We will find there are no stable regimes of inflation above the 2% target (not that that was stable either). A 5% target will find us with regular periods of 15% inflation within a handful of years. There has been one feedback loop that hasn't yet really kicked in, but is starting to- public employee wage increases of 20-30%. Then we are off to the races.
How do you hedge this? You don't, not really. The best you can do is buy time, but if you do successfully find protection, the government will consider you a lucky ducky who needs to share.
Arnold - I agree with you on A) Government options B) “crypto” technically not being the answer. C) However, Bitcoin (not crypto - big difference) is quite possibly the answer. Even with or BECAUSE of it’s volatility. The volatility repression regime that our current financial system has been under for the last 12+ years has been extreme and has removed true signal from the market place. The LACK of volatility should scare the pants off of you. Yesterday, the Wall Street Journal had a headline “Houses fall in value for first time in 11 years”. That is crazy. Repressing volatility is delaying and amplifying volatility. Bitcoin has had some extreme volatility, but the trend line from 2010 - today is up and to the right due to it’s properties that Lyn is referring to. Can’t print more of it, can’t confiscate it, can transport it around the world in any denomination cheaper than any store of value ever created. Just look at this volatility of gold against marks in the Weimar Republic.
Trust me - gold was the play if you could get it out of the country. Bitcoin is digital gold that can’t be confiscated. Rethink Bitcoin - have a zoom with Lyn Alden. I’d pay to attend.
bank deposits - $20T, public stock capitalization - $100T, private company capitalization - ?, Real Estate - ? (US homes $40T), commercial bonds? municipal bonds? federal public debt - ~$30T
Aside: Not that I'm typical but bank accounts are a tiny portion of my assets. Throw in money market funds and it isn't much bigger. The rest in stocks, bonds, real estate.
Thoughts:
Not my first thought but making alternatives to bank deposits illegal would seem closer to impossible than just absurd. Maybe you are just referring to that relatively tiny $20T of bank deposits but I don't know how you'd regulate to force that asset class not shrink.
My first thought was that they can't inflate away the govt debt problem because too many of the expenditures are inflation adjusted.
Inflating is at best a temporary delay of inevitable pain. Poor countries have to inflate to pay debts because they have no alternative. US has lots of wealth and therefore has alternatives.
Maybe most importantly, I don't think anyone can argue that trying to inflate away federal debt and expenditure problems would be good for the economy. A strong economy is key to the best outcome. Therefore taming inflation is the only reasonable objective.
I'm not saying what US will do, only that it is not even close to a foregone conclusion that inflation will remain.
"The form that regulation is likely to take is a requirement that banks undertake less lending to the private sector and instead hold more of their assets in the form of government securities."
Could happen, but what _ought_ to happen is on the margin banks should lend more to the private sector at variable rates.
I think this is now the best and most succinct explanation of what we face. One angle I remember a commentator speculating on is whether the government would require ETFs/Mutual Funds to hold some amount of treasuries as a way to force buying.
What are the prospects for a major increase in productivity, thanks to breakthroughs in Artificial Intelligence technologies? (It has sometimes occurred that positive technology shock transcends the drag of political economy.)
The "you" and "government" is a silly dichotomy. Of course different policies have different distributional and growth consequences, but that is for all the "you's." The "you/government" framing is at least as bad as arguments about how policy affects "firms" that ignore that "firms" have owners.
Pretty much explained in a nutshell the factors underlying my vague sense of unease regarding the economy since lockdown began seemingly intentionally putting small businesses out of business and up to reading about the complete depositor bailout at SVB.
However, what if this uncharacteristic full bailout of account holders isn’t part of the implementation of systemic regulation of banks coming down the pipe? What if this bailout is just more of the same from 2008, special treatment for the wealthy? Most depositors at this bank were more like the well heeled bankers that served them, rather than ‘regular people’.
Re: "in the 1940s and 1950s, tax revenues exceeded non-interest spending, bringing down the ratio of government debt to GDP. Now, the large government deficits are in front of us. The need to spend on Social Security and Medicare means that tax revenues are projected to be below non-interest spending. The outlook is for the ratio of government debt to GDP to keep growing until. . .until. . .well, something has to give."
Might the something-that-will-give be *tax rates*? What is your subjective probability that tax rates will increase substantially?
Has any government ever stopped inflation without making the real interest rate positive?
Once inflation makes almost all real interest rate negative it shifts credit allocation to just being less negative and not demanding real positive ROI's on investments. This will make credit allocation be non-optimal and rob high ROI investments of funding while increasing leverage in the finance economy that doesn't make real wealth and is just dividing up the wealth being lost by negative real interest rates.
The 2% goal is more achievable than Arnold believes, because consumables remain cheap to produce. Then a return to asset inflation. The government wants lower inflation and lower interest rates, not clear the trade offs. No big reduction in government spending until Democrats ask for reductions.
Governments around the world have been doing this for 15 years now, it's the only political option. Net negative interest rates are a stealth tax on the increasing portion of the population with significant assets held in income-yielding investments. Why the outcry now?
We will find there are no stable regimes of inflation above the 2% target (not that that was stable either). A 5% target will find us with regular periods of 15% inflation within a handful of years. There has been one feedback loop that hasn't yet really kicked in, but is starting to- public employee wage increases of 20-30%. Then we are off to the races.
