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The Bubble Question

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Re: The Bubble Question

#11

Post by rtpg »

sz4kerto wrote: post #7

The _really_ scary thing is that as rates are moved close to 0, inflation seems to slow down. This is true both in the US (almost 0 rates, low inflation) and in the EU (a bit higher rates, but almost 0 inflation in the last few months). If deflation kicks in, then this flood of free money will evaporate very quickly.

Economics aren't discontinuous around zero. All this evaporation would either happen approaching zero or not happen.

Deflation does not mean spending money is a bad idea. If I have $100 and there's 10% deflation, in a year, it's worth $110 of today's dollars(or some other number because I can't math, but in that general direction). But if a company is experiencing 100% growth and is worth $100 today, it's still a good investment (if you can sell it in a year).

Re: The Bubble Question

#12

Post by tonyedgecombe »

gizmo wrote: post #10
sz4kerto wrote: post #7

The _really_ scary thing is that as rates are moved close to 0, inflation seems to slow down. This is true both in the US (almost 0 rates, low inflation) and in the EU (a bit higher rates, but almost 0 inflation in the last few months). If deflation kicks in, then this flood of free money will evaporate very quickly.

The Eurozone is looking at mild deflation, and it will do a lot of damage. Deflation in the US is nearly impossible, because the FED will just purchase assets until the problem of low inflation goes away. Deflation in the Eurozone will be bad mainly because it will make the personal and public debts of the debtor nations unbearable. Not because "money will evaporate very quickly".

Deflation will be bad because nobody will by something today when they think it will be cheaper tomorrow.

Re: The Bubble Question

#13

Post by michaelt »

rdl wrote: post #6
kunle wrote: post #4

This is pretty spot on. We in the SFBA don't think about rates much but in a past life it was all I did. The moment the markets price in a long term expectation of rates rising, a lot of the current behavior we are seeing (eye popping salaries/valuations/home prices/rents) will correct themselves. It won't mean the businesses are bad - just that they're priced less richly. Until then, they are making hay while the su…

Aren't a lot of those levels "sticky"? I could certainly see rate of increase going to zero very quickly, but actual decreases in salaries, leveraged assets like homes, etc. are a much bigger step.

I agree it's unusual that an employer will cut someone's salary - but there's another way to decrease average salaries.

If the cost of money rises, companies that are only viable while the cost of money is low go out of business, and their employees' salaries drop to zero.

Re: The Bubble Question

#14

Post by dgreensp »

7Figures2Commas wrote: post #2

> It’s hard to sustain a bubble for four years. Says who? As Wilson observes, "Since the financial crisis of 2008, policy makers in the developed world have kept interest rates at or near zero. They have flooded the market with cheap money in an attempt to heal the wounds (losses) of the financial crisis and incent business owners to invest and grow their businesses." It's kind of amazing that he doesn't see how year…

Interestingly, he didn't answer the question with a no. He described a situation that, to some readers, may be a yes. "It's hard to sustain a bubble for four years, but here we are," in essence. He explains that the demand for stock in certain companies is artificially high, driving up valuations by a multiple.

Re: The Bubble Question

#15

Post by kunle »

rdl wrote: post #6
kunle wrote: post #4

This is pretty spot on. We in the SFBA don't think about rates much but in a past life it was all I did. The moment the markets price in a long term expectation of rates rising, a lot of the current behavior we are seeing (eye popping salaries/valuations/home prices/rents) will correct themselves. It won't mean the businesses are bad - just that they're priced less richly. Until then, they are making hay while the su…

Aren't a lot of those levels "sticky"? I could certainly see rate of increase going to zero very quickly, but actual decreases in salaries, leveraged assets like homes, etc. are a much bigger step.

They are sticky, but part of the rate of change is driven by people moving between companies and getting raises and such. That will just happen less and attrition over time will do the rest.

Re: The Bubble Question

#16

Post by kunle »

michaelt wrote: post #13
rdl wrote: post #6

Earlier quoted context omitted.

Aren't a lot of those levels "sticky"? I could certainly see rate of increase going to zero very quickly, but actual decreases in salaries, leveraged assets like homes, etc. are a much bigger step.

I agree it's unusual that an employer will cut someone's salary - but there's another way to decrease average salaries. If the cost of money rises, companies that are only viable while the cost of money is low go out of business, and their employees' salaries drop to zero.

Absolutely spot on

Re: The Bubble Question

#18

Post by badamson »

sz4kerto wrote: post #7

The _really_ scary thing is that as rates are moved close to 0, inflation seems to slow down. This is true both in the US (almost 0 rates, low inflation) and in the EU (a bit higher rates, but almost 0 inflation in the last few months). If deflation kicks in, then this flood of free money will evaporate very quickly.

I think we should be more worried about high inflation in the future, not deflation:

The lack of inflation despite the Fed's printing can be explained in the massive increase in excess reserves (and also the slowdown in the velocity of money.): https://research.stlouisfed.org/fred2/series/EXCSRESNS

This jump is a result of the Fed getting authorization from congress to pay interest on said reserves. By controlling this rate, the Fed can effectively control how much excess reserves they have, thus having a large impact on the rate of inflation. Having said that, it is a massive and unprecedented amount of excess reserves. If something goes terribly wrong in their exit strategy (and/or the velocity of money picks up unexpectedly) then the worry would be high inflation, not deflation.

EDIT: I believe you meant if inflation kicked in then the flood of free money would discontinue. That would be accurate as interest rates would rise and QE would most certainly be off the table. Deflation fears is what set QE into high-gear in the first place ;)

Re: The Bubble Question

#19

Post by gizmo »

tonyedgecombe wrote: post #12
gizmo wrote: post #10

Earlier quoted context omitted.

The Eurozone is looking at mild deflation, and it will do a lot of damage. Deflation in the US is nearly impossible, because the FED will just purchase assets until the problem of low inflation goes away. Deflation in the Eurozone will be bad mainly because it will make the personal and public debts of the debtor nations unbearable. Not because "money will evaporate very quickly".

Deflation will be bad because nobody will by something today when they think it will be cheaper tomorrow.

That effect isn't very strong in an already depressed economy (where people only buy the bare necessities anyway).

Re: The Bubble Question

#20

Post by kenster07 »

tonyedgecombe wrote: post #12
gizmo wrote: post #10

Earlier quoted context omitted.

The Eurozone is looking at mild deflation, and it will do a lot of damage. Deflation in the US is nearly impossible, because the FED will just purchase assets until the problem of low inflation goes away. Deflation in the Eurozone will be bad mainly because it will make the personal and public debts of the debtor nations unbearable. Not because "money will evaporate very quickly".

Deflation will be bad because nobody will by something today when they think it will be cheaper tomorrow.

That's a bit of an overstatement. Many purchases are time-sensitive to the extent that expected deflation would have to be very high.
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