Can the Fed raise interest rates? • Hacker News Board

Re: Can the Fed raise interest rates?

#51

Post by jayfuerstenberg » Wed, Sep 16, 2015, 8:22 PM UTC

HCIdivision17 wrote: post #32

acd wrote: post #19

Earlier quoted context omitted.

Point taken about inflation. But the thermophysics part still hold true though. You cannot increase economic output a lot without using more energy which will make earth boil.

The economy doesn't follow natural law, or - in many ways both literal and figurative - any laws at all. If you think it should, then it'll appear to violate all sorts of principles all the time. In some cases it behaves like a closed system (employment in countries), in others it's an open system (companies). Some cases money is conserved (double entry booking), in others money behaves more like a Banach-Tarski ball…

Neo-classical capitalism doesn't even acknowledge the laws of nature let alone follow them.

Jeremy Rifkin has written a lot of about this topic and his arguments that economists should first learn the laws of thermodynamics before being set loose on the economy.

His book, "The Third Industrial Revolution" touches on this topic quite a bit, if your interested… http://www.amazon.com/Third-Industrial-Revolution-Lateral-Tr...

Re: Can the Fed raise interest rates?

#52

Post by jhulla » Wed, Sep 16, 2015, 8:22 PM UTC

amluto wrote: post #4

That 10% reserve number is interesting. I learned about the 10% reserve ratio in macroeconomics class, where I also learned that there's this thing called the money multiplier. See, if banks are required to hold a fraction r (10%) of their deposits in reserve, then obviously they'll lend out the rest, which will in turn be held or spent by the borrower, and one way or another it'll end up back in a bank. So a (1-r) f…

This is an excellent paper by the Bank of England about how money is created in modern economies:

http://www.bankofengland.co.uk/publications/Documents/quarte...

Re: Can the Fed raise interest rates?

#53

Post by carsongross » Wed, Sep 16, 2015, 8:23 PM UTC

irln wrote: post #40

carsongross wrote: post #34

Earlier quoted context omitted.

See above. Or, ask yourself: why is there any reserve ratio at all?

As long as a loan is collateralized by an asset that a reasonable market would value at or above the amount of the loan, the only issue is liquidity...right? So whether the ratio is 10%, 2%, etc. is kind of irrelevant. If folks want their money all at once, no reserve requirement would be sufficient. But at least the idea here (not that it has been followed) is to keep things stable enough so no large group runs for…

That is not correct. For demand deposits there should be a 100% reserve requirement. No bank run is possible: if everyone shows up and wants the money they are legally able to demand at a given moment, it's all there.

Loans are then (strictly) duration matched with financial instruments offered to the public. Collateralization provides the banks with assets to offset the inevitable bad loans, but "investors" can't demand their money back earlier, and the banks had damn well better be on point when it comes to making and managing the loans, or they are out of business. There would be a secondary market for these instruments, of course.

It's pretty straight forward when you just think in terms of contracts. Its a testament to how fucked up (or, perhaps, effective) our education system is that smart people like yourself can't see these problems straight away.

Re: Can the Fed raise interest rates?

#54

Post by roymurdock » Wed, Sep 16, 2015, 8:23 PM UTC

mpweiher wrote: post #38

roymurdock wrote: post #18

The crux of the problem is that the Fed is "pushing on a string" - playing with the supply side of money while having absolutely no effect on the demand side. Thomas Palley [1] sums this up nicely in a 2011 critique of QE: The underlying problem is structurally deficient demand caused by thirty years of neoliberal economic policies that have undermined the income and demand generation process (Palley, 2009). However,…

You mean: "we keep pouring money in at the top, but it just isn't trickling down" ?

Yes.

I recommend that you read the linked paper, where Palley highlights the 5 channels through which QE should have had an expansionary effect on the economy, according to Keynesian economic theory (hence the name of the paper).

Here are the 5 channels:

1. A traditional Keynesian interest rate channel whereby the Fed purchases long-term bonds in order to reduce the long-term interest rates as it is unable to further reduce short term rates (zero lower bound)

2. The Tobin’s q channel whereby some of the liquidity is directed to the stock market, increasing stock prices and investment in turn

3. A wealth effect that increases consumption brought about by higher bond and equity prices

4. Expected inflation brings forward consumption and investment spending as households and firms purchase in the present rather than in the future when money is expected to lose real purchasing power (increased velocity of money due to inflation)

5. Increased net exports whereby some of the liquidity is used to purchase foreign reserves, decreasing the exchange rate and devaluing the dollar

I'll leave it up to you to research whether or not these 5 channels have been effectively manipulated as Keynesians would have predicted through QE. But I have a feeling you already know the answer...Bonus points if you can answer this question: Why did channel #2 work so well, and why haven't we seen the supposed wealth effect (#3) predicted under a burgeoning stock market?

Re: Can the Fed raise interest rates?

#55

Post by [deleted] » Wed, Sep 16, 2015, 8:24 PM UTC

mpweiher wrote: post #38

roymurdock wrote: post #18

The crux of the problem is that the Fed is "pushing on a string" - playing with the supply side of money while having absolutely no effect on the demand side. Thomas Palley [1] sums this up nicely in a 2011 critique of QE: The underlying problem is structurally deficient demand caused by thirty years of neoliberal economic policies that have undermined the income and demand generation process (Palley, 2009). However,…

You mean: "we keep pouring money in at the top, but it just isn't trickling down" ?

