth it's own discussion, imo.

@Systems101 ; yes, it's clearly all about the bank's expectations and future action, which is by definition impossible to know today.

@Financial.Velociraptor ; What is the difference between MMT & run of the mill Keynesian-ism? It sounds to me like the same thing by just another name--government spending to prop up aggregate demand.

What didn't you like about Keynes' ideas? Or Friedman? I do think that von Mises is a quack--or at least all his followers are. I have yet to meet anyone who quotes that website who has any working fundamental knowledge of economics--just poorly thought out opinions.

@vand & @ChpBstrd : RE: QE resulting in asset price inflation (only). We do have correlation, but if there were also causation, then I think we'd see ridiculously high PE's as a result of the distortion, which we don't. This means that asset prices have moved in line with their earnings and haven't distorted asset prices relative to underlying fundamentals. One could argue that coastal real estate prices have gone up too high, but I'd say it's a result of new (real) demand and the inability of regulators to allow new housing supply to come onto the market in those areas.

ChpBstrd

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Re: Econ Nerds: could lower interest rates / QE be disinflationary?
« Reply #27 on: November 14, 2019, 06:51:55 AM »
We do have correlation, but if there were also causation, then I think we'd see ridiculously high PE's as a result of the distortion, which we don't. This means that asset prices have moved in line with their earnings and haven't distorted asset prices relative to underlying fundamentals.

Are you saying the S&P 500ís PE current ratio of 22.87 is not meaningfully higher than the long-term mean of 15.77? Thatís 45% above the mean. And are you saying 10-year yields under 2% and junk bond yields around 5% are not historically unusual?

bwall

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Re: Econ Nerds: could lower interest rates / QE be disinflationary?
« Reply #28 on: November 14, 2019, 08:31:13 AM »
We do have correlation, but if there were also causation, then I think we'd see ridiculously high PE's as a result of the distortion, which we don't. This means that asset prices have moved in line with their earnings and haven't distorted asset prices relative to underlying fundamentals.

Are you saying the S&P 500ís PE current ratio of 22.87 is not meaningfully higher than the long-term mean of 15.77? Thatís 45% above the mean. And are you saying 10-year yields under 2% and junk bond yields around 5% are not historically unusual?

Good point(s).

PE: Ah! You're looking at the trailing twelve months and it does indeed seem to be much higher than the mean. If you look at the forward twelve month PE, I believe that it is much closer to the mean, (but most information available on the S&P PE show the TTM, not the forward PE). Since the stock market is inherently forward looking and stock prices are individually based on future expectations not past performance (i.e. 'value trap', etc), I base my statement on forward PE expectations.

Yield under 2%: The price of a ten year treasury is high by historical standards and the yield low, which re-inforces my above argument about PE's being in balance now. Traditionally the stock and bond markets have moved in opposite to each other--not in tandem. Therefore, it's the low yield on the 10 year that precisely makes the current PE attractive, or at a bare minimum not ridiculously high--which was my original statement. The yield on the 10 year is so low b/c the FED is working to achieve that exact result, i.e. this whole thread.

Buffalo Chip

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Re: Econ Nerds: could lower interest rates / QE be disinflationary?
« Reply #29 on: November 14, 2019, 09:55:04 AM »

@vand weighed in by saying in part;

Yet FIRE does not happen in a savings account, so do we throw in our chips despite it all and come up with a story?

What? FIRE doesnít happen in a savings account? Well how about a money market account? I guess Iíll be the guinea pig who finds out!

I do remember all sorts of stories that justified investments that crashed and burned. House flipping around 2005, investing in the stock market around 2000, NOT investing in the stock market in the Late 70s and early 80s. Amazing the lengths people will go through to rationalize their behavior. We see that a lot in FI circles currently with the idea that tossing large percentages of personal wealth into stock indexes is a simple way to get rich. (Cue graph showing stock prices over time)

In the end, growing, healthy economies need people. Preferably people willing to spend savings or float debt to consume what economies are producing. And you want lots who are consuming heavily. Which usually means young families. Since persuading people to start families and have kids is outside the purview of central banks, they do what they know how to do: expand the money supply. Unfortunately, that doesnít address the underlying issues of falling numbers of people who underpin demand.

