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No, I keep correctly stating the case by doing research, and citing historical and empirical evidence which takes a lot of work. Its much easier to appear intelligent with skepticism and make certain that no statement can be falsified. If I were you , I would do the same. Read their palms and tell them its buried near the water.
Though I am afraid we will disagree on Volcker. I am in a small minority camp that believes he helped cause it with cost push inflation. The problem with "high interest rates" are all the bond holders drawing say, 20%. In the aggregate its a placebo effect because high interest creates bond cash flows to those who own them. Same reason why the low rates do little. The bond market sucks today so lots of people feel poor. High Treasury yields and high CD rates make a certain class of people feel rich.
Basically the economic model I adhere to sees little difference between increasing or decreasing interest rates in the aggregate. It shifts bias away from fixed income to equity but the whole remains the same. I also use a model that sees little difference between Treasuries and cash. I consider them both money. Thus the government prints money with deficits and destroys it with a surplus. Next time the government runs a surplus, I'd sell into it unless bank credit is going bananas.
What stopped inflation was the new oil supplies.
To stop inflation dead in its tracks, just raise taxes....bang! dead in no time.
Please continue with your symphony of words in describing Federal fiddlin'!
Though I am afraid we will disagree on Volcker. I am in a small minority camp that believes he helped cause it with cost push inflation.
Volcker severely overshot the mark, but Reagan was gangbusters for wringing inflation out of the economy, so full speed ahead. Unforunately, he priced whole industries that were in dire need of modernization completely out of credit markets and basically turned our northeast industrial base into the Rust Belt with one wave of his little magic wand. What resulted was the worst economic collapse since the Great Depression, with unemployment above 10% for ten straight months. There was one such month in the more recent Great Recession.
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Originally Posted by gwynedd1
The problem with "high interest rates" are all the bond holders drawing say, 20%.
The problem with such high rates is that there are very few uses for money that will net that high a return, so nobody borrows anything or does anything. That stagnation is what kills economies. With the scarcity of notes, comparatively few investors were actually able to earn such returns, and all longer-term notes at such rates came with call provisions that were of course exercised as soon as rates began to fall.
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Originally Posted by gwynedd1
What stopped inflation was the new oil supplies.
What stopped inflation was a relative cessation of economic activity. Which undercut the demand and price for oil, in response to which OPEC cut production.
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Originally Posted by gwynedd1
To stop inflation dead in its tracks, just raise taxes....bang! dead in no time.
Taxes are one way to pull money out of an economy. There are other ways as well.
Volcker severely overshot the mark, but Reagan was gangbusters for wringing inflation out of the economy, so full speed ahead. Unforunately, he priced whole industries that were in dire need of modernization completely out of credit markets and basically turned our northeast industrial base into the Rust Belt with one wave of his little magic wand. What resulted was the worst economic collapse since the Great Depression, with unemployment above 10% for ten straight months. There was one such month in the more recent Great Recession.
I don't see that interest rates matter nearly that much. A true high return compensates the risk with upside. Same reason why low rates would do in industries with little credit worthiness because there is no upside. High rates often go with loose money for this reason. A lot depends on credit worthiness, more than I think the nominal interest rate. Sub prime could not get any money with low rates. So if the rust belt had bad credit, same problem. I don't think banks were loaning to high risk assets in 2008 even if bad credit would love to borrow it. It was difficult for many people to even refinance.
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The problem with such high rates is that there are very few uses for money that will net that high a return, so nobody borrows anything or does anything. That stagnation is what kills economies. With the scarcity of notes, comparatively few investors were actually able to earn such returns, and all longer-term notes at such rates came with call provisions that were of course exercised as soon as rates began to fall.
That is back to the one side of the equation . Why not talk about the gobs of money people were making with bond income? As a resident of Illinois, how did the tax hike in this state to cover pensions losing fixed income returns stimulate anything?
According to state law, all Illinois police and fire pension funds must be 90 percent funded by 2040. Huhn said the town works under the assumption that its two pension funds will be 100 percent funded by that time.
But, he said, because the invested money is getting such a low rate of return, the town will have to contribute more each year or lower its expectations. The town uses property tax income to fund pensions.
Again, hardly unalloyed.
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What stopped inflation was a relative cessation of economic activity. Which undercut the demand and price for oil, in response to which OPEC cut production.
As well as the supply of oil. Isn't that what started it? That is when the North Sea, Alaska, and Norway came on line. Russia also joined the party.
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Taxes are one way to pull money out of an economy. There are other ways as well.
That is by far, IMHO, the most direct and unalloyed influence. Given credit worthiness standards, appetite for debt, available equity to take on debt , and the offsetting loss of interest income, I find interest rates too murky.
I don't see that interest rates matter nearly that much. A true high return compensates the risk with upside.
