Interest rates are set by the Fed. If it says they’ll be low, low they will be.
Inflation can be squelched by the simple measure of raising taxes. Or cutting spending.
What are “future dollars”?
The only rate the fed sets directly is the fed funds rate which is only for overnight loans, or possibly extremely short duration loans. So their immediate influence tends to be focused fairly tightly on the short end of the yield curve.
It is of course possible for them to influence rates further out as they are doing now, but that has involved buying quite literally hundreds of billions in 10 to 30 year treasury and mortgage bonds - not something they are normally inclined to do.
I have a friend who thinks it is a big government conspiracy behind them not printing money to cover the debt. I have tried to explain to him about inflation and why you can;t just do that, but he keeps going back to the fact that there is no gold standard, so in his mind, all money has no real value.
He also believes in the 9/11 conspiracy.
I’m not sure if I should mention this again for fear of sounding . . . well, IDK. But, you should tell your friend that to some extent they’ve already stolen his idea. I’ve linked to a chart of the monetary base of the US a couple times in this thread. That’s just one of the components of what is generically referred to as “the money supply.” That was about $800B before the crisis in 2008. It’s now $2,800B - no that’s not a typo.
So why don’t we have inflation? A lot of people in the business community were asking that very question for quite awhile, but as one commentator put, most business leaders know just enough about economics to be dangerous. They were convinced that the US was becoming the ghost of the Wiemar Republic. And even the fed thought there was a more than decent chance of that and had to come up with contingency plans.
But the fact of the matter is that all of that money is in excess reserves. That’s money that member banks (members of the fed reserve system) keep at the fed that’s over and above what they’re reserve requirements are. Why would they do that? There are several reasons, and I won’t bore you - they just do, at least for now.
So from the point of view of the economy, is just the same as if that money doesn’t exist. What makes excess reserves dangerous is the our fractional reserve banking system. That means that a dollar spent today becomes almost $2 dollars in the not too distant future and that it continues to multiply in a way that makes rabbits look chaste.
But as of RIGHT NOW, that’s not an issue - yet. So you have a situation where technically the inflation hawks are half right but yet the fed is also half right - which means virtually everyone feels a bit uneasy.
Whatever Paul Krugman says is true. We can bet our economy on it.
Seems like when things are so bad you’re printing a 1 Hundred Trillion note you just hang it up and say, “OK, new currency.” and shut down the presses. You’re at that point in the monopoly game where you own Baltic Ave and have a $5 bill, and your opponent has everything else and drawing up IOUs from the empty bank. Quit already.
What’s his track record over the past few years compared to the track record of the people who are predicting the economy’s collapse?
Isn’t the answer obvious? The economic collapse is coming. Just wait… And no, it is impossible to provide a falsifiable hypothesis of when the collapse will come. Because doomsday economics isn’t about “predictions” and “analysis,” silly!
As much fun as it is to joke about that, so many people listened and really, still ARE listening to the prophets of doom.
The ones who actually made or held on to their money during the crash though, didn’t do well in the long run since they invested based on their beliefs and their “thesis” rather that what was right in front of them. So many blew up their trading accts - if their bitter rantings on various forums were to be even partly believed.
Obviously they have to take ultimate responsibility, but no one REALLY understands what’s going on at any given moment, so I do understand how you would WANT to believe someone else has all of the answers.
Get back to me on your theory of how much control the Fed has when demand for Treasuries drops so low (because we’ve over-borrowed and mistrust arises about whether or not we will repay our debt with non-devalued dollars) that they go unsold. It is very difficult to sell Treasuries at low interest rates if general inflation is running amok.
It’s not clear to me (and especially given the current “fiscal cliff” kerfuffle) that raising taxes or cutting spending is particularly simple.
“Future dollars” in the context I used it means dollars coming from future revenue as opposed to dollars paid out of current revenue.
Well good news then!
On with the borrowing! Why the heck anyone would want to not borrow is now beyond me after reading Paul’s explanation of my panic prone-ness.
