Money. Doing it Right this Time.

[Integral]

Yes we blew a 30 (or 40) year debt bubble and it hasn't totally popped either.

The debt bubble came from over supply. Reversing where the government prioritizes its money (from finance to industry and labor, or just the people in general) would completely change this equation. We had a supply side expansion that basically resulted in massive household debt and appropriation of wealth from the many to the few. But America is in the forefront of world economies and we are much better served by demand side policies.

In other words, it's not a zombie economy, it's an economy that just needs some antibiotics and drug rehab.

See, I barely even know how to parse most of those claims.

I'm not sure I know what a "40 year debt bubble" means.

I don't see the necessary link between "supply-side expansion" and "massive household debt."

"America is in the forefront of world economies and we are much better served by demand side policies." is a non-sequitur. A nation on the technological frontier needs to be consistently pushing that frontier, and I don't see the link between R&D and "demand side policies" except in a heuristic, ill-defined, "expectations of future demand drive current R&D spending" sense.

I'm hard on you because I know there are neurons firing in that brain of yours.

Aaand once again the problem is a demand shortage relative to supply. Investing in banks means putting supply money into a supply firm. Of course it's a bad idea. We are on the path of Japan, indeed. They refused inflation and refused sufficient stimulus for two decades now. Half-hearted quarter measures here and there. Kind of like us.

These claims, though, are slightly more sensible.

One very basic problem is that the Fed is paying interest on reserves, so it doesn't really matter where the money is injected - it will end up at a bank, which will then deposit it at the Fed.

I have less faith in fiscal policy than you, but reasonable people can and do disagree on that point.

 

[Kaitzilla]

Interesting!

The (complete?) transcripts from the Federal Reserve meetings from 2007 came out today.

http://www.nytimes.com/interactive/2013/01/18/business/18fomc-transcripts.html

My attention is of course glued to the last half of the year

 

[Monsterzuma]

One very basic problem is that the Fed is paying interest on reserves, so it doesn't really matter where the money is injected - it will end up at a bank, which will then deposit it at the Fed.

Are the kind of sums being paid as interest on reserves large enough to affect anything on a macroeconomic scale? Excess reserves currently amount to about 1.5 trillion dollars, 0.25% of which is less than 4 billion a year. That's orders of magnitude removed from most other variables being discussed in macroeconomic contexts.

Just that banks don't receive interest on reserves anymore doesn't mean they have no reason whatsoever to deposit money at the Fed. A return of their money without a return on their money can still be quite attractive under the current circumstances. So it's hardly like a flood of new lending is guaranteed when the interest payment is removed.

 

[Kaitzilla]

Perhaps this demand shortage I keep hearing about is because everyone is up to their eyeballs in debt and can't possibly consume more?

I'd be satisfied if most people in this thread felt at least a little uneasy printing $1 trillion per year, but I get the feeling the opposite is the case. (ie want more printing )

 

[Monsterzuma]

There is a lot of debt in OECD economies, but the interest dues on it are relatively small. From the perspective of how much consumption is being divested to debt service, household balance sheets are fairly strong again.

See for example: http://www.businessinsider.com/db-deleveraging-is-almost-complete-2013-1
DEUTSCHE BANK: The Deleveraging Is Almost Over

This, I think, is the fundamental contradiction that makes the current monetary situation hard to understand.

The important question, I think, is whether the low interest rate environment of today is a natural phenomenon (i.e. "savings glut" theory) or something artificial brought about by monetary interventions. In the latter case there is a risk of some kind of blowout occurring at a later point, causing the debt structures that were erected in the bubble years to suddenly implode on themselves. The Belgian economist Robert Triffin argued that sooner or later the situation under which monetary policy would be abused for personal gain will be reached: to have a reserve currency confers on it's holder the "exorbitant privilege", which is rarely refused.

What would bring about such a "blowout"? Probably a political change in the international monetary system. At this point, emerging market economies like China are "sucking up" the low interest payments that they are receivers of as a result of suppressing their currencies to soak up demand from developed economies. At a certain point this will cease being attractive to them and they will be prompted to focus more on domestic consumption markets. Timing the change is the difficult part. It could happen in 2 years or in 10, or things could reverse in a less disruptive way.

One interesting thing is, though, that this change would to a large extent bring about the demand stimulus that OECD economies need right now. It's hard to say exactly whether the negative effects would outweigh the positive ones or vice versa.

