Fed Ends Zero-Rate Era • Hacker News Board

Re: Fed Ends Zero-Rate Era

#311

Post by daveguy » Thu, Dec 17, 2015, 4:11 AM UTC

vezzy-fnord wrote: post #100

dragonwriter wrote: post #95

Earlier quoted context omitted.

> > I argue my ideas only need to hold water for another 10-30 years, depending on if technology advancement keeps up. > Given that the AI community's prediction making skills have been just slightly better than those of Nostradamus, that's a very tough gambit to rely on. That's a weird comment; "technology" is a lot broader than "AI".

I made some perhaps overly hasty generalizations. HN is a community that is heavily skewed towards a belief in transhumanism (especially that AGI will be coming very soon) and moreover that high rates of technological unemployment are upon us, necessitating a UBI or stronger reforms to make sure the general-purpose labor saving of AGI doesn't cause social unrest from crowding humans out of the labor market. I can't i…

I have made a comment or two recently about how unlikely AGI/superintelligence is in the next 50+ years. Those comments received a net positive response. I don't think HN is as biased toward AGI as you might think. Then again automation in labor tasks doesn't require AGI --just specialized programs that work well. Advanced automation is very likely to have an impact in the next 5-10 years.

Re: Fed Ends Zero-Rate Era

#312

Post by meric » Thu, Dec 17, 2015, 4:17 AM UTC

millstone wrote: post #286

brc wrote: post #226

Earlier quoted context omitted.

Of course I know it is Say's Law. My purpose here is to post it for people to understand the principle. Giving everyone money does not work. You can only increase the size of the economy and wealth of the people within by producing more. That much is self evident, yet people have been bamboozled by muddied thinking that aggregate demand is all. I don't try and convince the hardened Keynesian thinker with Krugman in t…

I'm not sure where you're going with that. Ok, so we become wealthier if we produce more. The next question is, how do we shape public policy so that our economy produces more? If you tug on that rope, you find that supply is connected to demand, and demand is connected to things like the money supply. So choosing the correct money supply can increase real output. I think you're arguing against a strawman, something…

Here is the mechanism that will fully elaborate brc's point.

Elderly consume more than they produce. The young produce more than they consume to save for retirement.

A lowering of interest temporarily induces additional borrowings which will be invested in capital in the short run. Inefficient companies that were going to go bankrupt and release their physical capital for more efficient use, will be kept alive, staving off job losses.

In the long run, low interest reduce elderly's income on their savings. Reducing elder's income reduces demand for the goods the young produce. Since the young cannot produce at a loss, they produce less and have less income to save with. The causes reduced savings, which in turn means reduced investment, and thus even less spending, less income, which means deflation. This deflation is further enhanced from the increased supply caused by the increased investment in capital when interest was first lowered. And if you keep lending to companies at near zero interest rate with money from nowhere, increasing inefficiency in capital means lower yields in stock markets general, also lowering income in the long run, and lower job growth.

The Fisher equation[1]: Nominal interest rate = Real interest rate + Inflation.

The initial thrust of lowering interest will boost the economy temporarily. Keep down nominal interest rate long enough, and the economists will get the deflation they so dread.

Now you know why the EU and the U.S. has trouble with lack of inflation "even though" interest rate is so low for the past so many years.

[1] https://en.wikipedia.org/wiki/Fisher_equation

Re: Fed Ends Zero-Rate Era

#313

Post by roymurdock » Thu, Dec 17, 2015, 4:22 AM UTC

tdaltonc wrote: post #307

rlucas wrote: post #163

Earlier quoted context omitted.

No, the institutions who allocate money to VC typically do so as part of a long (> 30 year) horizon plan based upon portfolio theory. There are no institutional investors for whom a 25 bp change in a short term interest rate will materially alter their allocation to VC (typically a tiny sub-portion of a minor portion allocated to "private equity," the lion's share of which goes to later-stage buyout). Private equity…

This is what I keep thinking. People are talking about an imminent winter, but I don't see how VC money could drain out that fast.

Winter comes when exits dry up. After all, the exit is where the VCs make their money. Valuations don't mean anything until a VC can get out of his equity position and into cash or another liquid asset.

We are starting to see valuation corrections with large funds writing down investments in startups in later rounds, and IPOs proving to be very tricky to sell correctly to the market.

