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Why I Dissented

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Re: Why I Dissented

#41

Post by lend000 »

Like unemployment, inflation measures seem to be significantly under-represented in the government's working data. Of course, inflation can never be perfectly measured, even against the cost of commodities, since that assumes commodities are of constant value. This is simply not true -- although values may not change as quickly as new products, almost every commodity is slightly less valuable than it was ten years ago due to marginal improvements in operations, supply-chain, and production technology.

And then you have the impact of oil, whose volatility is derived from difficult-to-predict geopolitics and abundance, making it useless as a short-term inflation indicator and even more useless as a very long term indicator, and yet we heavily rely on it regardless. Might as well include Bitcoin while we're at it. Not to mention the absence of real estate / college tuition / credit card debt in these measurements. Here's an interesting look at some cost comparisons, showing just how difficult it is to capture inflation using a CPI or even PCE approach.

http://www.mybudget360.com/cost-of-living-compare-1975-2015-...

While the author is concerned with meeting his distorted inflation metric on paper before raising rates, there's another reason to keep rates low: the cost of debt is about to rise for the world's largest debtor, and the payment is going to further add to its deficit. If the Fed is only concerned with the short-term problems of the US economy, like it usually is, then it should probably never raise rates.

Re: Why I Dissented

#42

Post by hueving »

autokad wrote: post #19
tradersam wrote: post #16

Earlier quoted context omitted.

> its sort of like saying lets take poison so that if we get sick we can stop taking poison and feel better. Raising interest rates isn't poison. Also, at the moment deflation isn't a bigger risk. It says right in the article inflation is slowly rising, not falling.

"Raising interest rates isn't poison." Higher interest rates are intended to slow down the economy by making borrowing harder. "Also, at the moment deflation isn't a bigger risk. It says right in the article inflation is slowly rising, not falling." 1.74% is very low, and on the wrong side of target inflation. ~3% inflation is considered historic, and we are no where close to getting there. not even a little bit. if…

>Higher interest rates are intended to slow down the economy by making borrowing harder.

Which is precisely what you need to do to get inflation under control. You may be correct that inflation is too low right now to tighten the screws, but calling interest rates poison is ignoring the reason the fed sets them.

Re: Why I Dissented

#43

Post by aidenn0 »

patrickg_zill wrote: post #40
skywhopper wrote: post #14

Glad to hear that someone on the Fed has some sense. The confusion of "target" with "ceiling" has been disastrous for the economic recovery. Raising rates now is a terrible idea. Moderate inflation is good for an economy based on credit, _especially_ so when so many individuals are overburdened by overwhelming student loan debt and underwater mortgages. Running under 2% core inflation for the past nine years has dest…

What is the source of your view, that supports your pro inflation statements? I have heard this argument before, but only get arguments from authority when I ask for actual data that shows this.

On a microeconomic scale, at least, it should be self-evident that higher inflation benefits debtors, and hurts creditors:

If I owe you $100, and a dollar becomes worth less, I'm better off (since I'm paying you back in dollars that have less real value than what I borrowed).

There is a macroeconomic argument that a predictable and modest inflation rate is good for the economy. Some of the points are:

1) If both parties can accurately predict future inflation, it becomes much easier to negotiate an interest rate for borrowing; if there is much uncertainty about future inflation, then there is extra currency risk added to both the borrower and lender.

2) In the case of deflation, investors will be very cautious, since they become more wealthy just by holding cash.

3) In the case of very high inflation, currency becomes useless as a store of value, so people will rush to convert their currency to something less inflationary.

So if you think that currency should be a useful store of value, that we should encourage those with wealth to invest it in possibly risky endeavors and you want to encourage free-flow of credit by removing some of the risks involved, then those 3 points will be pro modest inflation.

There are of course counterarguments:

A) Free flow of credit has downsides as well as upsides; in particular households with lower net worth have less ability to absorb economic downturns.

B) Forcing wealthy people to invest to preserve their wealth by taking risky investments can create bubbles

C) B+1 means that the bubbles can become highly leveraged.

Re: Why I Dissented

#44

Post by petters »

skywhopper wrote: post #14

Glad to hear that someone on the Fed has some sense. The confusion of "target" with "ceiling" has been disastrous for the economic recovery. Raising rates now is a terrible idea. Moderate inflation is good for an economy based on credit, _especially_ so when so many individuals are overburdened by overwhelming student loan debt and underwater mortgages. Running under 2% core inflation for the past nine years has dest…

Perhaps the yearly targets should accumulate, so that if the actual inflation one year was 1%, the target for the next year becomes about 3%.