 

[Integral]

Perhaps this demand shortage I keep hearing about is because everyone is up to their eyeballs in debt and can't possibly consume more?

I'd be satisfied if most people in this thread felt at least a little uneasy printing $1 trillion per year, but I get the feeling the opposite is the case. (ie want more printing )

I want more printing.

Inflation is running below the Fed's target and unemployment is running above the Fed's target. Both sides of the mandate are in agreement: it is time for expansionary monetary policy, and has been since 2008.

 

[Kaitzilla]

Curious.

Doesn't the fact that historic ultra low interest rates for 5 years in a row have resulted in Deleveraging the entire time indicate that consumers have hit a kind of fundamental debt limit?

That their appetite for going further into debt relative to their income has soured?

Once you are deeply in debt, even moderest interest payments can weigh you down. House underwater? Can't move to find a better job.
Get laid off and can't make a few interest payments? Bankruptcy.

Beeing deeply in debt makes you financially fragile. That money has to be paid back eventually, regardless of interest rates.



The fact that this banker thinks that trendline can go up forever and the deleveraging is over makes me wonder about our economy.

He probably thought that housing prices would never go down too.

**Edit**
I guess I can grudgingly concede that his call is early but will become true eventually.

 

[Monsterzuma]

@kait,

it's actually funny that people use the word "deleveraging" so lightly when it's clear than from the point of view of total debt, i.e. public + private, there is no such thing happening. The debt is being shifted around from private to public sector and there is no true reduction in aggregate.

interest payment wise there is some relief going on, but the question is how sustainable it is. How long do the Chinese keep tolerating negative real returns on their foreign exchange holdings. I doubt the answer is forever.

 

[Kaitzilla]

@kait,

it's actually funny that people use the word "deleveraging" so lightly when it's clear than from the point of view of total debt, i.e. public + private, there is no such thing happening. The debt is being shifted around from private to public sector and there is no true reduction in aggregate.

interest payment wise there is some relief going on, but the question is how sustainable it is. How long do the Chinese keep tolerating negative real returns on their foreign exchange holdings. I doubt the answer is forever.

Ah yes, total debt. Now we get to the heart of the matter.

Does it really matter what the Chinese do? The Fed can simply print more and buy up all those Treasuries if China tries to sell them.

We were already on the way out as the world's reserve currency with QE printing and that would just speed the process up a little until another system can get its act together.


Would you agree that the country is getting "poorer" when total debt growth is higher for a year than total gdp growth?

Looks to me like real growth stopped in the 1980 and we've been getting poorer each year since, but have covered it up by getting deeper and deeper into debt.

That would certainly explain why one worker could support a family back then while today 2 parents both working are barely able to make it.

Even more stimulus to hold that blue line above that red line is ultimately killing us. That is why I don't want more printing.

**Edit**
I suppose that chart could be read as investment opportunities drying up, interest rates going down, and debt increasing because it is less onerous, but now rates are near 0% aren't they? Can't really make debt more palpable than it currently is.

 

[Kaitzilla]

That gives me a thought.

Since money/credit creation stopped even at 0% interest rates, then QE was the next logical step towards forcing it to increase no matter what.

Does that mean our future is escalating QE money/credit creation into the big banks/governments?

I'd hardly expect those 2 sectors to increase GPD growth in any meaningful way. But they are amazing at running up debt loads. I guess regular people just aren't qualified to create bonds and sell them to the Fed. (At least not yet )

 

[Kaitzilla]

Oh what the heck.

Print nonstop, why not.

Buy Treasuries, MBS, Corporate debt, municipal debt, student loan debt.

Get on the phone, but up stocks in other countries, have them print and buy up stocks in yours.

Print, print, print and never slow down.

Whatever the next bubble is that pops, print and buy up the bad debt there too.

Time to stop fooling around. $1 trillion per year is not nearly enough!

 

[Monsterzuma]

Does it really matter what the Chinese do? The Fed can simply print more and buy up all those Treasuries if China tries to sell them.

they can only do that to the extent they are willing to tolerate the inflationary consequences this would have. if they want to maintain their current inflation target, they will not be able to do this. they would be forced to unwind QE and/or raise short term rates to curb inflation.

We were already on the way out as the world's reserve currency with QE printing and that would just speed the process up a little until another system can get its act together.

yes, I would argue that the main effect QE currently has is to communicate to emerging markets to stop insisting on export based growth and if they do insist, the US will just pocket some seigniorage from money printing at their expense.