How do you hedge this? You don't, not really. The best you can do is buy time, but if you do successfully find protection, the government will consider you a lucky ducky who needs to share.
The market is unconvinced - TIPS breakevens aren’t much above 2% for all durations.
Which also makes for a nice investment option.
Believing this hypothesis, what should a relatively unusual homeowner salary man do with their savings, 401k, etc.?
Arnold - I agree with you on A) Government options B) “crypto” technically not being the answer. C) However, Bitcoin (not crypto - big difference) is quite possibly the answer. Even with or BECAUSE of it’s volatility. The volatility repression regime that our current financial system has been under for the last 12+ years has been extreme and has removed true signal from the market place. The LACK of volatility should scare the pants off of you. Yesterday, the Wall Street Journal had a headline “Houses fall in value for first time in 11 years”. That is crazy. Repressing volatility is delaying and amplifying volatility. Bitcoin has had some extreme volatility, but the trend line from 2010 - today is up and to the right due to it’s properties that Lyn is referring to. Can’t print more of it, can’t confiscate it, can transport it around the world in any denomination cheaper than any store of value ever created. Just look at this volatility of gold against marks in the Weimar Republic.
https://twitter.com/balajis/status/1637506678177566720?s=61
Trust me - gold was the play if you could get it out of the country. Bitcoin is digital gold that can’t be confiscated. Rethink Bitcoin - have a zoom with Lyn Alden. I’d pay to attend.
Here's what I found in a really quick search.
bank deposits - $20T, public stock capitalization - $100T, private company capitalization - ?, Real Estate - ? (US homes $40T), commercial bonds? municipal bonds? federal public debt - ~$30T
Aside: Not that I'm typical but bank accounts are a tiny portion of my assets. Throw in money market funds and it isn't much bigger. The rest in stocks, bonds, real estate.
Thoughts:
Not my first thought but making alternatives to bank deposits illegal would seem closer to impossible than just absurd. Maybe you are just referring to that relatively tiny $20T of bank deposits but I don't know how you'd regulate to force that asset class not shrink.
My first thought was that they can't inflate away the govt debt problem because too many of the expenditures are inflation adjusted.
Inflating is at best a temporary delay of inevitable pain. Poor countries have to inflate to pay debts because they have no alternative. US has lots of wealth and therefore has alternatives.
Maybe most importantly, I don't think anyone can argue that trying to inflate away federal debt and expenditure problems would be good for the economy. A strong economy is key to the best outcome. Therefore taming inflation is the only reasonable objective.
I'm not saying what US will do, only that it is not even close to a foregone conclusion that inflation will remain.
And yet, Mr. Kling, in five years we'll probably have economists complaining again about inflation being too low.
Yea!
My GOVCO Needs Me.
Mmmmm. Yummy toast.
"The form that regulation is likely to take is a requirement that banks undertake less lending to the private sector and instead hold more of their assets in the form of government securities."
Could happen, but what _ought_ to happen is on the margin banks should lend more to the private sector at variable rates.
I think this is now the best and most succinct explanation of what we face. One angle I remember a commentator speculating on is whether the government would require ETFs/Mutual Funds to hold some amount of treasuries as a way to force buying.
Re: "Have a nice day."
What are the prospects for a major increase in productivity, thanks to breakthroughs in Artificial Intelligence technologies? (It has sometimes occurred that positive technology shock transcends the drag of political economy.)
Hope springs eternal?
The "you" and "government" is a silly dichotomy. Of course different policies have different distributional and growth consequences, but that is for all the "you's." The "you/government" framing is at least as bad as arguments about how policy affects "firms" that ignore that "firms" have owners.
Pretty much explained in a nutshell the factors underlying my vague sense of unease regarding the economy since lockdown began seemingly intentionally putting small businesses out of business and up to reading about the complete depositor bailout at SVB.
However, what if this uncharacteristic full bailout of account holders isn’t part of the implementation of systemic regulation of banks coming down the pipe? What if this bailout is just more of the same from 2008, special treatment for the wealthy? Most depositors at this bank were more like the well heeled bankers that served them, rather than ‘regular people’.
Re: "in the 1940s and 1950s, tax revenues exceeded non-interest spending, bringing down the ratio of government debt to GDP. Now, the large government deficits are in front of us. The need to spend on Social Security and Medicare means that tax revenues are projected to be below non-interest spending. The outlook is for the ratio of government debt to GDP to keep growing until. . .until. . .well, something has to give."
Might the something-that-will-give be *tax rates*? What is your subjective probability that tax rates will increase substantially?
Has any government ever stopped inflation without making the real interest rate positive?
Once inflation makes almost all real interest rate negative it shifts credit allocation to just being less negative and not demanding real positive ROI's on investments. This will make credit allocation be non-optimal and rob high ROI investments of funding while increasing leverage in the finance economy that doesn't make real wealth and is just dividing up the wealth being lost by negative real interest rates.
The 2% goal is more achievable than Arnold believes, because consumables remain cheap to produce. Then a return to asset inflation. The government wants lower inflation and lower interest rates, not clear the trade offs. No big reduction in government spending until Democrats ask for reductions.
Governments around the world have been doing this for 15 years now, it's the only political option. Net negative interest rates are a stealth tax on the increasing portion of the population with significant assets held in income-yielding investments. Why the outcry now?