RT @CNBCnow: BREAKING: Federal Reserve announces major policy shift, saying that it is willing to allow inflation to run hotter than normal in order to support the labor market and broader economy.
I'm a bit late to the party here but I'm commenting because it looks like nobody is quite as cynical as I am.
This announcement provides great cover for the Fed to screw up. If inflation overshoots 2% for a long period they can now just point to this as being policy. It also allows them to keep printing right now which pleases the current administration.
This doesn't seem like it's based in sound economics, rather it's based in CYA.
I called this awhile ago. My theory is they're going to try and go full post-ww2 and intentionally let inflation climb to essentially devalue the debt from this stimulus (and pre-existing).
The fed will sit on this 0% rate for as long as possible, inflation will rise, fixed liabilities will comparatively decrease, 20 years down the line the debt will be small enough that its much easier to chew through.
Downside to this is since currency is devaluing, bond yields are garbage, interest rates are garbage, all the institutional money looking to park cash are going to be looking at other assets like public/private equity and real estate.
So the national debts gonna go bye bye, but your kids will find property to be even morr unattainable.
This is a long time coming honestly. #Never4get that it was the Jimmy Carter supported Volker recession that gutted the labor and consumer rights movement and handed the 1980 election to Reagan setting the stage for hell world.
Fiscal stimulus is preferable since it’s less conducive to speculation and bubbles but this is a good step in acknowledging we can accept some inflation
The 70s conventionally gets a bad rap for the high inflation, which is true but the living standards and standards we held the government and companies to was so high back then. Like it would seem like communism to us now
Inflation like I said was a problem and maybe there were some necessary rate hikes that had to take place but not the 20% or whatever monstrous shit volker did. I haven’t really read up on how to slow/prevent inflation aside from rate increases and gutting unions
The purpose of higher inflation is to get the economy going again...which is really tough in the current environment. The only way we're getting higher inflation is if lending is stimulated even more. Meaning, even lower rates and loosening of the lending standards... similar to what it was in 2007/2008...and we all know how that ended. The only problem is that today the unemployment is really high and the future is uncertain so not many people will go out to get a loan regardless of the lending standards. So the Fed can say anything they want but they can't do much right now.
So, the Federal Reserve will be letting inflation go above 2% so that it would average out to 2% over an unspecified period of time (the "flexible" part). They also claim that they are going to be looking at the unemployment rate among low-income individuals specifically in the future, although I am going to guess that many here will doubt that. At least some other articles are complaining that this change in policy will increase the power of labor compared to shareholders in the future, which would make this unironically based, but I do not know how much to trust that. What do you people think should be done in terms of having a pro-labor monetary policy within a system of capitalism? Does this actually move slightly towards that, or is the news and Federal Reserve just seeking to deceive the people and this will actually harm the proletariat?
I think the Federal Reserve is fucking retarded and is doing everything to keep the stock market up until election day. First off, calculating inflation is not a perfect science. The Fed uses the PCE or [Personal Consumption Index](https://en.wikipedia.org/wiki/Personal_consumption_expenditures_price_index) . This basically tries to track how goods and services used by the average consumer have changed in price. This is not a perfect system. It can easily miss where inflation is happening and often inflation can take years to creep into this index.
Small steady inflation is generally the way to go. Too much inflation is terrible, especially for lower and working class people. Asset prices rise with inflation. If you own stock, real estate, or other assets, you'll be fine. If you don't, well your wages will stay the same, but everything will go up in price.
Trump talked about how China manipulates their currency by keeping it low... Well he's literally trying to do it with the US dollar.
I think the long term effects of this stock market recovery will be very bad. The market keeps hitting record highs while our economy is in a depression with many out of work. I have no doubt a bubble will burst, but we will probably have to wait until after election day.
Nominal wages still go up and that can be used to relieve debt burdens.
I’m mostly hoping the stock market tanks because it’ll mean that there can be actual leverage to get some new welfare spending programs
The purpose of higher inflation is to get the economy going again...which is really tough in the current environment. The only way we're getting higher inflation is if lending is stimulated even more. Meaning, even lower rates and loosening of the lending standards... similar to what it was in 2007/2008...and we all know how that ended. The only problem is that today the unemployment is really high and the future is uncertain so not many people will go out to get a loan regardless of the lending standards. So the Fed can say anything they want but they can't do much right now.
It’s my personal feeling that inflation is somewhat constrained by wages. There has been significant inflation in discretionary goods, events, ski passes, hotel prices, luxury cars, designer clothing, movie tickets, etc.
Also, the Fed just put in stone what they’ve been saying for a while now: lower for longer. And mainly because they don’t want to be the bad guy unless forced to. They are fine exacerbating current problems as long as they aren’t the ones being targeted with the blame.
so it sounds like Powell's afraid of deflation to me. I guess they can allow inflation to run significantly above 2%, but can they make it happen? They haven't for the last decade for the most part. Makes it sound like they'd like that to happen, but they're not sure they can do it.
So long as they are printing money (loose lending with little to no interest), then you can create more available cash to create inflation.
I think the fear of propping up the stock market creating inflation was the reason this was done- now if it happens then it was by design.
The problem is that the printed cash isn't being distributed in a stimulative way. Stimulus checks to ordinary americans and bolstering unemployment is productive, and there's no indication that it will happen given how hard the Republicans are fighting against any money given to normal americans
the issue is figuring out normal americans.
A bump in unemployment helps maybe 10% of people (whatever the unemployment figure is). So you are still leaving virtually everyone out by doing that.
Printing a 1200 check ended up going into the market for a lot of people, since 80-90% of people did not lose their jobs. For me and my wife, we did not lose our jobs, so the 1200 was sort of a "what do we do with the money" thing that just sat in an account for a few months.
This is so incredibly dangerous i don’t understand how anyone is ok with this. I don’t see any scenario where this doesn’t result in the complete debasement of the USD once the recovery is in full swing.
This is a blatant attempt to try to control the $26.7T of US national debt which only exists as a result of the total bastardization of the US free-market system
Look at a plot of inflation since 1981. Notice a pattern?