There IS nothing with a 20% upside. If it costs 20% to borrow, you are effectively left with nothing that it is worth borrowing to undertake. And the funds on hand that might have gone to a project thought to return 12% go away in order to chase after 20%. Nobody borrows at 20%. Nothing gets done. Economies collapse.
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Originally Posted by gwynedd1
Same reason why low rates would do in industries with little credit worthiness because there is no upside.
It has nothing to do with creditworthiness. Interest rates are an effective throttle for economic activity because they either expand or contract the range of projects that will be financed and undertaken. If a project will return 8% over time, people will borrow to finance it at 8% or below. If a project will return 5% over time, people will NOT borrow to finance it at 8%. They would change their minds however if rates were to fall to 5% or below.
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Originally Posted by gwynedd1
High rates often go with loose money for this reason.
High rates are associated with tight money. Low rates are associated with loose money.
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Originally Posted by gwynedd1
Sub prime could not get any money with low rates.
Subprime was having money thrown at it hand over fist with low rates, and they still were even as rates began to rise. The crooks involved knew early on that none of this stuff was going to be repaid, but they didn't care. They were still making their fat-cat profits and bonuses so they kept at it. So much for markets being wise enough to regulate themselves, Alan.
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Originally Posted by gwynedd1
So if the rust belt had bad credit, same problem.
Volcker killed credit markets just at the time when the northeast manufacturing belt needed access to credit in order to modrnize and compete with newer facilities emerging in Europe and Asia. Those companies and millions upon millions of jobs died at Volcker's hand with millions of retirees and widows of retirees simply left holding the bag.
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Originally Posted by gwynedd1
I don't think banks were loaning to high risk assets in 2008 even if bad credit would love to borrow it. It was difficult for many people to even refinance.
You are confusing the two sides of the Grand Canyon. The housing market peaked in early 2006 as the Fed completed its two-year ramp-up of the federal funds rate. Already long foreseen, the credit crisis finally hit in the summer of 2007. Asset markets crashed by the Fall of 2008. It was then difficult for people to refinance a mortgage because the new value of their homes was less than the old value of their mortgages.
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Originally Posted by gwynedd1
That is back to the one side of the equation . Why not talk about the gobs of money people were making with bond income?
There were very few notes in existence at 20%. Very few people were making these gobs of money, and the opportunity to do so was short-lived to boot.
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Originally Posted by gwynedd1
As a resident of Illinois, how did the tax hike in this state to cover pensions losing fixed income returns stimulate anything?
Was this sold as stimulus? I hardly think so. Perhaps as a fiscal necessity or some such. This is the sort of stuff that the direct aid to state budgets included in ARRA was designed to ward off at that time.
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Originally Posted by gwynedd1
As well as the supply of oil. Isn't that what started it? That is when the North Sea, Alaska, and Norway came on line. Russia also joined the party.
The Islamic Revolution in Iran cut into their production levels, but world supplies were not much affected. Gas lines in the US in 1973-74 were because gas was in short supply for various reasons. Gas lines in the US in 1979-80 were because people feared it was going to be 1973-74 all over again and began to hoard the stuff. There never was a supply shortage in 1979-80. And in his fealty to Reagan's wishes, Volcker promptly caused the worst economic collapse since the Great Depression. Demand fell and prices fell. To points that made new and more expensive supplies unprofitable, especially after the Saudis began dumping cheap oil into the market left and right. But that made being a part of OPEC unprofitable and the memory of OPEC as a cartel just slowly faded away. This is mid-1980's and later however.
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Originally Posted by gwynedd1
That is by far, IMHO, the most direct and unalloyed influence. Given credit worthiness standards, appetite for debt, available equity to take on debt , and the offsetting loss of interest income, I find interest rates too murky.
Not murky at all. Monetary policy is based on interest rates. Fiscal policy is based on taxes and spending. But you have a bunch of nutcase politicians involved in taxes and spending. Kind of complicates things. The election of 2010 resulted in a mini-recession in 2011-I as Republicans took control of the House. That left the Fed to go it alone on supporting this recovery thing.
Did you learn anything from the experience? There is no substantive fear of inflation to be had here. It will not happen. The Fed can literally flip a switch and shrink away all those excess reserves that banks and others are sitting on in the unlikely event that such an action would become warranted. It is much easier to rein in an economy than it is to get one to run. Ask Paul Volcker about the early 1980's.
In the first place we should by all measures be in a world wide deflationary environment given the current circumstances. The fact that we are instead in an inflationary environment despite high unemployment and poor wages is proof of the inflationary impact of the massive credit creation.
Secondly the US government could not survive the increase in interest rates that will result from trying to reign in inflation.
Obviously you did not live through the early 80's. If you think 18% interest rates are as easy as flipping a switch you are delusional. The kind in interest rates it takes to offset the fear of inflation are devastating to the economy, business, and markets.