Would you agree that the country is getting "poorer" when total debt growth is higher for a year than total gdp growth?

That's an excellent question to focus on, but I don't think the graph you posted addresses it properly. It is not the growth rate of credit that adds to GDP growth, it's the acceleration (growth of the rate of growth). If you want to know more about this I urge you to look into the views of Steve Keen. I think you'll find plenty of support with him for your hypothesis that economic growth since the 80s was not built on solid ground, though.

Oh what the heck.

Print nonstop, why not.

Buy Treasuries, MBS, Corporate debt, municipal debt, student loan debt.

Get on the phone, but up stocks in other countries, have them print and buy up stocks in yours.

Print, print, print and never slow down.

Whatever the next bubble is that pops, print and buy up the bad debt there too.

Time to stop fooling around. $1 trillion per year is not nearly enough!

My understanding is that they do this until emerging market governments start objecting to it, at which point they start catering more to domestic demand and the US gets its much awaited demand site stimulus via the foreign exchange market. The longer the Chinese sit back and wait, the more seigniorage the US gets to pocket. If the Chinese (et al.) wait forever, the US can basically get away with monetizing it's government debt. This happens pretty much automatically: profits made by the central bank are turned over to the treasury. So the more QE the central bank does, the more profits end up getting returned to the government. And this automatically confers a stimulus on the economy by lowering expectations of future tax rates (there's no strict need for increased govt spending for that reason).

 

[Kaitzilla]

... This happens pretty much automatically: profits made by the central bank are turned over to the treasury. So the more QE the central bank does, the more profits end up getting returned to the government. And this automatically confers a stimulus on the economy by lowering expectations of future tax rates (there's no strict need for increased govt spending for that reason).

Sounds like a free lunch to me. Something in that idea has to be wrong. Are we quietly robbing the world or something?

But thanks for the great post!

Not many people talk about this subject at all.

 

[Kaitzilla]

Oh LOL. Someone thinks they found proof of a mole leaking Fed decisions prematurely to the big banks from those transcripts. (Ultimate Insider Info )

http://www.zerohedge.com/news/2013-01-18/did-tim-geithner-leak-every-fed-announcement-banks


Must be nice to be a master of the universe.

**Edit**
That New York Times link went all nutty.
Here's another, just click on the transcript button on the right to read.
http://www.federalreserve.gov/monetarypolicy/fomchistorical2007.htm

At least now I know why the Fed waits 5 years before releasing full transcripts. Statute of Limitations have just about run out
http://money.cnn.com/2012/08/13/news/companies/financial-crisis-prosecution/index.htm

The system is perfectly delicious.

 

[Cutlass]

Perhaps this demand shortage I keep hearing about is because everyone is up to their eyeballs in debt and can't possibly consume more?

That's certainly a big part of it. But what does that tell you in terms of policy? We need inflation, low unemployment, and fiscal stimulus.

I'd be satisfied if most people in this thread felt at least a little uneasy printing $1 trillion per year, but I get the feeling the opposite is the case. (ie want more printing )

Why? It's not like it matters. Remember what I was telling you above: The Fed needs to change M such that it matches a growing PQ. If it fails to do so, then it forces PQ to decline. And having PQ decline would be the worst thing that could happen in this situation.

Remember what the drivers of the deficit are: The Bush tax cuts, the financial crisis, and the Wars. And the only one of those the government is willing to end is the wars.

Curious.

Doesn't the fact that historic ultra low interest rates for 5 years in a row have resulted in Deleveraging the entire time indicate that consumers have hit a kind of fundamental debt limit?

That their appetite for going further into debt relative to their income has soured?

Once you are deeply in debt, even moderest interest payments can weigh you down. House underwater? Can't move to find a better job.
Get laid off and can't make a few interest payments? Bankruptcy.

Beeing deeply in debt makes you financially fragile. That money has to be paid back eventually, regardless of interest rates.



The fact that this banker thinks that trendline can go up forever and the deleveraging is over makes me wonder about our economy.

He probably thought that housing prices would never go down too.

**Edit**
I guess I can grudgingly concede that his call is early but will become true eventually.

Low interest rates aren't primarily targeted at consumers. They are primarily targeted at businesses. Recall that interest rates are the cost of capital (money). Lower costs of capital encourages business investment.