Also; neither QE nor ZIRP have produced target inflation. People predicting this at this point just sound uneducated (inb4 “but CpI”)
Thirdly, there isn’t even a correlation between inflation and DXY.
inflation subdued with higher interest rates after Volker jacked them up. help me understand your point.
inflation may not be the most relevant factor for DXY, but all else equal greater inflation = lower exchange rate
Inflation has been on a secular decline due to broader, structural forces. What constitutes these forces is a matter of dispute among economists (I favor a value-chain approach), but that the decline is happening is not.
The Fed has proven itself incapable of countering this slide, even with ZIRP and massive QE. A change in targeting, IMO, would not be sufficient to change this. And, for the record, a higher rate of inflation would be a good thing (though this is another conversation in and of itself).
Ceteris paribus, yes. Inflation is conversely related to DXY. But all else is never equal. The dollar regularly appreciates while inflations tics up. See 2016. The broader context is that the financial sectors of East Asia are globalizing, and they provide a growing demand for dollar-denominated collateral and trade financing. When capital market conditions get shaken, there are often not enough FX dealers to take the other side of this trade.
so ur saying, as the reserve currency, the demand for dollar denominated securities outstrips the inflationary impact of printing. correct?
if this is so, in your opinion, what would it take for the USD to lose its reserve currency status? you could say “default”, but that’s allegedly never gonna happen cause we would just keep printing
I think it’s a difficult question, since we’ve never seen a currency transition in a fiat environment, and what “reserve currency” status constitutes today is more expansive in it’s meaning than ever before.
On the future of the dollars reserve currency status, I’d say it’s stickiness is a result of two things. The first is just network effects. It’s almost always more efficient to use a platform everyone else already uses. The second is the configuration of political economy around the world. The euro has been too institutionally weak to really gain traction, and yuan is bottled up in China’s (mostly) closed capital account. The pound and yen are viable but not deeply traded enough.
So, that first condition is not going anywhere. Currency network effects can have momentum for a century. But the second is transient; the EU might get it together (I think they eventually will), and the status of the Chinese capital account isn’t eternal. And more broadly; the world is globalizing and developing. There will be more pieces on the board as time goes on.
And I don’t think Americans should flinch from any of this. You have to take a more granular view. The dollars current dominance does not benefit the average American - it guts high value added exports in exchange for empowering a relatively tiny Wall Street elite. It’s useful for sanctions I suppose. And I’m not one of those people who thinks that the dollars RC status saves America from some debt apocalypse
People are delusional, they think it's sustainable. What Powell basically said was that FED is ok with current printing and will keep doing so.
House is on fire yet he says "everything is fine", and everyone around is accepting it as acknowledging whole situation would trigger panic and start most severe recession we have ever seen. FED is doing damage control and anyone smart enough will be slowly moving away from USD. Any national emergency will result in more printing just to keep house of cards together, this is extremely dangerous.
go on FRED.com and pull-up 3 charts: the M2 money supply chart (annual change), the savings rate, and the disposable income chart
all three together tell a story that we r starring down the barrel of a potential currency crises imo
So, people with actual Econ degrees - how radical does this sound? I learned the Taylor rule in college and was told more or less the Fed has always followed or been quite close to it, and as such this sounds like a rather large departure and one of the bigger updates to Fed policy in the last half-century.
I'm way too rusty on inflation and macro to tease out the policy, macroeconomic, and government revenue implications off the top of my head so I'm hoping people will think for me, but I would rather know the actual theoretical differences, and most of what I'm seeing in the replies is not about how the Macro environment will change but various complaints about items not directly tied to inflation.
I think it’s a rather radical change. If interest rates stay low people who have the money to spend will more likely spend money in that kind of economy which would increase tax revenue. I feel like simply put, the more people will spend money in the economy the more prices will go up because companies are receiving more revenue which means they can pay their workers more etc.. which leads to an inflation because now people would have more money in their pocket and spend money in the economy more. This is just a possibility though, but I like their approach!
Yes but this only occurs when people are borrowing that cheap money. People are buying houses at a rapid pace right now, but most people aren't buying a new car or taking other new loans out right now. The Fed is stuck because they want to increase the velocity of money, but Congress is dragging it's heals on more fiscal policy
The way Powell explained it is we're in a situation where the natural rate of interest has fallen due to factors outside of monetary policy such as demographics & expected productivity growth. This constrains the ability of the Fed to cut rates in an economic downturn before hitting the zero lower bound and thus constrains their ability to hit the 2% inflation rate in a downturn. If we only hit the inflation rate in good times and it consistently falls below in bad times, that leads to an average inflation rate of less than 2%. If long-run inflation expectations become anchored below target, that drives down the nominal interest rates and can cause a low-inflation stagnation like Japan. By committing to allow inflation to run moderately above 2% to make up for past misses, the Fed hopes to keep long-term inflation expectations anchored near their target.
I had hoped to see a price-level target and this is basically a watered-down version of that so I think it's a big step in the right direction but not ideal.
Can't one argue that we are just bad at measuring inflation. Housing, education, healthcare, etc. are all necessities that continue to go up - other than edu (not sure about healthcare) they are already rising.
Without some structural reforms in those areas like change in zoning laws or development red tape - it appears historically you're going to see way higher prices in those areas before you do in consumer staples.
Which btw we are already seeing inflation in the things people can consume - like grocery store and home renovation stuff. And like I said homes. I sort of worry that an exogenous shock that is causes lots of distortion is making the Fed a bit blinded to the reality of things.
Edit: also if some are successful with bring supply chains back to the US - then that would probably lead to a lot of inflation and a decent risk to the economy.
I'm not oppose to overshooting it a bit - I just want them to focus on areas because if housing shoots way up it will be bad for anyone that rents and we worry about inequality already.
So it's been a while -but inflationary calculations typically use a basket of goods that aren't so volatile in price change because the Fed doesn't make change to the rate very often in the overall scope of things.