Great! Finally a sensible and true statement!
Seriously, unlimited borrowing is not good, nor is the wrong amount of borrowing under the wrong conditions. Some borrowing is good under most conditions, though. It’s been my experience that people who want the government to balance its budget also want it to run like a business. But any good business runs under the principle of always using somebody else’s money, i.e. borrowing, to finance anything. As long as the business has high assurance that it can repay its loans, this is standard practice. All business run debt. Taken-seriously-by-some presidential candidate Donald Trump makes his entire living by running up huge amounts of debt.
What’s good for businesses in moderation is also good for government in moderation. That’s about as far as the analogy stretches. In this particular case, moderate amounts of debt are fine. And the entire world financial system tells us every day that it’s fine by buying our bonds at ridiculously low rates. Our annual deficit has gone down every year since Bush’s meltdown and it will be much lower in the future. Even a modestly improved economy will generate enough new billions in taxes to reduce the deficit significantly. Some of the fiscal deals that will be coming, like it or not, will further reduce the deficit. A Clinton-era balanced surplus is not impossible a few years down the line. At least it is orders of magnitude more likely than an economic collapse because of debt.
Chief Pedant, you seem to be operating under the assumption that we will transition from “can easily sell bonds at a trivially low interest rate”, where we are now, to “can’t sell any bonds at all at anything resembling a reasonable rate”, where further borrowing would be impossible, so quickly that we would not have a chance to adjust to the changing situation. What is the basis for this assumption, as opposed to the alternative assumption that it will be gradual?
Well, during the immediate post WWII Hungarian hyperinflation, a single postage stamp cost as much as 500,000 billion pengo (with the pengo the Hungarian unit of currency), i.e. 500 trillion pengo.
There’s only one reason banks have excess reserves - which is that they don’t have any choice in the matter. Commercial bank reserves are whatever the Fed decides they are. Commercial banks can swap them back and forth, but they can’t make them disappear. Commercial bank lending doesn’t reduce the amount of reserves. It only creates new liabilities on commercial banks.
Meanwhile, commercial banks can lend only what people are prepared to borrow. If people don’t borrow, commercial bank deposits won’t increase.
Definition of “excess reserves” from Investopedia:
Emphasis added.
Government spending on public goods can itself be considered a form of “investment”. This seems to be what they’re talking about
For example, good infrastructure facilitates commerce. An investment in quality infrastructure projects will thus have a “rate of return”, in the sense that it will lead to stronger economic performance. That this rate of return cannot be easily measured isn’t really relevant. The rate of return exists, and with low interest rates, marginal government projects (whatever they are) have high a higher likelihood of being worthwhile.
While it’s true that this isn’t investment in its strictest sense, buying Treasuries at auction is also not investment in its strictest macroeconomic sense. Words have many meanings. The word “investment” has at least different three technical meanings in common use among different sorts of professionals.
This is technically true. But this doesn’t strike me as a helpful comment.
You can claim no one REALLY understands the world. Well okay. We have limited human brains, and so it will always be the case that certain aspects of the vast world are simply beyond us. That doesn’t mean, however, that our real knowledge is zero. We have the ability to learn certain limited things.
Some people use this limited human ability to understand certain limited aspects of macroeconomic policy. They don’t make statements of absolute knowledge, not if they’re smart. Someone like Krugman certainty doesn’t. When it comes to topics he might be wrong about, he admits that he might be wrong. Even when he’s talking about his very favorite New Keynesian models, he admits that those models could be in error. (He doesn’t write these qualifications in every blog post or newspaper column, so a casual reader might miss them.)
When we have limited knowledge, we need to act based on that limited knowledge rather than acting as if we still persist in total ignorance. And in that case, we need to act on the recommendations of the people who have the most robust evidence to support their limited knowledge. So yes, looking at the track record of economic commentators is a useful and relevant criterion for determining who we should listen to. Notice that neither Exapno Mapcase nor Ravenman stated any views with absolute certainty. They pointed out (or implied in a joke) that some groups have had evidence supporting their claims, and a reasonably good track record so far, while they dismissed the people who preach perpetual doomsday, as if every single month is the end of the Mayan calendar.