Ah yes, total debt. Now we get to the heart of the matter.

Does it really matter what the Chinese do? The Fed can simply print more and buy up all those Treasuries if China tries to sell them.

We were already on the way out as the world's reserve currency with QE printing and that would just speed the process up a little until another system can get its act together.


Would you agree that the country is getting "poorer" when total debt growth is higher for a year than total gdp growth?

Looks to me like real growth stopped in the 1980 and we've been getting poorer each year since, but have covered it up by getting deeper and deeper into debt.

That would certainly explain why one worker could support a family back then while today 2 parents both working are barely able to make it.

Even more stimulus to hold that blue line above that red line is ultimately killing us. That is why I don't want more printing.

**Edit**
I suppose that chart could be read as investment opportunities drying up, interest rates going down, and debt increasing because it is less onerous, but now rates are near 0% aren't they? Can't really make debt more palpable than it currently is.

There's a fair amount of justice to that claim. The economy is not growing fast enough to repay the debt that is being taken out to make it grow? Why is that? Because not enough of the debt is going to capital investment and science to create new wealth. In short, Reaganomics. (Or Supply Side Economics, if you prefer).

 

[Kaitzilla]

...Low interest rates aren't primarily targeted at consumers. They are primarily targeted at businesses. Recall that interest rates are the cost of capital (money). Lower costs of capital encourages business investment...

I'm convinced businesses invest when they think there is a future.

This mountain of debt has killed that future off, and the government levering up is just promising big tax increases in the future.

What we need are bankruptcies and debt forgiveness. Businesses and banks will hem and haw, but will ultimately come around again, just like in Iceland.
http://www.bloomberg.com/news/2012-...ebt-relief-in-best-crisis-recovery-story.html

There's a fair amount of justice to that claim. The economy is not growing fast enough to repay the debt that is being taken out to make it grow? Why is that? Because not enough of the debt is going to capital investment and science to create new wealth. In short, Reaganomics. (Or Supply Side Economics, if you prefer).

I suppose Reaganomics can take some blame ya. It certainly kicked off a willingness to go into debt without any obvious payoff.

 

[Cutlass]

I'm convinced businesses invest when they think there is a future.

This mountain of debt has killed that future off, and the government levering up is just promising big tax increases in the future.

What we need are bankruptcies and debt forgiveness. Businesses and banks will hem and haw, but will ultimately come around again, just like in Iceland.
http://www.bloomberg.com/news/2012-...ebt-relief-in-best-crisis-recovery-story.html

Businesses invest when there are customers. But that said, the second criteria is cost of capital. And this again is why fiscal policy is the necessary policy.

Ultimately the problem is that we are not following Keynes.

Yes, the debt is a problem in the long run. But that has nothing to do with monetary policy. We cannot stop running a deficit now. What you need to understand is that we can not stop running deficits. It is not technically possible. Not under these circumstances. If we cut spending, we cut the economy, which cuts tax revenue, which causes more deficits.

 

[Kaitzilla]

...We cannot stop running a deficit now. What you need to understand is that we can not stop running deficits. It is not technically possible...

Heaven help us

 

[Hygro]

See, I barely even know how to parse most of those claims.

I'm not sure I know what a "40 year debt bubble" means.

I don't see the necessary link between "supply-side expansion" and "massive household debt."

"America is in the forefront of world economies and we are much better served by demand side policies." is a non-sequitur. A nation on the technological frontier needs to be consistently pushing that frontier, and I don't see the link between R&D and "demand side policies" except in a heuristic, ill-defined, "expectations of future demand drive current R&D spending" sense.

I'm hard on you because I know there are neurons firing in that brain of yours.



These claims, though, are slightly more sensible.

One very basic problem is that the Fed is paying interest on reserves, so it doesn't really matter where the money is injected - it will end up at a bank, which will then deposit it at the Fed.

I have less faith in fiscal policy than you, but reasonable people can and do disagree on that point.

We aren't exactly discussing the same things. I won't address most of this because that would take more attention than I'm emotionally invested in.

But supply side policy/régulation and asset bubbles are very closely linked, and I would say that supply side policies create asset bubbles when there's a lack of demand for there to be sufficient markets for increased investments. This necessarily leads to riskier investing (and trading), especially as profits are driven down as everything gets arbitraged to "equilibrium".