Including something like food, that can have large swings in price comparatively can lead to data they may mislead about real underlying price levels. I haven't looked but volatile goods like that are not included because inflation determination is about the overall price level of the economy on a large spread of goods and volatile items may increase or obfuscate the rate for everything that isn't that product. Because the Fed is concerned with the overall inflation rate
The Fed's mandates really surround controlling inflation and maintaining jobs - so while I agree concern for the well-being of the actual people is important, it's not precisely in the purvue of what they do and because their levers are mostly managing interest rates and money supply - they can only do so much for an average person that won't cause a ruckus in various securities markets.
I don't think the Fed, as it currently exists, necessarily concerns itself hugely with exogenous shocks -the Fed is a compliment for Fiscal policy which is supposed to handle stuff like exogenous shocks because Fed policy is slow - it takes a year to several years to feel the full effects of rate changes and cash injections - so something as abrupt as an exogenous shock or large swing in prices of a product like food or oil is better handled by Fiscal government policy by far because these issues are better handled by a direct, instant injection or cash or purchase or the opposite.
Same with housing shooting up - there will need to be a reason for it to shoot up. The previous bubble was caused significantly by a really borrower friendly lending environment and significant foreign money and speculative internal wealth pushing up the buble. I don't think or see how the Fed can do anything about factors like that and I can't think of a time they've concerned themselves with a single market outside of securities, but I am rusty on all of their tools that they use.
Edit: oh and powell himself mentioned this in the policy change - he referenced that there are better tools to handle issues of distribution which would be a sideways reference to stuff like housing markets or food prices. He directly called out that the Executive branch is responsible for things like that and that the Fed does not have the tools to manage something of that nature.
So you basically eluded to the notion that the Fed's primary goal is to stabilize the securities markets. What would you say to the opinion that by prioritizing the stabilization of securities markets, they are enforcing and even widening wealth gaps?
Inflation to me seems like something which overwhelmingly favors the rich. They own assets. Assets seem to gobble up the majority of inflation, while things like consumer staples are only lightly impacted. It's not hard for a company to make more bread. They are not necessarily supply constrained.
However, there's only so many plots of land in a city. There's only so many AAPL shares. You can't print or grow a Van Gogh painting. My point is that scarce and desirable assets will rapidly outpace the growth of products which do not have supply constraints.
Another thing which isn't particularly supply constrained is labor. Especially in a high unemployment climate. This means that wages will not compensate for the real dilution of the USD. The government has every reason to obfuscate the fact that a healthy market often means a widening wealth gap.
When the Fed decides to target certain rates of inflation, they are essentially diluting the wages of the working class. Meanwhile, assets, which are owned by the rich, appreciate at a much quicker rate than wages. This means assets become even more expensive relative to worker wages, which renders them even less attainable.
The response to COVID-19 from the Fed has resulted in a historic bounce, following a sharp but extremely brief market crash. This all comes on the heels of 10+ years of growth in equities, fueled by the Fed's measures in 2008-2009. If this type of monetary policy subsists, it seems that the already massive wealth gap between the rich & the poor will only widen further.
If that is the case, should we really consider this policy to be effective? Is it really unacceptable to have bear markets & corrections in equities? If equities & securities are owned predominantly by the rich, should it really be such a negative event when they go down?
> Housing, education, healthcare, etc. are all necessities that continue to go up
While many other necessities such as food and clothing have gone down. We measure all the things you mention as part of measuring inflation.
It’s not that radical, it actually creates a better path toward recovery and potentially a way to stop missing inflation targets.
The short story is that in time like this when rates hit rock bottom, the Fed will fail in reaching its target and because of that people expect that when situations like that happen again the Fed will miss the target.
Result : inflation expectations are on average below target because you anticipate years with precisely 2% inflation (followed by a rate hike to anchor it at this point) and years with below 2% inflation. Since inflation expectations play a major role in actual inflation, the target will be missed which hampers economic growth and employment.
With below target inflation expectations, real interest rates are higher than they should be which slows the economy.
By saying that they will overshoot in the future to compensate for the past and reach 2% on average, inflation expectations will rise toward the target creating a better economic setting for recovery by lowering real interest rates.
In normal times, lowering the Federal Fund Rate is enough but when the rate is at 0 like today, they buy Treasuries to lower the rates further out on the yield curve (like 5-10 year Treasuries and such).
Could happen, the ECB did that countries like France and Germany have negative nominal yield.
But going into negative interest rates territory is a whole other thing, the Fed probably won’t make that move. Not because of the impact on Treasuries but more because we don’t know if it really works, it also puts a lot of stress on banks and stressed banks don’t loan a lot.
I see those in Europe and Japan. They don’t go far below 0. Most have been -0.25 as a charge for “storage”. Essentially 0 is the bottom and we are near there at 0.69% for 10 yr bond, 0.31% for 5 yr bond and 0.16% for 2 yr bond. So the Fed is essentially running out of room in that direction now just tossing in how long they want to hold the rate down to control the crowd. They might not succeed though. If it continues to look risky as rate will only have room to go up and to yield is negligible and has negative real rate, the world would dump both the US currency and bonds. What would stop that from happening? US has been getting lots of benefits from US dollars being the currency of choice in the world. US fed/gov don’t want to let that happen. Also if inflation is high, business suffers. The Fed they don’t have lot of freedom/effective tools as they want us to believe.
I'll be writing my thesis on a related subject(r*). If you really want to find out how dynamic the 'taylor principle' is in reality, check out https://www.newyorkfed.org/research/policy/rstar
This is all about the'natural rate': one part of the Taylor rule we take for granted in undergrad and even most graduate econ courses.
Academics spend decades studying these models. White and black are nearly non-existent, but every once and a while the fed has to step out into the public eye to retain the economy's trust (ex ante must equal ex post policy some of the time)
What you call inflation is inflation as determined by inflation indicators. These indicators contain very little amount of capital, but capital inflation is also inflation, and this is mostly what we currently get. Capital inflation increases inequality.
Which is why people make such bad decisions and elect bad politicians who implement bad and self serving policies. The public wants quick Google search answers while the correct answer requires the reading of a book.
in terms of ST economics no, but in terms of medium/long-term economics i think it is very problematic.