Money sloshing around needs a place to go, and it eventually ends up in various investments. Which inflates the cost of those investments, and leads to all sorts of flaky ideas being funded.  The cycle goes on and on. And what could ever go wrong?

bwall

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Re: Econ Nerds: could lower interest rates / QE be disinflationary?
« Reply #30 on: November 14, 2019, 10:27:32 AM »
In the end, growing, healthy economies need people. Preferably people willing to spend savings or float debt to consume what economies are producing. And you want lots who are consuming heavily. Which usually means young families. Since persuading people to start families and have kids is outside the purview of central banks, they do what they know how to do: expand the money supply. Unfortunately, that doesnít address the underlying issues of falling numbers of people who underpin demand.

As you say, the Fed cannot address the birth rate. But, they can adopt policies designed to help the working poor, which constitutes tens millions of Americans. The poor spend all their money. The rich tend to save most of theirs. "No matter how much money you have, you can only eat one steak a day". Thus, in order to sell more steaks (generate more aggregate demand), seeing that more people can afford a steak will see much better results in increasing aggregate demand than making sure someone can afford two steaks in one day.

Unfortunately, not many politicians are talking about this. And the ones that do tend to scare those with money. So not much will change.

waltworks

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Re: Econ Nerds: could lower interest rates / QE be disinflationary?
« Reply #31 on: November 14, 2019, 10:54:51 AM »
Are you saying the S&P 500ís PE current ratio of 22.87 is not meaningfully higher than the long-term mean of 15.77? Thatís 45% above the mean. And are you saying 10-year yields under 2% and junk bond yields around 5% are not historically unusual?

We haven't had the S&P around the long term mean for any meaningful amount of time for 30 years, though. Some of today's higher ratio is accounting standard changes, too. My personal feeling is that P/E will hover around 20 going forward - with all the usual caveats about my personal crystal ball, of course.

I'm not particularly worried about investing at a P/E of ~22 for the long term, personally.

-W

ChpBstrd

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Re: Econ Nerds: could lower interest rates / QE be disinflationary?
« Reply #32 on: November 14, 2019, 11:50:39 AM »
Are you saying the S&P 500ís PE current ratio of 22.87 is not meaningfully higher than the long-term mean of 15.77? Thatís 45% above the mean. And are you saying 10-year yields under 2% and junk bond yields around 5% are not historically unusual?

We haven't had the S&P around the long term mean for any meaningful amount of time for 30 years, though. Some of today's higher ratio is accounting standard changes, too. My personal feeling is that P/E will hover around 20 going forward - with all the usual caveats about my personal crystal ball, of course.

I'm not particularly worried about investing at a P/E of ~22 for the long term, personally.

-W

Are you predicting higher than usual productivity and earnings growth? Or is this sentiment due to a lack of appealing other investments?

chasesfish

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Re: Econ Nerds: could lower interest rates / QE be disinflationary?
« Reply #33 on: November 14, 2019, 12:00:54 PM »
Not adding anything productive, just enjoying the conversation.  I've got a low to mid six figure number invested in a way that goes up if long term rates go down.

waltworks

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Re: Econ Nerds: could lower interest rates / QE be disinflationary?
« Reply #34 on: November 14, 2019, 12:18:58 PM »
We haven't had the S&P around the long term mean for any meaningful amount of time for 30 years, though. Some of today's higher ratio is accounting standard changes, too. My personal feeling is that P/E will hover around 20 going forward - with all the usual caveats about my personal crystal ball, of course.

I'm not particularly worried about investing at a P/E of ~22 for the long term, personally.

-W

Are you predicting higher than usual productivity and earnings growth? Or is this sentiment due to a lack of appealing other investments?

A little of both. I'm constantly optimistic about people inventing things, investing in things, and making things more awesome. And I'm not particularly interested in trying to outsmart the market, though I'm not saying that's impossible to do.

A few years of flat stock prices and continued revenue/productivity growth gets you right back to your long term average, too. I think sometimes people just assume we have to have a market crash to get back to "normal" P/E ratios.

And again, I don't think they're comparable pre and post-2001 GAAP changes, and given that stock buybacks have offset dividends so much in the last few decades.
https://www.philosophicaleconomics.com/2013/12/shiller/

-W

bwall

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Re: Econ Nerds: could lower interest rates / QE be disinflationary?
« Reply #35 on: November 14, 2019, 12:46:53 PM »
Not adding anything productive, just enjoying the conversation.  I've got a low to mid six figure number invested in a way that goes up if long term rates go down.

This thread (and others recently) have spurred me to sharpen my thoughts on your proposition (bold mine). If @ChpBstrd is correct, then QE will result in lower long terms rate and you will do well. If @Financial.Velociraptor is correct, long term rates are bottoming now and only have one way to go--up.