So no, there’s no person who is REALLY correct on everything. But that doesn’t matter. Chronos’s question is still absolutely, 100% on target. If someone has a picture in their minds that bonds are going to go from having negative real interest rates, as they have now, to losing value so sharply and so quickly that the government will not be able to compensate, then that belief should, by even the barest minimum of standards, be based on some model of the economy. Factual answers are truly tough in this field, sure, but if the doomsayers believe in the factual reality of their prognostications, they should have a consistent and compelling picture of how doomsday should come about, step by step.
Citing historical parallels that aren’t even parallel is not going to cut it. Zimbabwe is a poor country without any tradition of stable governance. Weimar Germany was a postwar state dealing with onerous international reparations denominated in gold, which led them to pay their own citizens in paper. In stark contrast, US government liabilities are still denominated in dollars, in our own currency. How many historical situations were like that? All the hyperinflations I know went from cumbersome interest rate levels, to even more cumbersome levels, to unsustainable levels. I can’t think of a single example that went from negative real rates to wheelbarrows full of banknotes, with no intermediate steps.
One might reasonably think that any story that leads our country down the trip to hyperinflation would have to include what might happen along that road when foreign central banks decide it’s no longer a good idea to use dollars as a reserve currency. How would the whole world shift on that decision at one time? What would it look like? What would they do instead? How would they shift from buying up Treasuries (as they continue to do) and move toward dumping Treasuries overnight? How would that even work? What set of circumstances would lead to that? Such a loss of confidence would have a lot of effects on the world stage, and not only do I see no plausible answers to any of those questions, I don’t see the doomsayers even making the slightest attempt. Meanwhile, I look at the evidence. Right now, they’re lending the US government 100 dollars and are expecting to be paid back 99 dollars a year from now (in real terms). That’s the very opposite of panic. Panic is possible, sure, but it’d be nice to have some notion of how it might work, based on the evidence we see in front of us today.
People like me have a model we can point to, showing why the debt is not a problem at this time. The model could be wrong, but at least it’s a model. I don’t see any such thing from the doomsayers. All I see is a prejudicial fear, a preconceived notion with a series of post hoc rationalizations offered in support of that preconceived notion… with said rationalizations, at the end of the day, not even being consistent with one another. Rather than giving up their preconceived notion, they just seem to continually change the arguments in favor of their fixed and unchangeable conclusion. I mean, really. A proper theory at the very least should be internally consistent.
Even though we’re not perfectly knowledgeable, we should still follow the best supported ideas available. And yes, it’s pretty clear listening to these sorts of discussions which side has the evidence backing them, and which side doesn’t. That’s not a guarantee of correctness, but we’ll never have any such guarantees. We go with what we have.
It has nothing to do with what’s required by regulators - that’s just how the financial system works. Reserves are liabilities of the Fed. They continue to exist until the Fed reclaims them. Only the Fed can create liabilities on itself, and only the Fed can redeem them. Commercial bank lending cannot change the Fed’s balance sheet by $1.
It seems to me that you didn’t follow the entire discussion. As I pointed out a couple of times the nature of the ‘investments’ in questions were ones on which people buying treasuries would make a risk/reward decision. Investors do not consider any of the things you mention in buying treasuries. If have cites to prove otherwise please share them.
That’s technically true however my comments were obviously limited to economic understanding and you seem to agree with me so I’m not sure what the issue is.
Of course there are different schools of thought, all wrong in an absolute sense most likely. That’s why science has to be empirical in nature rather than deductive. You hypothesize, observe and refine your hypothesis. However when it comes to economic issues, passions seem to become unduly inflamed.
No, “excess reserves” is what is known as a term of art. It is a component of the money supply. Please go the wiki entry and search on it. It is included in the monetary base (MB).