My opinion is that the real reason why they’re going to let inflation run so high is because of how large the national debt has grown during the COVID recession
we will debase the USD before we ever default
Inflation looks to be historically low currently:
Government debt is basically a made up number at this point and doesn’t really hurt anything.
I’m of the belief that things like income inequality and the current unemployment crisis are far bigger issues than adding a couple trillion to the debt (which we would have done anyway in a couple years).
We could easily raise taxes and fix the entitlements programs and lower the debt. We can’t easily fix instability caused by people’s current economic situations.
1. sure, but keep in mind that inflation as an indicator is backward looking. The Fed is basically pulling out all of the breaks (low reserve requirements, low rates, helicopter money, etc.) without actually seeing the sum total of these effects in a non-recession environment. Consumers will not spend in full force until they feel safe from COVID.
2. national debt is immaterial until it’s not. historically, exorbitant national debt has preceded the downfall of most empires. To say otherwise is short-sighted imo.
3. taxing your way out of debt is very impractical. That doesn’t help anyone and is only going to piss people off. what sane person wants to pay 60% of their income to Uncle Sam who has a track record of mismanaging money? When was the last time the US actually ran a budget surplus?
1. They don’t really have a choice at this moment because they need to stimulate spending as best they can. I doubt we’ll be anywhere near normal even in a years time.
2. What empires downfall was caused by government debt?
3. Taxing your way out of debt is basically the only way to get out of debt without causing drastic instability within the populace. What do you think happens if you try to cut government spending to the point where people can’t afford food or shelter?
1. i agree. average people need money. but here’s an idea, maybe we don’t bailout shitty, over-levered US companies some of who don’t even pay US taxes (Carnival Cruise). We shouldn’t be rewarding poor management. What kind of precedent does this set?
2. for starters, Weirmar Republic and Rome
3. you think higher taxes wouldn’t cause instability amongst the populace? there are no winners in a high-tax regime. We have no industrial policy which is a the problem. Whatever happened to good old fashioned economic growth?
> for starters, Weimar Republic and Rome.
The Weimar Republic collapsed because their debt was in **foreign currency** and they printed money into the **real economy** to repay.
The US debt is Dollars and the money created by the Fed is in excess reserves in banks deposit accounts.
Last thing, look up automatic stabilizers in regards of US debt.
1. It’s historically been the same people saying we can’t increase taxes that bailout shitty companies. Maybe there is a theme there and we should stop voting for that party based on their economic decisions?
2. Weimar Republic *maybe*, but you’re going to need to provide a source for Rome because I’ve never seen a suggestion that Rome failed because of government debt.
3. You can’t have solid economic growth with increasing income inequality. Historically, while there may be other factors involved, the most successful the US has been was when we had extremely high taxes on those making the most. I know, you’ll probably say, “but those rich people will just leave the country or move their money offshore” and to that I say, “fine, let’s just make it a criminal offense and ban companies from doing business in the US if anyone in the upper echelon of their company doesn’t pay the necessary taxes.”
1. lol we shouldn’t be bailing out anyone in the first place!
2. [rome](https://www.google.com/amp/s/www.armstrongeconomics.com/history/ancient-economies/roman-republics-debt-crisis-led-to-its-collapse/%3famp) . grew too big and had to finance somehow. Also Weimar Republic is just a blatant yes lol? How could you argue otherwise?
3. Economic inequality is more of a symptom of low growth than a cause. Income inequality was low back in the day because the US manufacturing sector actually existed. the US steel flourished in the past not because of government welfare but because of job opportunities and strong labor unions that were justified!
I think there is a middle ground. Capital flight is a real thing, but I am also in favor of a VATs tax (despite the fact that it quite literally marks up every product substantially which hurts everyone). i’m also in favor of a larger luxury tax.
u can downvote me but these r just facts 😂
> We could easily raise taxes
Good luck with that. The American people have been propagandized to believe taxes are always bad. When in reality, they are necessary in order to promote and maintain broad economic stability.
> our government is just historically bad at managing our tax dollars and acting in the best interest of the people
This only started to become a serious structural issue in the 70's. I wonder what changed?
The baby boomer generation believed in and advocated for less government--not more. I don't think that can be disputed by anyone paying attention to recent history.
Personally, I believe in the **quality** theory of government instead of the **quantity** theory.
Green new deal! No more highways. High speed rail and other mass transit projects in cities that legitimately would benefit from them. Why did Dallas or Atlanta get a rail system in the 70s? They’ve done nothing to utilize them. Meanwhile, NYC, Chicago, DC, SF, Boston, and Philadelphia have aging systems that would benefit from spending.
Relevant Powell quote:
> "There are better tools for dealing directly with distributional issues. And those are the tools that are held in our system of government by elected officials, and the people who are appointed in the executive branch who work for an elected official."
I don't know how much more clear he can be in asserting that, as many knew all along, fiscal policy trumps (no pun intended) monetary policy.
This is exactly the case. We cannot have infrastructure improvements with this administration, they want to privatize everything.
Just look at what they are doing with the USPS, destroying a 300 year old piece of critical infrastructure for the sake of their reelection.
>Fedex and UPS warn that private companies cannot legally carry ballots:
>Trump admits to blocking USPS funding to prevent as many people from voting by mail:
>Trump appints Louis Dejoy in June to head of USPS:
>Louis Dejoy and wife have ownership stakes of $70 million in companies that compete with the post office:
>Head of USPS union warns of post office closures in July:
>USPS shutting down sorting machines crucial for processing mail in ballots:
>USPS claims it may be unable to handle so many mail in ballots.
>In June, shortly after Mr. DeJoy was selected to lead the agency, union officials received a notice that Postal Service management was removing 671 machines.
>Some of these machines process up to 35,000 pieces of mail per hour:
>Stimulus bill deadlocked over USPS funding: The president has said he will not approve funding for either the postal service or mail-in voting, which is a sticking point for Democrats.
Unfortunately, Biden has historically been in favor of privatization and austerity policies. Though, perhaps not to the extent of the extreme views held by most Republicans.