Ultimately, we won't know who was right (or mostly right, as is often the case in economics) until it's too late. I think that with the 10 year yielding 1.8% today it doesn't have much further left to fall (maximum 1.8%, right?). I guess there could be waves of yield-chasing money escaping negative rates in Euroland or Japan, driving the yield even lower, but then we would be seeing the USD rising precipitously against these currencies if that were the case.

Buffalo Chip

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Re: Econ Nerds: could lower interest rates / QE be disinflationary?
« Reply #36 on: November 14, 2019, 02:31:02 PM »
In the end, growing, healthy economies need people. Preferably people willing to spend savings or float debt to consume what economies are producing. And you want lots who are consuming heavily. Which usually means young families. Since persuading people to start families and have kids is outside the purview of central banks, they do what they know how to do: expand the money supply. Unfortunately, that doesnít address the underlying issues of falling numbers of people who underpin demand.

As you say, the Fed cannot address the birth rate. But, they can adopt policies designed to help the working poor, which constitutes tens millions of Americans. The poor spend all their money. The rich tend to save most of theirs. "No matter how much money you have, you can only eat one steak a day". Thus, in order to sell more steaks (generate more aggregate demand), seeing that more people can afford a steak will see much better results in increasing aggregate demand than making sure someone can afford two steaks in one day.

Unfortunately, not many politicians are talking about this. And the ones that do tend to scare those with money. So not much will change.

Oh come on.  Wouldn't it be great to have Jerome Powell start a Fed meeting with a rendition of "Let's get it on"?

As for assisting the working poor, of course it makes sense, but it has to be something with lasting value.  E.g actual quality education, making sure kids are produced and raised with values that support an expanding economy, etc. Tough stuff to do for any society, damn near impossible in ours. Everyone political crony has their hand out, so the chances of the funds going to where they'd be effective aren't very good.  And tossing money out of a helicopter isn't going to be palatable. 

For grins, let's expand the idea of making sure more people can afford a steak to the entire globe.  Puts that whole "belts and roads" initiative in a different light, no?

chasesfish

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Re: Econ Nerds: could lower interest rates / QE be disinflationary?
« Reply #37 on: November 14, 2019, 03:35:30 PM »
Not adding anything productive, just enjoying the conversation.  I've got a low to mid six figure number invested in a way that goes up if long term rates go down.

This thread (and others recently) have spurred me to sharpen my thoughts on your proposition (bold mine). If @ChpBstrd is correct, then QE will result in lower long terms rate and you will do well. If @Financial.Velociraptor is correct, long term rates are bottoming now and only have one way to go--up.

Ultimately, we won't know who was right (or mostly right, as is often the case in economics) until it's too late. I think that with the 10 year yielding 1.8% today it doesn't have much further left to fall (maximum 1.8%, right?). I guess there could be waves of yield-chasing money escaping negative rates in Euroland or Japan, driving the yield even lower, but then we would be seeing the USD rising precipitously against these currencies if that were the case.

I'll go ahead and say it...but it doesn't mean this will continue to work.  1.70% on the 10 year is my line of demarkation.  Below it I sell some, above it I buy more.  I'm also doing more with 30yrs, with those 2.25% is my line.  When yields get above that, I buy more of them.  When yields get below that, I take some profits.

Eventually I think it'll break through and go lower and I don't want to have everything sold when it does.  Alternatively (like right now), I eventually run out of cash buying and don't want to go into margin or trim my equities lower than 60%.  I'm using VGLT, TLT, then individual bonds.  I'm irritated at the bid/ask spread with Fidelity on zero coupon treasuries, so I end up buying more of the 2.25% coupon 30-years that have been issued this year.  Aug 2049 at 2.25% is my largest holding.

Financial.Velociraptor

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Re: Econ Nerds: could lower interest rates / QE be disinflationary?
« Reply #38 on: November 14, 2019, 04:47:56 PM »

@Financial.Velociraptor ; What is the difference between MMT & run of the mill Keynesian-ism? It sounds to me like the same thing by just another name--government spending to prop up aggregate demand.

What didn't you like about Keynes' ideas? Or Friedman? I do think that von Mises is a quack--or at least all his followers are. I have yet to meet anyone who quotes that website who has any working fundamental knowledge of economics--just poorly thought out opinions.



@bwall

MMT is not intended to be a prescription for increasing government spending or a stimulus tool.  It is a set of observations and predictions about how government debt really works under a fiat money system.  People with political agendas have taken the findings and put a hyper-Keynesian twist on it that I think was never intended.  And it terrifies the alt-right and the Austrians.