Furthermore the 80's were a period of much stronger employment than we currently have, to enact those kind of draconian measures today would have much worse results.
The only reasonable choice the government has to deal with their runaway debt is to pay it down using wealth confiscation from the people.
There IS nothing with a 20% upside. If it costs 20% to borrow, you are effectively left with nothing that it is worth borrowing to undertake. And the funds on hand that might have gone to a project thought to return 12% go away in order to chase after 20%. Nobody borrows at 20%. Nothing gets done. Economies collapse.
Everyone who borrowed did so at 20% at least back in the early 80s.
It has everything to do with credit worthiness. If nominal rates are 5% and 40% of the population is "worthy to borrow" then rates at 10% with 70% worthy to borrow implies a lot more borrowing to me because, as usual, I am referring to actual events.
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Interest rates are an effective throttle for economic activity because they either expand or contract the range of projects that will be financed and undertaken. If a project will return 8% over time, people will borrow to finance it at 8% or below. If a project will return 5% over time, people will NOT borrow to finance it at 8%. They would change their minds however if rates were to fall to 5% or below.
Its all very logical if you believe in the assumption. Same with supply and demand, which is another assumption that is in all the text books with no real empirical, historical, or observable basis. Tulips rose in price, and yet, people kept buying more...High rates cause people to borrow money faster so they can chase rising prices.
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High rates are associated with tight money. Low rates are associated with loose money.
I guess it just me then...
The Japanese bank has supposedly had, until very recently, a zero interest rate policy. Yet that zero interest rate policy was evidence of an extremely tight monetary policy.
Milton Friedman
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Subprime was having money thrown at it hand over fist with low rates, and they still were even as rates began to rise. The crooks involved knew early on that none of this stuff was going to be repaid, but they didn't care. They were still making their fat-cat profits and bonuses so they kept at it. So much for markets being wise enough to regulate themselves, Alan.
Rates were even lower after the sub prime debacle and yet money was consider tight? What constitutes more of a liability? 50 free, $5 meals or 1000 meals subsidized by $1? Low rates when fewer people qualify is the same thing.
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Volcker killed credit markets just at the time when the northeast manufacturing belt needed access to credit in order to modrnize and compete with newer facilities emerging in Europe and Asia. Those companies and millions upon millions of jobs died at Volcker's hand with millions of retirees and widows of retirees simply left holding the bag.
Yes I have heard it a thousand times. Thought I said I disagreed with it. Volcker also added to the cost of finance which caused lots of cost push inflation. Again, not unalloyed.
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You are confusing the two sides of the Grand Canyon. The housing market peaked in early 2006 as the Fed completed its two-year ramp-up of the federal funds rate. Already long foreseen, the credit crisis finally hit in the summer of 2007. Asset markets crashed by the Fall of 2008. It was then difficult for people to refinance a mortgage because the new value of their homes was less than the old value of their mortgages.
But the rates were low. So now we we are back to credit worthiness again. Even people with equity had trouble getting money because even banks could not trust their own credit worthiness. They would not lend even to each other.
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There were very few notes in existence at 20%. Very few people were making these gobs of money, and the opportunity to do so was short-lived to boot.
Lots of people were making gobs of bond money for years. It was the biggest bond bull market in history. It reached 20% but people were picking up double digit bond yields for years which kept rising in value as rates fell.
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Was this sold as stimulus? I hardly think so. Perhaps as a fiscal necessity or some such. This is the sort of stuff that the direct aid to state budgets included in ARRA was designed to ward off at that time.
They keep selling "low rates" as a stimulus. After years of watching it not stimulate, you would think people would begin to question it. My taxes were raised because of the "low rate" stimulus. All I am doing is telling you what happened. Pension funds fell short due to low yields and now they raised taxes. What do you want me to do? pretend the books that say low rates are easy money are right?
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The Islamic Revolution in Iran cut into their production levels, but world supplies were not much affected. Gas lines in the US in 1973-74 were because gas was in short supply for various reasons. Gas lines in the US in 1979-80 were because people feared it was going to be 1973-74 all over again and began to hoard the stuff. There never was a supply shortage in 1979-80. And in his fealty to Reagan's wishes, Volcker promptly caused the worst economic collapse since the Great Depression. Demand fell and prices fell. To points that made new and more expensive supplies unprofitable, especially after the Saudis began dumping cheap oil into the market left and right. But that made being a part of OPEC unprofitable and the memory of OPEC as a cartel just slowly faded away. This is mid-1980's and later however.
Its the amount of supply that matters. One can only hoard so much of a real commodity like oil until it his the point where it must be dumped. Anyone with a garden and canning equipment knows that demand can be saturated while hoarding capacity remains unsaturated. That is when the caner fires up. Then when there are no more cans , look for a bag of squash on the door step from friendly neighbors who will can no more.