A recent example: Square IPOd at $11.20 for a market cap of $3.5b (was valued at $5bn in 2014) and, more importantly, only floated 8% of its stock on the IPO. This means that supply was so low that they essentially guaranteed a pop in price as there was bound to be more demand at this lower price and for such a limited number of shares. This is not how an aggressive, confident IPO is structured.

So once the exit round starts to gum up, it will have a chain reaction on all earlier rounds as people re-evaluate the likelihood and size of an exit. The crash will be swift.

Re: Fed Ends Zero-Rate Era

#314

Post by brc » Thu, Dec 17, 2015, 4:32 AM UTC

millstone wrote: post #286

brc wrote: post #226

Earlier quoted context omitted.

Of course I know it is Say's Law. My purpose here is to post it for people to understand the principle. Giving everyone money does not work. You can only increase the size of the economy and wealth of the people within by producing more. That much is self evident, yet people have been bamboozled by muddied thinking that aggregate demand is all. I don't try and convince the hardened Keynesian thinker with Krugman in t…

I'm not sure where you're going with that. Ok, so we become wealthier if we produce more. The next question is, how do we shape public policy so that our economy produces more? If you tug on that rope, you find that supply is connected to demand, and demand is connected to things like the money supply. So choosing the correct money supply can increase real output. I think you're arguing against a strawman, something…

The whole point of Keynesian theory is that, in times of economic contraction ('a glut' in the old money), you should borrow from the future and buy things - any things - now.

You could make the argument that buying worthwhile things - like dams or power stations - makes this true. But for two things : if it's worth building a dam for positive return, you should do it at any time, as soon as you can. The second is that governments do not spend money on buying good things. In 2008/9 they spent money buying and crushing old cars, which is about as close to paying people to dig holes and fill them in as you can get.

The believers in 'aggregate demand is all' absolutely do believe that giving people money makes us all richer. They may not say it like that, but that's what they mean.

Re: Fed Ends Zero-Rate Era

#315

Post by seoguru » Thu, Dec 17, 2015, 4:39 AM UTC

roymurdock wrote: post #28

Fed raising interest rates 0.25% and setting a goal of "normal" 2% by 2018 means little to nothing. Market already priced the miniscule rate hike in as the move was widely expected, and move did nothing to assure markets that the Fed is in control, or set credible, measurable goals for future hikes. Fed can continue to push on the supply side of money at the bank/institutional level all it wants. We need the Federal…

Yes. Former Chief Economist and Managing Director of PIMCO: The deficit is too low. https://www.youtube.com/watch?v=Sdhv2WuoYGM&feature=youtu.be...

Re: Fed Ends Zero-Rate Era

#316

Post by branchless » Thu, Dec 17, 2015, 5:17 AM UTC

toomuchtodo wrote: post #51

dsr_ wrote: post #50

Earlier quoted context omitted.

If you want to stimulate aggregate demand at the consumer level, you need more people to have good jobs, so they can make money, so they can spend money. This would represent a reversal of the trend since 1970 towards greater income inequality. It is not clear to me that anyone is doing anything about that (except, of course, in the negative sense.)

Exactly correct. The Federal Reserve has the knobs and levers to create asset bubbles, but not to stoke consumer demand. Only Congress can do that with legislation increasing the minimum wage, changing corporate taxes so it behooves companies to pay employees more, or legislation increasing entitlements such as social security. Those in lower and middle classes are the ones who govern the velocity of money through th…

So kill the asset bubble and give the next generation more disposable income...

Re: Fed Ends Zero-Rate Era

#317

Post by gnaritas » Thu, Dec 17, 2015, 5:34 AM UTC

brc wrote: post #285

gnaritas wrote: post #271

Earlier quoted context omitted.

You're missing his point; he's saying whomever happens to be the larger group in a given scenario will be the better spender of the money. Which is a point, given your stances, that you should be agreeing with unless you're just purely anti-government. He's saying the government is a better spender than the 'wealthy oligarchs' precisely because that's such a small group and the government is the bigger group but that…

'Good' and 'bad' spending are pretty loose concepts. Sure, building weapons is worse than building tractors in terms of human impact, but when you get down to incessant government intervention in everyday spending, it's not clear that governments spend money better than individuals of any wealth level. Only a minority of citizens waste their money; while a majority of governments waste theirs.