[deleted]

Re: Can the Fed raise interest rates?

#56

Post by Steko » Wed, Sep 16, 2015, 8:25 PM UTC

roymurdock wrote: post #18

The crux of the problem is that the Fed is "pushing on a string" - playing with the supply side of money while having absolutely no effect on the demand side. Thomas Palley [1] sums this up nicely in a 2011 critique of QE: The underlying problem is structurally deficient demand caused by thirty years of neoliberal economic policies that have undermined the income and demand generation process (Palley, 2009). However,…

Any mention of the Fed on HN seems to come with a generous helping of heterodox complaints about QE. I'll just point out that despite throwing everything at the wall for 6+ years they are all still batting zero.

Re: Can the Fed raise interest rates?

#57

Post by chralieboy » Wed, Sep 16, 2015, 8:26 PM UTC

mpweiher wrote: post #38

roymurdock wrote: post #18

The crux of the problem is that the Fed is "pushing on a string" - playing with the supply side of money while having absolutely no effect on the demand side. Thomas Palley [1] sums this up nicely in a 2011 critique of QE: The underlying problem is structurally deficient demand caused by thirty years of neoliberal economic policies that have undermined the income and demand generation process (Palley, 2009). However,…

You mean: "we keep pouring money in at the top, but it just isn't trickling down" ?

Precisely.

In Silicon Valley it would be like a company that is raising record amounts of money at mind-boggling valuations but whose revenue isn't growing at the same pace.

One of the major question marks has been wage growth during the recovery. Stock markets have been skyrocketing, but wages have generally remained stagnant.

Similarly, labor participation (i.e. of the people who could work, how many are actively looking/employed) has remained worryingly low. While the US unemployment rate is very low (~5.1%), that isn't a direct inverse of those who are employed. There is a huge group of people who have simply given up trying to find work and others who are working but less than they would like (e.g. part-time, have one job but would like to work another/overtime, etc.)

We see that effect on inflation, which is no where near the 2% level that the Fed would like. Inflation crudely correlates with real growth because it encourages spending; if the money I have will be worth less in the future, I'm more likely to spend it today.

So in effect, we look at the S&P and think "Awesome! We're at all time highs!" But then we look at the economic fundamentals for people and it looks less sketchy.

Re: Can the Fed raise interest rates?

#58

Post by dragonwriter » Wed, Sep 16, 2015, 8:27 PM UTC

carsongross wrote: post #25

amluto wrote: post #4

That 10% reserve number is interesting. I learned about the 10% reserve ratio in macroeconomics class, where I also learned that there's this thing called the money multiplier. See, if banks are required to hold a fraction r (10%) of their deposits in reserve, then obviously they'll lend out the rest, which will in turn be held or spent by the borrower, and one way or another it'll end up back in a bank. So a (1-r) f…

With sweep accounts, the reserve ratio is far, far worse than 10%. This is why we are screwed: we've been expanding the fractional ratio for 60 years and it's finally starting to matter as the U.S. economy slows and stops growing fast enough to paper it over. There is no exit. The Fed cannot raise rates.

> This is why we are screwed: we've been expanding the fractional ratio for 60 years and it's finally starting to matter as the U.S. economy slows and stops growing fast enough to paper it over.

If the above was the problem, then the below wouldn't matter:

> There is no exit. The Fed cannot raise rates.

Because the Fed wouldn't be considering raising rates. If the US economy is growing too slowly, the Fed generally seeks to lower rates, not raise them.

Re: Can the Fed raise interest rates?

#59

Post by chralieboy » Wed, Sep 16, 2015, 8:28 PM UTC

goodcanadian wrote: post #2

From the article: Why doesn’t the Fed sell its Treasury bonds then? Because there’s no one buyer big enough to purchase them. The Federal Reserve itself is now the world’s largest holder of US government debt, after its bond-buying programs pushed its holdings above those of China. In an otherwise interesting and well written article, this is just an absurd statement. They are under no obligation to sell all of them.…

Thank you for this, it is spot on.

It's like saying Amazon can't have a sale because then it would have to lower the price of every item it sells.

Re: Can the Fed raise interest rates?

#60

Post by irln » Wed, Sep 16, 2015, 8:29 PM UTC

Steko wrote: post #56

roymurdock wrote: post #18

The crux of the problem is that the Fed is "pushing on a string" - playing with the supply side of money while having absolutely no effect on the demand side. Thomas Palley [1] sums this up nicely in a 2011 critique of QE: The underlying problem is structurally deficient demand caused by thirty years of neoliberal economic policies that have undermined the income and demand generation process (Palley, 2009). However,…

Any mention of the Fed on HN seems to come with a generous helping of heterodox complaints about QE. I'll just point out that despite throwing everything at the wall for 6+ years they are all still batting zero.

There are so many smart people on HN, such as yourself (and not being sarcastic!), with wide ranging expertise. I think we can crowd source some improvements right here.