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Not murky at all. Monetary policy is based on interest rates. Fiscal policy is based on taxes and spending. But you have a bunch of nutcase politicians involved in taxes and spending. Kind of complicates things. The election of 2010 resulted in a mini-recession in 2011-I as Republicans took control of the House. That left the Fed to go it alone on supporting this recovery thing.
Ok then, i'll jut go spend that money that the state taxed away from me due to low fixed income rates. I'll also pass that on to Bill Gross if I see him . Maybe I'll even spend that 75 cents a month my money market is earning.
Makes me glad I was mostly in equity with the except of junk bonds. Problem is I know a lot of people who were going to spend their fixed income returns aren't. That is to say , little growth n the effective money supply. But this myth , I am sure , will never die.
In the first place we should by all measures be in a world wide deflationary environment given the current circumstances. The fact that we are instead in an inflationary environment despite high unemployment and poor wages is proof of the inflationary impact of the massive credit creation.
Your characterizations of the current environment are highly suspect.
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Originally Posted by jimhcom
Secondly the US government could not survive the increase in interest rates that will result from trying to reign in inflation.
There being virtually no inflation at the present time, this is currently not a concern. The suggestion is made however that the large run-up in the monetary base (as opposed to the money supply) could pose inflationary problems at some point. But all those excess reserves can be tuned into not excess reserves at the stroke of a pen.
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Originally Posted by jimhcom
Obviously you did not live through the early 80's.
Obviously you would have no clue at all as to that, which is how you managed to get it so completely wrong.
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Originally Posted by jimhcom
If you think 18% interest rates are as easy as flipping a switch you are delusional. The kind in interest rates it takes to offset the fear of inflation are devastating to the economy, business, and markets.
Yada, yada, yada. Tell it to the freepers, zero-hedgers, and other tin-foil hatters. Consensus inflation projections for 2014 are below 2%. Long-term is barely above 2%.
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Originally Posted by jimhcom
Furthermore the 80's were a period of much stronger employment than we currently have...
Well except for the 44 of 48 months in Reagan's first term when the unemployment rate was higher than it is today. Didn't get below the 7.0% mark until late 1986.
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Originally Posted by jimhcom
The only reasonable choice the government has to deal with their runaway debt is to pay it down using wealth confiscation from the people.
Why on earth would the government want to pay down the debt? There were reasons why all those who hold our debt purchased it to begin with. Those reasons still apply. These people do not want to sell their debt holdings. When these securities mature, the great majority of them simply rolls a maturing note over into a brand new one. We are having exactly no problems servicing the debt we have. There is nothing to justify your oddball fears.
Everyone who borrowed did so at 20% at least back in the early 80s.
And "everyone" was basically "nobody". Rational people do not pay 20% interest to finance a project or investment that will return 12%.
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Originally Posted by gwynedd1
It has everything to do with credit worthiness. If nominal rates are 5% and 40% of the population is "worthy to borrow" then rates at 10% with 70% worthy to borrow implies a lot more borrowing to me because, as usual, I am referring to actual events.
You are talking about worthless hypotheticals. Volcker slammed the door to credit markets shut, period. He didn't care how creditworthy anyone was. He was turning off the faucet. Caused the greatest economic collapse since the Great Depression.
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Originally Posted by gwynedd1
Its all very logical if you believe in the assumption. Same with supply and demand, which is another assumption that is in all the text books with no real empirical, historical, or observable basis.
Uh-huh. And you claim not to be a total nutcase?
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Originally Posted by gwynedd1
I guess it just me then...
Yup, it's just you. Carry on while I go get more sand for your sandbox.
And "everyone" was basically "nobody". Rational people do not pay 20% interest to finance a project or investment that will return 12%.
Except that they did pay 20% and didn't collect only 20%. You must have missed the prime rate I posted. Wonder why it kept going up? I mean why didn't 19% do the trick?
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You are talking about worthless hypotheticals. Volcker slammed the door to credit markets shut, period. He didn't care how creditworthy anyone was. He was turning off the faucet. Caused the greatest economic collapse since the Great Depression.
You are stating the wildly circulated cliche` dot dot dot
And uh, you are giving me all the theory. What about that Illinois tax hike I mentioned? What about Japan? Your accusation crosses over from straw man to lying. You keep telling me the theory of nominal interest rates which is the first sign of people who cannot understand economics. Its like those old commercials on radio that said to invest in fuel oil cause winter is coming. Think maybe people factor it in just like in nominal rates. I stated the facts and cited my sources.
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Uh-huh. And you claim not to be a total nutcase?
Nice argument and so original. Perhaps you are a bag of ergot infested grain.
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Yup, it's just you. Carry on while I go get more sand for your sandbox.
Yep, that comes in grains too. You'll find it in the gizzard of the crow you'll be dining on.
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