Keynes was a smart cookie and an able trader in his own right. But he had too much faith in human nature especially when said humans are of the politician stripe.  Getting governments to spend to stimulate a failing economy was easy.  Getting them to step on the breaks/take away the punch bowl when times are good is essentially impossible and has never been observed in action to my knowledge.  Keynes also did not consider Monetary theory important as he had faith the Bretton Woods gold backed system essentially resolved all problems related to inflation and inflation rates.

Friedman was a little too obsessive about Monetary policy and seemed convinced it was the only thing that mattered in economics.  He also was sort of an anti-Keynesian in that he wanted to do away with any attempts at stimulus with a "strict monetary rule."  That may have worked just fine in the 70s.  In today's hyper financialized economy, the Fed needs to be able to not just change the money supply and interest rates but be the liquidity provider of last resort.

Mises is not entirely unhinged, just controversial.  A lot of mainstream economists still reject the entire foundation of the Austrian school of thought but several Austrian school economists have won Nobels for important work.  The fiat money fear mongers love Mises but don't even seem to know his hero Knut Wicksel.  Wicksel did some very important work on the "natural interest rate".  I think it would be lost on most Mises fans that he found interest rates needed to float, even in a commodity money system.  Because they think gold can fix the business cycle, interest rates, inflation, and cure the gout.

Take my thoughts with a grain of salt.  My last Econ class was almost two decades ago and I haven't spent much time since then keeping up with developments.

bwall

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Re: Econ Nerds: could lower interest rates / QE be disinflationary?
« Reply #39 on: November 15, 2019, 05:46:45 AM »
In the end, growing, healthy economies need people. Preferably people willing to spend savings or float debt to consume what economies are producing. And you want lots who are consuming heavily. Which usually means young families. Since persuading people to start families and have kids is outside the purview of central banks, they do what they know how to do: expand the money supply. Unfortunately, that doesnít address the underlying issues of falling numbers of people who underpin demand.

As you say, the Fed cannot address the birth rate. But, they can adopt policies designed to help the working poor, which constitutes tens millions of Americans. The poor spend all their money. The rich tend to save most of theirs. "No matter how much money you have, you can only eat one steak a day". Thus, in order to sell more steaks (generate more aggregate demand), seeing that more people can afford a steak will see much better results in increasing aggregate demand than making sure someone can afford two steaks in one day.

Unfortunately, not many politicians are talking about this. And the ones that do tend to scare those with money. So not much will change.

Oh come on.  Wouldn't it be great to have Jerome Powell start a Fed meeting with a rendition of "Let's get it on"?

As for assisting the working poor, of course it makes sense, but it has to be something with lasting value.  E.g actual quality education, making sure kids are produced and raised with values that support an expanding economy, etc. Tough stuff to do for any society, damn near impossible in ours. Everyone political crony has their hand out, so the chances of the funds going to where they'd be effective aren't very good.  And tossing money out of a helicopter isn't going to be palatable. 

For grins, let's expand the idea of making sure more people can afford a steak to the entire globe.  Puts that whole "belts and roads" initiative in a different light, no?

I thought that was how Powell started every Fed meeting?!?!?

This article does a great job of explaining how Powell's Fed is doing (apparently) a lot to help the working poor: https://www.vox.com/2019/6/26/18759628/federal-reserve-interest-rates-jobs-inflation-workers
Quote: "From the standpoint of fighting poverty, the longer we can have low unemployment, the better, and thatís what we wish for.Ē

If we want to boost aggregate demand, we need to continue with policies like this in order to meaningfully help more Americans.

To your other point, the worldwide poverty rate has dropped sharply since 1990, from 36% of the world's population to 10% in the midst of a rising world population. Read more about this amazing story here: https://www.worldbank.org/en/topic/poverty/overview

Extreme poverty can be eliminated in our lifetime for the first time ever in the history of the world.. It's amazing.


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Re: Econ Nerds: could lower interest rates / QE be disinflationary?
« Reply #40 on: November 15, 2019, 03:04:02 PM »

I thought that was how Powell started every Fed meeting?!?!?

This article does a great job of explaining how Powell's Fed is doing (apparently) a lot to help the working poor: https://www.vox.com/2019/6/26/18759628/federal-reserve-interest-rates-jobs-inflation-workers
Quote: "From the standpoint of fighting poverty, the longer we can have low unemployment, the better, and thatís what we wish for.Ē

If we want to boost aggregate demand, we need to continue with policies like this in order to meaningfully help more Americans.