If he wins, it will be interesting to see which economic policy camp he listens to. In an unprecedented time such as this, I do not believe a moderate approach will accomplish much of anything, except perhaps to stifle the bleeding, but not stop it or reverse it.
If elected leaders don't want to pass fiscal policy to protect the economy, then why is the Fed pushing monetary policy to accomplish the same objectives? If the Fed really believes in subservience to the elected leaders, then perhaps it should let the economy crash and burn as that is what our elected leaders want.
Their mandates are often at odds with each other. It would be trivially easy for the Fed to reduce unemployment to zero, just give 0% interest loans to companies for every new hire, but that would not be likely to lead to price stability.
Alternatively they could maintain lending standards and monitor long term interest rates to better abide by the objectives of stable prices and moderate long term rates, but at the cost of higher unemployment.
So which should they pick? Where should their priorities be?
I think its fair to say that these conflicting objects are a political issue, and to follow the lead of the political branches. Congress clearly isn't too concerned about unemployment, so why should the Fed pre-occupy itself with "maximum employment"?
Dont bother with this guy, hes all over the place spreading disinformation.
He is actively using a russian propoganda method:
>The effect created by such Internet trolls is not very big, but they manage to make certain forums meaningless because people stop commenting on the articles when these trolls sit there and constantly create an aggressive, hostile atmosphere toward those whom they don’t like. The trolls react to certain news with torrents of mud and abuse. This makes it meaningless for a reasonable person to comment on anything there.
Corporatism is a subset of capitalism. Where capitalism is an economic model which refers to ownership and distribution of resources. It has nothing to do with a "free market," which has never existed, does not exist now, and will never exist.
In the past it seemed the government believed that market cycles were natural phenomenon. You can find numerous bear markets before 2008 which just sorted themselves out naturally. You know, price discovery, perhaps an overshoot, a recovery, and eventually things carried on.
Now it seems like the Fed is petrified of a bear market. It would appear to me that they feel the entire fiscal system would be under threat without their intervention. If that is the case, then you can imagine that they are simply kicking the can down the road, and making the inevitable collapse all the more catastrophic.
QE doesn't really create money if banks don't lend. It looks to me that the FED and the banks are at odds right now. The FED wants banks to take risks and lower the lending standards but banks don't bite... 2009 is still fresh in their memory.
Problem is that doing that now is that it’s like trying to punish people with starvation while in the middle of winter.
It’s entirely possible that they *ought* to be punished as an example to others. But there’s a limit to how much you can do that without losing the manpower you’ll need to recover come spring.
It’s true that this dynamic amounts to a game of chicken, and if a business believes you’ll *never* take the risk of letting them fail they have good reason to keep taking advantage of your hesitation.
But that doesn’t mean that the timing of when you take that risk doesn’t matter.
The 08 crisis lead to the Eurozone crisis, which required 5 European countries banks to be bailed out over the last decade. That's in addition/connected to the Fed bailing out US banks.
We were at $250 Trillion in global debt and $80 Trillion of global wealth in 2019, then a pandemic came along.
Now the central banks are printing debt to solve a problem that was never a financial problem.
The solution is not within their control because finance still requires consumer confidence.
We see the job losses, social unrest and declining production/consumption, it really is only a matter of time before it's obvious that the system crashes.
Like I said in another comment, getting mad at firemen for not trying to police people by not putting out fires caused through bad behaviour doesn’t really make sense - the problems that could create are greater than the problems it would be trying to solve.
Getting mad at the police for not policing (aka, the legislature for not legislating) is what makes sense.
Well if the Fed's job is to keep prices stable, how come they don't have any problems when the prices go up? It sounds like stable actually means flat or increasing. In which case, the Fed's job is to protect people who own assets, and that seems to be done by diluting the working class.
There's never a good time for a wildfire. But constantly putting out fires has lead to an accumulation of combustable materials.
Eliminating consequences does not eliminate risk. Risk accumulates in the absence of consequences.
Its always the middle of winter when the Fed is asked to act. Under what scenario would the Fed feel the need to act to rescue businesses while the Congress idly sat by... and the general public wasn't in great need? How would that come about?
With COVID at least things are aligned with the presidential election cycle, and the problems are less esoteric than they were with the '08 financial crises so the public can understand the issues better.
Yes, because the Fed isn’t well equipped to punish businesses, except through inaction at times when inaction risks punishing everybody.
Like, it’s true that firemen refusing to put out house fires caused by people ignoring fire safety rules would be an incentive for people to not ignore fire safety?
But can you really blame the firemen for prioritizing the safety of the rest of the neighborhood, and pointing with confusion at the police department when people ask them why they aren’t policing?
And they are equally poorly equipped to reward businesses.
They have a very blunt instrument that allows good and bad businesses to survive on free credit, but whether or not that is desirable as policy is a political question.
I agree. This is why Yang's UBI plus VAT were paired together. The proposed UBI covers the added VAT for most consumers, up to the upper range of the 'middle class'. It's been awhile since I've crunched the numbers on his policy, but from what I remember, for the UBI to get wiped out due to the VAT you'd have to spend 10's of thousands on VAT applicable goods. I know there are a lot of ripple impacts of a VAT, but the simple math penciled out for being a significant boost to the lower and middle classes.
I for one am all for Biden’s infrastructure and climate proposals. The literature is pretty clear that spending for infrastructure and energy technology tends to reap rich rewards up and down the economic ladder, and the US desperately needs improved infrastructure. It is sad how much better roads, internet, transit, and other services are in just about every first world country. To reinvent our infrastructure with a push toward self-sustainability is a smart move strategically and economically IMO.
I’d be fine with a UBI pilot program, but it doesn’t have the rich research history to prove its net benefits outweigh the costs.
Not necessarily. The fed controls short term rates while mortgage rates are priced off of long term rates. If the market views this fed move as inflationary, it is still possible for mortgage rates to move higher.
How does one lend when the chances for unemployment, property value corrections, are so high?
