Fed cuts half point in emergency move amid spreading virus

The Coronavirus is going to harm the economy no matter what. But if the Fed acts correctly it can prevent compounding effects like an increase in unemployment that leads to a further decrease in production.

Don’t worry, literally every single one of the presidential candidates in the democratic primary wants to “build wealth” by making housing ever more expensive. It’s practically state policy to make it impossible for a first-time buyer.

Interest rates have been on a secular decline over the course of the last century. Different economists have described this via various terms- "savings glut" is the one I like the most (even though I don't like Krugman). Right now there is so much saved cash out there looking to be lent out that any project looking for financing can find it for cheap.

The Fed does not keep interest rates low in a vacuum. There is an auction system that determines real rates. If the Fed is not able to sell all their bonds at the target rate, they have to adjust.

In the long run, I think we will see:

1. (at risk of calling this bull market a "new normal") P/E ratios for stock will continue to climb in a secular fashion. Low returns from the alternative investment of bonds will dictate high P/E ratios.

2. Debt financing will remain cheap. Low interest rates signal cash that is desperate to find a place to park it.

3. Government debt will remain popular and affordable. This is a win for Keynesians.

4. Secular low interest rates are an indicator of a stable and mature economy, which is good. The bad part is that they signal a world where obvious available capital investment projects are missing- we seem to have picked the low hanging fruit.

5. Next recession the U.S. will hit the zero lower bound, and we will see lots of QE and/or nominal negative interest rates through some institutional mechanism.

6. Increasing government deficits look better when interest rates are low.

7. Speculative: Deficit spending can increase indefinitely if real interest rates are below 0 (aka nominal rates are below inflation). To put it in other terms: Any deficit spending is free money up until the point that it causes inflation to rise about the nominal interest rate.

This assumes a return to trend, right? If stocks are temporarily depressed you can get them at a discount.

If stock prices are permanently lower as a result, though, it's certainly not good for you. And, believe it or not, this is probably the more accepted idea -- that price movements are memoryless, that we shouldn't subscribe to the gamblers fallacy (that down today means up tomorrow), and that being happy for a price drop is a form of timing the market, which is frowned upon.

I don't fully buy it, but it's worth thinking about.

We are in/at the start of an actual financial crisis, people just haven't internalized that yet.