To your other point, the worldwide poverty rate has dropped sharply since 1990, from 36% of the world's population to 10% in the midst of a rising world population. Read more about this amazing story here: https://www.worldbank.org/en/topic/poverty/overview

Extreme poverty can be eliminated in our lifetime for the first time ever in the history of the world.. It's amazing.

Thanks for the article links.  Both were worth reading.  I was aware of the great strides made to reduce absolute poverty.  One of many, many reasons why I'm so optimistic about the future.  In 20 years, I expect that subsaharan Africa will be largely out of extreme poverty as well. Ironic that China of all countries will be the best positioned to profit from this new, huge market. 

I was not aware of the information about the Fed.  That's great to hear, although I'm skeptical of monetary policy making a big dent in the plight of the relatively poor in the US. The twin dilemmas of housing costs and education will continue to drag that sector of the population down.  Not because there aren't solutions: there are.  See Singapore.  I just don't see that our culture is willing to embrace some systemic changes necessary to fix poverty in the US.  Too many profit from the suffering of others.  If we're lucky some smart disruptors will fix both issues, but that's a Hail Mary pass.       

(Edit to remove any reference to politics.)
« Last Edit: November 20, 2019, 04:01:03 PM by Buffalo Chip »

marty998

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Re: Econ Nerds: could lower interest rates / QE be disinflationary?
« Reply #41 on: November 17, 2019, 01:15:04 PM »

I thought that was how Powell started every Fed meeting?!?!?

This article does a great job of explaining how Powell's Fed is doing (apparently) a lot to help the working poor: https://www.vox.com/2019/6/26/18759628/federal-reserve-interest-rates-jobs-inflation-workers
Quote: "From the standpoint of fighting poverty, the longer we can have low unemployment, the better, and thatís what we wish for.Ē

If we want to boost aggregate demand, we need to continue with policies like this in order to meaningfully help more Americans.

To your other point, the worldwide poverty rate has dropped sharply since 1990, from 36% of the world's population to 10% in the midst of a rising world population. Read more about this amazing story here: https://www.worldbank.org/en/topic/poverty/overview

Extreme poverty can be eliminated in our lifetime for the first time ever in the history of the world.. It's amazing.

Thanks for the article links.  Both were worth reading.  I was aware of the great strides made to reduce absolute poverty.  One of many, many reasons why I'm so optimistic about the future.*  In 20 years, I expect that subsaharan Africa will be largely out of extreme poverty as well. Ironic that China of all countries will be the best positioned to profit from this new, huge market. 

I was not aware of the information about the Fed.  That's great to hear, although I'm skeptical of monetary policy making a big dent in the plight of the relatively poor in the US. The twin dilemmas of housing costs and education will continue to drag that sector of the population down.  Not because there aren't solutions: there are.  See Singapore.  I just don't see that our culture is willing to embrace some systemic changes necessary to fix poverty in the US.  Too many profit from the suffering of others.  If we're lucky some smart disruptors will fix both issues, but that's a Hail Mary pass.       

*(Western and US politics being the obvious exception to any sense of optimism.)

What political system and society would you rather have? Notwithstanding the absolute shit show that US and UK politics is, I think it is fantastic that in a free society the public is permitted to exercise its democratic rights to swing the pendulum every now and again, even if it is heavily lobbied and influenced by money, you still get a vote.

You only need to look and see what is going on in Hong Kong to know the grass is not greener on the other side. Singapore isn't exactly the utopia either.
« Last Edit: November 17, 2019, 01:17:17 PM by marty998 »

ChpBstrd

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Re: Econ Nerds: could lower interest rates / QE be disinflationary?
« Reply #42 on: November 20, 2019, 08:48:04 AM »
^ Actually there is a case to be made that the US economic system is becoming less competitive as politically active corporations tweak regulations to deter competitors. See https://www.google.com/amp/s/amp.ft.com/content/97be3f2c-00b1-11ea-b7bc-f3fa4e77dd47

An economy of politically protected monopolists and duopolists probably reacts differently to low interest rates than a competitive economy.

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Re: Econ Nerds: could lower interest rates / QE be disinflationary?
« Reply #43 on: November 20, 2019, 02:21:48 PM »
^ Actually there is a case to be made that the US economic system is becoming less competitive as politically active corporations tweak regulations to deter competitors. See https://www.google.com/amp/s/amp.ft.com/content/97be3f2c-00b1-11ea-b7bc-f3fa4e77dd47

An economy of politically protected monopolists and duopolists probably reacts differently to low interest rates than a competitive economy.