There is going to be an overhaul at some point, there is no way the banks will risk losing money just because they are "supposed to" lend. Regardless of how it worked before the pandemic, if the government wont guarantee or the Fed wont take the risk the banks are totally out of lending to the average person.
I think it will. What I'm confused about as a layman is, How does the fed keep saying inflation is low when housing, childcare, higher education costs are all growing at such a tremendous rate and they are the majority of the younger generations' budgets? Only because electronics and cars are cheaper to produce? The drag on consumable spending is *because* of these three high costs.
Housing is more expensive because of covid and extremely low inventory. But that will change in the next few months with a spike in foreclosures. Also, the realtors I talk to confirm that a lot of people were worried of putting their places out for sale due to covid. The funny thing is that while covid gets worse, people become more familiar with it and tend to feel more comfortable in their decisions. Therefore expect higher housing inventory in the fall and lower prices.
Yup, it happened in 2008 crash it happened again. It took 2-3 years for housing price to reach the bottom in the last few recessions I checked. The mortgage interest rate then had room to go down; this time they are hitting bottom already. The world is getting scared of bond price to crash as it yields near 0 with all the risk.
Why would there be a risk, when the yield is effectively 0? Market doesn't seem to agree and i have to agree with the market here, as it is kinda difficult to go tits up, when you can always just roll the debt over at practically no cost.
The risk for bond holders is that when the yield goes up by 1% the bond price drop 8-9%. There is no room for yield to go down much further. So either stay and collect near 0 interest (+ paying tax on negative real yield) or lose 8-9% for each increment of yield % while still collecting only small yield, probably still negative real yield then.
Last time the banks had crashed before housing, so there was no way to provide a solution for homeowners. The powers that be will not repeat that mistake again, it neither makes sense to let at prices tank nor to incur the wrath of homeowners. Anyone waiting for housing prices to crash ala 2008 is on a fool's errand.
Most of us have lived longer than six months. We are not talking about this temporary blip. The same people paying cash for million dollar homes will continue buying houses if there are foreclosures. Only, at that time, they'll get a bigger cash discount and the rest of us will still be outbid.
When foreclosures are up, builders generally play it safe and development slows, placing more strain on supply. Rates will stay low + low supply = flatline prices at best, continued price inflation at worst.
Anecdotally, in my area I'm still seeing all-cash buyers bidding up 40k over asking with no inspection. Until this shit starts to slow down, I think the market stays hot.
Since no one has mentioned the actual fix to house price issues: it's local legislation. A city has to promote development and building to drive price down locally, but those who would have the loudest opinions in local city councils are also those who benefit the most from ballooning values.
Builders need to make money too. It looks like construction of new homes just started to pick up in June/July after a few months of pause. I expect construction of new homes to pick up significantly regardless of what everybody else is doing. Again, they need to make money, they won't wait around to see what's going on with the rest of the market. [https://fred.stlouisfed.org/series/HOUST](https://fred.stlouisfed.org/series/HOUST)
But in the past they did slow new developments when foreclosures were ramping up, see 2008. This tells me developers don't think a foreclosure wave is imminent just yet after seeing how congress reacted to the initial economic hit. I suppose you could argue builders were also going out of business then because of exposure to the secondary markets and special financing, which was all the rage at the time.
I have a sense that the inflation in these categories are bi-modal. High in cities low/non-existent everywhere else. When measured as a mean/median inflation comes out lower than it would be if the distribution was normal.
CPI is based on the spending of either All Urban Consumers or Urban Clerical Workers, so the costs should roughly match what you would expect (unless you live in a VHCOL area). You also have to remember that CPI tracks TOTAL SPENDING, so while higher education, healthcare, and childcare are all rising faster than inflation, [many baskets of goods are lagging inflation significantly.](http://ritholtz.com/wp-content/uploads/2018/02/pricechanges.png) On the average, you end up with that black line, but very few people are vocally upset about the fact that software, toys, new cars, furnishings, and clothing aren't getting as expensive as quickly as the "should."
> very few people are vocally upset about the fact that software, toys, new cars, furnishings, and clothing aren't getting as expensive as quickly as the "should."
Hell, /r/gaming routinely throws shitfits about $5 DLC packages when game prices have gone up 16% over the last forty years.
Farmers and rural people are having the same issues, everything is just debt and even though they say interest rates are low, they are still higher than in all of history. We’re all being grifted by the aristocracy.
The cost burden on people living in higher cost areas (where jobs have moved for the last couple of decades and will continue to move) is significant but they are blind to that half of the population. The cost burden of the younger generation relative to their income is higher too but they are blind to that half of the population. They are literally ignoring pain points and imbalances in favor of averages. Bad enough that they are using the less elastic PCE instead of CPI.
Remember that you're looking at **average** sale price for **new** houses sold. So there's definitely a floor to the possible cost and absolutely no ceiling. Also remember what an average new house in 1980 looks like in terms of [size,](https://www.cdsmr.com/uploads/6/5/4/7/65475949/9429189_orig.jpg) amenities/building code, and [availability](https://wakeup2050index.eu/wp-content/uploads/2017/05/IMG_0550-768x464.jpg).
Yeah, the point of using median rather than mean is so the outliers like billionaires won't skew your data. With mean, someone that makes 10000x what everyone else does would make it seem like most people have more money than they actually do. Using median just takes the middle number, which can be a lot more accurate in this case.
I think income inequality is not as big of a deal as wealth inequality.
There will always be income inequality, but large wealth inequality could be a problem, where labor gets devalued as compared to capital
Weeeell... keep in mind that people choose to spend their money on different things. Food and apparel used to be a much larger percentage of people's budgets - as those have gone down, housing has gone up, which means it should be ahead of overall inflation.
I mean... people are buying larger and larger houses, that's just a simple fact. Houses that held six people in the 50s are getting torn down and replaced with houses twice the size for childless couples, and a big part of the reason is that in the 50s people spent more than 50% of their disposable income on food and apparel, whereas today that number is 16%.
Nothing's being "forced" on anyone - this is /r/economics. If people wanted to buy thousand-square-foot houses in the same numbers they used to, companies would build them.