I don't care how you define good and bad; that's not the topic. You asked how he categorized wealthy as worse spenders than government, the answer is the size of the group. More people equals better spending decisions because it's less centralized. So are you anti-government, or anti-central planning? Because you can have defacto central planning without a government; that's what extreme wealth is, defacto central planning. Sometimes giving the government the money to spend is the more decentralized option.

Re: Fed Ends Zero-Rate Era

#318

Post by brc » Thu, Dec 17, 2015, 5:35 AM UTC

millstone wrote: post #299

brc wrote: post #238

Earlier quoted context omitted.

I don't agree with the statement that a glut in one area must equal a surplus elsewhere. You've added at interpretation to my statement. If a person produces hot pink sweaters and finds nobody wants them, that doesn't mean there is a shortage of blue sweaters, or even sweaters in general. Additionally, it might mean that people might want hot pink sweaters, but not at the price being asked. Taking this back to labor…

You wrote "The person who produces unwanted goods and services must...switch production to what is desired," which presupposes that there is something else desired, i.e. there is no general glut. For example, we Americans demand less oil today than we did 10 years ago. This contributes to the oil glut, which has turned many drill sites into malinvestments and caused layoffs in the petroleum industry. How can you say…

Unpacking that slightly. First, an oil glut is not a general glut, so it's possible that the demand for oil has shifted elsewhere. I don't agree that an ad campaign for national gas guzzler travel would increase oil prices, because it's very unlikely that such a campaign would work, and even if it did, it would be a poor choice of resource spend.

Going back to a general glut - and I hate the term - of course it is possible to have an economy-wide contraction where production overwhelms demand temporarily. This is possible from external shocks (eg war, disaster) or persistent interference (eg Venezuela). Such a scenario is generally best resolved by solving the cause of the shock and doing everything to let the market clear. Most of the time this will be temporary and conditions will resolve, if not at the speed at which makes everything happy. I think the key thing here is that while there will be demand for other production at some point, it's necessarily a case of timing and there is likely to be a lag before new preferences are developed. The key here for future prosperity is not to borrow and spend on what is already not wanted, or to borrow and spend on pointless spending just for the sake of making money move.

The alternative is if an economy dropped to a new, lower level of production by choice, such as if everyone decided to lower their production and consumption and consciously not increase it again. You'd then get reversing economic growth, but then that would be the intention as results from people choosing less.

Re: Fed Ends Zero-Rate Era

#319

Post by guelo » Thu, Dec 17, 2015, 5:39 AM UTC

bpodgursky wrote: post #158

Frondo wrote: post #145

Earlier quoted context omitted.

Nah, it's actually pretty easy. The 535 people just need to assign general priorities, like spend a third our country's money on health care and education, a third of it on infrastructure, a little bit on funding pure research, and whatever's left over, the military can have. They're not in charge of deciding how each individual dollar is spent, and they shouldn't be.

This is super naive. For much of the past decade, congress could have removed the entire discretionary budget (yes, including the military) and still had a deficit. The deficit is driven by social security, medicare, and medicaid. If you want to balance the budget, you have to reform those.

Social Security runs a surplus.

Re: Fed Ends Zero-Rate Era

#320

Post by crdoconnor » Thu, Dec 17, 2015, 5:56 AM UTC

greggman wrote: post #306

crdoconnor wrote: post #244

Earlier quoted context omitted.

I'm not at all concerned about economists who are "for" or "against" the minimum wage. They can hold whatever opinions they want if they don't lie. It's the economists who poorly design studies with the intent of demonstrating that it either causes prices to rise uncontrollably (which it doesn't), causes unemployment to rise (which it also doesn't) and who pointedly never, ever, ever look at the effect it has on prof…

It sounds like you've dismissed any economist who doesn't agree with you. You claim raising the minimum wage would never raise prices nor cause unemployment to rise. Ok, let's set it to $1000 a hr. Do you really think that would have no effect on either of those? Maybe there's some range on increase where the effects are offset by other effects but it's not lying to believe those effects will become real at some poin…

It hits profits first and hardest. Raise it significantly and it also causes prices to rise. Raise it to stupendous levels (in the US probably > $40-50 hr) and it eventually causes unemployment.

Realistically speaking, though, most arguments are over minimum wage hikes that only affect profits and won't even have a minimal effect on prices. $10 -> $12 isn't even going to cause prices to rise, let alone have an effect on employment. It'll go straight from profits to paychecks.

I can think of only one instance where raising the minimum wage actually affected employment, actually, and that was because it was set at first world levels in a third world environment.