Good article. A company that doesnít Maximize its competitive position will find itself at a relative disadvantage over the long term. For a good sized company, the ROI to be obtained through involvement in lobbying or other forms of legalized graft are far more than what could be obtained otherwise. Interest rates donít have as much affect on those companies that are already sitting on piles of cash.

ChpBstrd

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Re: Econ Nerds: could lower interest rates / QE be disinflationary?
« Reply #44 on: November 21, 2019, 08:19:42 AM »
^ Actually there is a case to be made that the US economic system is becoming less competitive as politically active corporations tweak regulations to deter competitors. See https://www.google.com/amp/s/amp.ft.com/content/97be3f2c-00b1-11ea-b7bc-f3fa4e77dd47

An economy of politically protected monopolists and duopolists probably reacts differently to low interest rates than a competitive economy.

Good article. A company that doesnít Maximize its competitive position will find itself at a relative disadvantage over the long term. For a good sized company, the ROI to be obtained through involvement in lobbying or other forms of legalized graft are far more than what could be obtained otherwise. Interest rates donít have as much affect on those companies that are already sitting on piles of cash.

Another reason it seems likely to me that the US will enter a period of Japanese style stagnation and deflationary pressures.

Buffalo Chip

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Re: Econ Nerds: could lower interest rates / QE be disinflationary?
« Reply #45 on: November 21, 2019, 02:34:41 PM »
^ Actually there is a case to be made that the US economic system is becoming less competitive as politically active corporations tweak regulations to deter competitors. See https://www.google.com/amp/s/amp.ft.com/content/97be3f2c-00b1-11ea-b7bc-f3fa4e77dd47

An economy of politically protected monopolists and duopolists probably reacts differently to low interest rates than a competitive economy.

Good article. A company that doesnít Maximize its competitive position will find itself at a relative disadvantage over the long term. For a good sized company, the ROI to be obtained through involvement in lobbying or other forms of legalized graft are far more than what could be obtained otherwise. Interest rates donít have as much affect on those companies that are already sitting on piles of cash.

Another reason it seems likely to me that the US will enter a period of Japanese style stagnation and deflationary pressures.

Thatís only part of the tale. Larger, cash rich companies are less susceptible to the sort of day to day (lawful) shakedowns that plague smaller businesses. If you have a public location as a small business, youíre a target.  Those small companies also happen to be the job generators. How does that work out when would be entrepreneurs look at the lay of the land and say ďscrew it.Ē

chasesfish

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Re: Econ Nerds: could lower interest rates / QE be disinflationary?
« Reply #46 on: November 22, 2019, 07:20:21 AM »
@Buffalo Chip - As someone who worked in banking, the financial shakedowns tended to happen on the upper end in that industry.

bwall

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Re: Econ Nerds: could lower interest rates / QE be disinflationary?
« Reply #47 on: November 22, 2019, 07:51:54 AM »
@Buffalo Chip - As someone who worked in banking, the financial shakedowns tended to happen on the upper end in that industry.

Fascinating. I cannot even remotely imagine what this would look like. Can you provide an example of a shakedown at the high end, @chasesfish ?

chasesfish

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Re: Econ Nerds: could lower interest rates / QE be disinflationary?
« Reply #48 on: November 22, 2019, 09:35:06 AM »
Here you go, practices that were considered acceptable in 2007 were retroactively declared not acceptable.

Every top 20 bank who originated FHA loans has a similar settlement.  Whispers when it got to the regional bank level were the FHA came to the bank and said "we want X amount" before there was even an investigation.

https://www.wsj.com/articles/u-s-reaches-968m-settlement-with-suntrust-banks-over-mortgage-issues-1403033015

bwall

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Re: Econ Nerds: could lower interest rates / QE be disinflationary?
« Reply #49 on: November 22, 2019, 11:45:26 AM »
Thank you for the link. I don't subscribe to the WSJ, so I can only see the top two paragraphs.

But, I do see your point; after the crash it was 'abusive practices' and 'rampant problems', whereas before the crash it was standard operating procedure across the board. Kinda like at the post WWII Nuremberg trials "I was following orders" was not an acceptable defense, even though not following an order on the battlefield was punishable by death in almost every army.

For me, the greatest irony is that it's ultimately the shareholders who took the hit, not the people who actually orchestrated the (alleged) wrongdoing.