Sadly it doesn’t go back that far. Comparing housing price and CPI isn’t really a good method to identify a bubble. In the early 2000s there was a housing bubble and yet when it bursted prices didn’t move in line with inflation.
There are specific factors in the housing market that make it behave this way, like the growing demand for housing while supply can’t follow in most metro areas.
If you want to identify a housing bubble before it burst (hard to do) you would need to compare salary, rents, supply, demand... stuff like that to housing prices and see if prices are out of control.
But a better thing to look at regarding housing would be home affordability, prices on their own don’t tell much. And this index is rising since the 90s. (If a median income family has enough income to qualify for on a mortgage with something like 15-20% down payment and other stuff)
Homes are definitely more affordable that the 80s.
>There are specific factors in the housing market that make it behave this way, like the growing demand for housing while supply can’t follow in most metro areas.
But I think we can mitigate some of this by removing single family housing from inner ring suburbs and expanding the urban growth boundary.
>Homes are definitely more affordable that the 80s.
Really that's interesting I mean we can't have the high down payment but lowering inflation at this point.
Definitely, also if we removed zoning law and stuff like that the supply of homes would be booming making prices lower. Cities like Paris suffer for them same problems, people want to buy and live there but there is no room for construction so prices skyrocketed.
That’s a little bit counterintuitive I agree but here is the data if you’re interested :
An index above 100 means that an household has more than the income necessary to buy a home.
Thanks for the data, I'm going to dig into this furthe
>Definitely, also if we removed zoning law and stuff like that the supply of homes would be booming making prices lower.
I've definitely been convinced that we could have an economic boom with extra housing being built leading to more jobs and investment but also lowering inflation.
You’re comparing **real** income to inflation ? Really ?
Look at what happens to your chart if I use the proper metric to compare to inflation.
Doesn’t fit your narrative anymore doesn’t it ?
You have to use the brut data to actually see if income has been rising with inflation. The goal is to see if income have at least been following inflation to make sure that workers aren’t getting ripped off.
I’m not even gonna talk about your stagflation comment.
Because what he tried to do was see if real income at the very least followed inflation, if not workers would actually be earning less every year. (Losing purchasing power)
If you use real income (which strips inflation), your comparing the rise of income due to gain in revenue share or better salary negotiations to the rise in prices : that doesn’t make sense.
If you want to make a proper comparison you have to take income that includes the gains due to inflation, this way you can properly asses if income follows inflation or not.
Yeah noticed that too, but didn’t bother to change it because median home sales follow roughly the same pattern of mean.
Best thing to compare to would be home affordability instead of home prices. But it’s not on the Fed website.
1) [32.9%](https://www.nber.org/chapters/c12661.pdf) for PCE-adj
2) Sure, the definition of both PCE and CPI starts off from a position of constant standard of living. There is absolutely no reason not to adjust for quality. Considering that savings rate (outside of certain outliers like coronavirus lockdown) is typically between 5% - 15% all the time, this suggests that no matter how much money you make, most people will just end up spending their money on better things. So an accurate measure of "inflation" should account for the fact that quality of products are constantly going up (if we are accounting for constant quality of living).
1. The federal reserve uses PCE PI, adjusted PCE PI is an after the fact number, since it is PCE PI after adjustments and corrections.
2. Easily. If you say, go back to the standard of living of 1990, the average American can save hundreds of dollars a month. For instance, cancel your internet service and use dialup (that's what, $9.99?), cancel your cell phone plan, cancel your cable TV. The average American lives in houses 20% bigger than in 1990, so find a crappier place to live. Cars have easily gotten so much better, so you can chop off half of your car payment/lease a month.
And then there's amortized durable goods. If I own an $800 cell phone that I replace every two years, that's $33/month I'm saving (since people didn't have cell phones in 1990). My laptop that I replace every \~3 years and my big flat screen TV? in 1990 people had garbage computers and TVs, worse than the free stuff on craigslist, so that's like, $100/month I'm saving.
As for stuff like healthcare, refuse every single procedure and drug invented in the last 30 years, and you'd save a lot of money. I'm Canadian, so this should be a reduction in my taxes, but Americans see savings more directly. Remember, drug patents are 20 years, so if we're going by 1990s standards, you're allowed generics only.
I like craft beer, but in 1990 there wasn't much craft beer. Replacing all my craft beer with crummy macrobrews means I'm cutting half my beer budget. I like to dine at nice restaurants, but that is due to the foodie boom of the last decade or so. So I can cut my eating out money by half if i replace 80% of my dining with mediocre chains.
In 10 minutes, I figure that if I went back to the 1990s standard of living, I can probably save $500-600/month. If I'm willing to sit down and spend a bit more time thinking about it, I can save even more.
Yeah I've wondered how much this is why the economy hasn't grown in the same way.
The industrial boom was expensive per unit of cost, so machines were expensive.
Now everyone has on demand and computer stuff with less jobs but less cost for entry.
1. Do you have any data on how those adjustments and corrections are applied? I've searched, but the Fed is semi-opaque.
It would be nice if we could go back to older housing standards. Minimum lot/sq foot sizes are backed by the full force of law. Same with car standards.
Drug patents are often extended and extended, but yes - generics would be cheaper.
I think you've overestimated the impact of durable goods (or perhaps I'm thrifty).
Can you break down that 500-600? I don't see that.
The federal reserve doesn't produce PCE PI, the BEA does. Check their methods guide: https://www.bea.gov/resources/methodologies/concepts-methods-io-accounts
Here's a bit of back of napkin math for me:
Eliminated bills: Cell phone, high speed internet *50%, and cable TV *50% = $140/month
Major durable goods: ~$800 cell phone that I replace every ~2 years ($33/month), ~$2000 Surface I replace every 3 years ($55/month), ~$2000 gaming desktop I replace every 5 years ($33/month) = $121/month (I'm considering that the replacement PC cost as $0, since I can go on craiglist, get one of those garbage computers people offer for free as long as you take it home, and it is still better than the top of the line stuff from 1990).