Re: Why I Dissented

#45

Post by jfoutz »

patrickg_zill wrote: post #40
skywhopper wrote: post #14

Glad to hear that someone on the Fed has some sense. The confusion of "target" with "ceiling" has been disastrous for the economic recovery. Raising rates now is a terrible idea. Moderate inflation is good for an economy based on credit, _especially_ so when so many individuals are overburdened by overwhelming student loan debt and underwater mortgages. Running under 2% core inflation for the past nine years has dest…

What is the source of your view, that supports your pro inflation statements? I have heard this argument before, but only get arguments from authority when I ask for actual data that shows this.

I think it's just basic macro. Interest rates are low, it's easy to get loans. Interest rates are high, and it's hard. Excessively low, and maybe people make 20-30 year commitments that they aren't ready for.

Like, would we all be better off if maybe student loans were a little tougher to get?

Also, lowering rates speeds up the economy a bit. It's probably better to run a little high, so interest rates can be dropped a little when bad things happen; that'll goose the economy, and power through small rough patches.

Re: Why I Dissented

#46

Post by jfoutz »

caf wrote: post #28
tradersam wrote: post #5

Earlier quoted context omitted.

> that the Fed should wait on raising interest rates I don't agree either. If the economy tanks again, there is almost nothing that can be done, being that one of the usual steps is to lower interest rates to spur growth.

It's the interest rate in real terms (nominal rate minus inflation rate) that spurs growth, so higher inflation itself adds a couple more arrows back into the quiver. (That's also why deflation is avoided like the plague - in that event, even a zero nominal interest rate is a positive real rate).

I kinda wonder if technical advances means we actually have de facto deflation. Regular stuff is constantly being improved. Perhaps socks are 2% cheaper or better every year, effectively making inflation negative.

Re: Why I Dissented

#47

Post by [deleted] »

caf wrote: post #28
tradersam wrote: post #5

Earlier quoted context omitted.

> that the Fed should wait on raising interest rates I don't agree either. If the economy tanks again, there is almost nothing that can be done, being that one of the usual steps is to lower interest rates to spur growth.

It's the interest rate in real terms (nominal rate minus inflation rate) that spurs growth, so higher inflation itself adds a couple more arrows back into the quiver. (That's also why deflation is avoided like the plague - in that event, even a zero nominal interest rate is a positive real rate).

[deleted]

Re: Why I Dissented

#48

Post by nhaehnle »

gozur88 wrote: post #23
skywhopper wrote: post #14

Glad to hear that someone on the Fed has some sense. The confusion of "target" with "ceiling" has been disastrous for the economic recovery. Raising rates now is a terrible idea. Moderate inflation is good for an economy based on credit, _especially_ so when so many individuals are overburdened by overwhelming student loan debt and underwater mortgages. Running under 2% core inflation for the past nine years has dest…

>Moderate inflation is good for an economy based on credit, _especially_ so when so many individuals are overburdened by overwhelming student loan debt and underwater mortgages. Inflation is good for borrowers and bad for lenders. I don't see any reason to prioritize borrowers.

By their very nature, borrowers tend to spend money while lenders don't. The total sum of spending in the economy is equal to GDP, so if you care about increasing GDP, prioritizing borrowers makes sense.

At least, that's the basic argument. In practice, what might happen is that the borrowers mostly borrow to make asset purchases in financial markets rather than in the real economy, which is a kind of spending that doesn't count towards GDP.

Re: Why I Dissented

#49

Post by Kenji »

Wow, real dissent right here. Central banker votes a bit different on interest rates. It has zero consequences for him. Do you know what would be real dissent? Scrapping fiat money and going back to money that cannot be created out of thin air, proper money.

Re: Why I Dissented

#50

Post by brutus1213 »

nhaehnle wrote: post #48
gozur88 wrote: post #23

Earlier quoted context omitted.

>Moderate inflation is good for an economy based on credit, _especially_ so when so many individuals are overburdened by overwhelming student loan debt and underwater mortgages. Inflation is good for borrowers and bad for lenders. I don't see any reason to prioritize borrowers.

By their very nature, borrowers tend to spend money while lenders don't. The total sum of spending in the economy is equal to GDP, so if you care about increasing GDP, prioritizing borrowers makes sense. At least, that's the basic argument. In practice, what might happen is that the borrowers mostly borrow to make asset purchases in financial markets rather than in the real economy, which is a kind of spending that d…

Savers build up capital stocks. When you consider domestic savers vs external ones, you start to see a weird problem: over time, you sell out all your assets. We're sort of seeing this in real-estate in major cities.
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