But it also increases "supplies demand for demand" (as all this extra money needs somewhere good to go), which could be solved by reliable things like wage growth accompanied by more leisure time. But that does of course limit the agency of capital as it loses dominance. So instead brilliant entrepreneurs and "intrapreneurs" create new markets to create untapped demand. This untapped new demand has mostly come in the form of household debt. (Some others have been funded via advertising (where the customer is the product)). This is a historical correlation or causation, not one that, as far as I can see, is some sort of economic axiom.

When consumers are at their limit, but there's tons of capital sitting around, that capital will find its way into speculative bets that household debt financed demand will grow and create new markets, or it will invest in profitable ventures that will simply knock off old ventures, an often zero-sum economic game with transaction costs if the new product or technology doesn't change the structure of the economy.

That's just mad broken.

It's perversely somewhat analogous to a Keynsenian description of full employment: there's no more investment. Except it's not full employment, it's full debt tapping. And it's not no investment, its investment into a false liquidity preference that is solidified, so to speak, by speculating that there will be new sources of debt.


Fiscal policy, like monetary policy, is ultimately the creation and destruction of money. Both have their advantages. It's just a lot more convenient to change a number in an excel document to stimulate the economy than to have a bureaucracy hire people.

Perhaps this demand shortage I keep hearing about is because everyone is up to their eyeballs in debt and can't possibly consume more?

I'd be satisfied if most people in this thread felt at least a little uneasy printing $1 trillion per year, but I get the feeling the opposite is the case. (ie want more printing )

The world consumes and creates more energy, the world needs more dollars to represent it.

But yes, that is the demand shortage in a way. We have had no meaningful wage growth, but have had massive increases in aggregate demand due to household debt. Credit cards, sure, but mortgages and refinancing of homes during a decades-long housing bubble basically made households behave as though wages were going up. Pop goes the bubble, and the easy access to credit, and pop goes the demand.

Fix the demand shortage? Increase wages. Increase pensions. Increase welfare. Fund projects. Increase public service. You do this until you reach full employment, which probably takes more employment than our theoretical level of full employment (during WW2 we saw it go down to what, 2%?)

Household debt and government debt is not the same. It's a shame we even use the same word.

Heaven help us

I think the reason people get upset by this concept is because of the emotional charge of the terminology. Another way we could put this is "The government keeps commerce alive by making sure that the physical energy used to create our economy and material living doesn't dry up in a liquid-free deflation death trap as the dollars stop flowing". The only reason to run a surplus is when the economy is doing so well that you are literally trying to destroy parts of the private sector. Kind of like raising interest rates.

Now that's some radical stuff right there.

 

[Cutlass]

But supply side policy/régulation and asset bubbles are very closely linked, and I would say that supply side policies create asset bubbles when there's a lack of demand for there to be sufficient markets for increased investments. This necessarily leads to riskier investing (and trading), especially as profits are driven down as everything gets arbitraged to "equilibrium".

But it also increases "supplies demand for demand" (as all this extra money needs somewhere good to go), which could be solved by reliable things like wage growth accompanied by more leisure time. But that does of course limit the agency of capital as it loses dominance. So instead brilliant entrepreneurs and "intrapreneurs" create new markets to create untapped demand. This untapped new demand has mostly come in the form of household debt. (Some others have been funded via advertising (where the customer is the product)). This is a historical correlation or causation, not one that, as far as I can see, is some sort of economic axiom.

When consumers are at their limit, but there's tons of capital sitting around, that capital will find its way into speculative bets that household debt financed demand will grow and create new markets, or it will invest in profitable ventures that will simply knock off old ventures, an often zero-sum economic game with transaction costs if the new product or technology doesn't change the structure of the economy.

That's just mad broken.

It's perversely somewhat analogous to a Keynsenian description of full employment: there's no more investment. Except it's not full employment, it's full debt tapping. And it's not no investment, its investment into a false liquidity preference that is solidified, so to speak, by speculating that there will be new sources of debt.

I've had this discussion with Inty a couple of times. And haven't gotten a satisfactory answer (to this either )

Essentially the stock argument is that Savings = Investment. Except what if it doesn't? S=I is an accounting identity that is essentially unquestioned in economics, and to be fair it normally holds. Except that if S=I holds, then there is no explanation for bubbles. And yet we know that bubbles are real. And the only way to have a bubble is for S=/=I!