Other durable goods I occasionally upgrade due to technology advancements: Flatscreen TV, Roomba, Speakers, Headphones, Instapot, Printer, etc, etc. Let's just say $30/month.
Car - Considering that my car is faster than, and has more features than cars twice or three times as expensive (without adjusting for inflation) in 1990, I'll just drop my lease payment by half - $400/month to $200/month (for $200/month savings).
Food and drink consumption - I like craft beer, but most of these breweries didn't exist in 1990. If I replace all the craft beer I drink with cheap macros, that's a 50% reduction in beer money ($60-> $30). I like to try interesting restaurants, but many of these interesting restaurants only existed due to the foodie boom in the last few years. If I replace one meal at an interesting exotic restaurant to TGI fridays or something, thats $80 -> $20, or $60/month in savings.
Add it all up: $140 (bills) + 121 (tech products) + 30 (other durables) + 200 (car) + 30 (beer) + 60 (restaurant) = $581.
Thanks, I'll dig into that later.
Maybe I'm a little bit more frugal, but I'd save:
~$140/month trading cell phone for land line.
~$80/month removing cell phone and computer
Car calculation is odd. $200 because of quality improvements? I want to come back to that later.
~$20 Craft beer to cheap beer
That's 5% of my monthly budget, in comparison.
The larger item (34% of my budget) is the ~$1700/month for a home from 1940s. A couple of renovations, but that's the big ticket item here. Harder to say that it has improved in quality with the cracks in foundation and garage's caving wall.
This is getting to the point that I'm trying to make about the "no inflation meme". The calculation is bogus! You've tried to point out how quality improvements in 5% of my budget is so great, while over a third of the household budget is an old house.
Back to the car and quality argument - here are two great articles that go into detail over the Fed's calculation of car price inflation vs real prices. The author spent time in the auto industry, FWIW.
I've had this discussion on /r/cars a lot over the years, but you cannot use straight nameplate to nameplate comparisons when it comes to things like cars and quality adjustment.
The 1990 Toyota Camry is the V20 generation Camry. It was 170ish inches long and had 110 horsepower. Price was just a hair under $15k for a low trim vehicle. The fair comparison would be the Toyota Yaris, which for 2020 starts at $15400, is 170ish inches long, and has like, 106hp in base trim but a 6 speed transmission to better use that power.
The 2020 Yaris is approximately the same size, and is an absolutely better car in every way than that 1990 Camry. It isn't a fair comparison between the 1990 Camry and a 2020 Camry at all.
In fact, if you had a time machine, and took a higher trim $30-40k 2020 Camry back to 1990, it would hold its own against most high end luxury cars that cost easily twice that.
And this is why, after applying quality adjustment I think it is fair to discount a car payment by half. in 2020, you can easily go to your local Chevy dealer, and buy a Camaro SS for like, $40k. That Camaro SS can easily, without breaking a sweat outrun any exotic sports car under like, $200k you can find in 1990. Like, a Ferrari 348 going for 6 figures is less fast, less refined, and has less tech than a $40k sports car today.
I drive a mustang, to get a car better than mine in 1990, you'll have to significantly more than what I paid for mine. Hence why I'm willing to cut down my car payment.
Our house size is double the sq ft per capita in 1970. The price per sq ft has been relatively flat.
Falling household sizes has a lot to do with this. More single people/less kids etc. Also more people living longer after kids.
I still think housing is a massive issue and I think we should allow some more downsizing of house sizes via government regulations on like lot size and setbacks, and more multifamily housing.
Are quality of products really going up? Look at something like clothing that has a highly globalized supply chain. Quality of clothing in recent years has dropped dramatically while the price has climbed substantially.
Americans have never spent a lower percentage of their income on clothes. 2019 was the lowest year on record. Assuming that people aren't going naked more, even if you weigh for longevity, clothes have collapsed in prices.
Also, don't forget that in recent years, clothing brands have more or less all been forced into a "constant sales" model. Even "higher end" brands like Brooks Brothers or Hugo Boss, and even higher end brands like Canali and Armani have adopted constant, year round sales.
Finally, I cannot really comment on women's fashion, but anecdotally, in mens fashion quality has shot up remarkably in the last 20 years or so. The 90s were a low point where formerly illustrious brands were coasting on brand value alone. Information proliferation has killed off those practices, as more informed buyers are demanding higher quality products.
I have anecdotally witnessed the opposite. Brooks brothers, ralph luaren etc only produce rubbish at the moment. The quality has gone down any way you spin it. Even brand synonymous with quality like LL bean have began producing junk and as such have had to end the guarantee. Patagonia is the only company i know that makes a broad range of cloths with a good warranty and even they have been using thinner and thinner fabric.
I will concede that on the lower end Hanes and others who make basic cotton products are producing quality garments. However anything beyond the bare necessities seems to have declined in quality
Sure the cost of a mortgage goes down for everyone but low interest rates make investing in real estate more lucrative that other investment, thus capital flows into housing raising the price for the house itself. I’d rather pay 7% on a 300k house than 3% on a 450k house.
How is it that federal student loans are still 5+% when the Fed rate is zero? That’s a massive spread for SallieMae.
Do hedonic quality adjustments get applied to healthcare?
>I’d rather pay 7% on a 300k house than 3% on a 450k house.
Same and imo obvious but people just aren't understanding this. You can always ReFi a high interest rate but that huge price won't ever come down.
Well if you are looking to buy a house to live in, not if you want to buy a house to sell it later. You want the price of the house to increase from 450k to 500k later on. This is the problem, while you might want an affordable house price, there are others who want to make this is money generating segment.
That's possible as well, though I'm not sure how useful an investment it would be for anyone but institutional or nation-sized funds.
50 year T note at 1.5% doesn't sound all that interesting to me as a layman, and I'm not sure how that would affect the composition of a bond fund since most target midrange (4-5 year average term).
You can also cram down an investment property in a BK, so if you are an investor, there are other ways around it.
Also, every refi is likely to cost you 10-20k in closing costs on the refi- so that can add up if you are chasing a lower rate.