Comment by coldpie
1 year ago
> ZIRP was toxic. It made us bad and lazy.
Yes. It makes me really nervous to see people celebrating the fed talking about lowering rates. Maybe rates should be lowered a bit, sure, I don't know. But please, please don't ever let us go back to zero-interest. As a person who works with technology, that era was so incredibly depressing. So much waste. I'm on the verge of leaving the tech industry because of what happened over the past 10 years. City bus drivers don't have to share an industry with SBF and Juicero and Elon Musk, you know?
Lowering rates is fine. Lowering them to zero is bad.
Economists generally believe the baseline, target rate should be around 2-3%.
Zero interest rate is like steroids. You can take them for a while to pick you up and help fight a bug (like the 2008 crash), but if you don't stop taking them, you'll need a long, painful, 5.5% interest rate rehab.
> and help fight a bug (like the 2008 crash)
That was not a "bug." That was a parasite. If you take steroids with a parasite you might just make the parasite stronger.
The presenter is not a doctor :)
1 reply →
> Economists generally believe the baseline, target rate should be around 2-3%.
The problem with that is (as we found out) that does not leave you much room to cut without going to near zero rates.
That's a feature, not a bug.
The government reaction to the 2021 economic circumstances was to counter the hot job market, not inflation. It is explicitly and legally the mandate of the federal reserve to target maximum employment first, and 3% inflation if possible.
Inflation has been normal for a while now by most metrics, but rates are still sky-high to crush worker power. This may not be the stated goal, but it is the actual outcome we can see.
The purpose of a system is what it does.
Super-low inflation targets hurt worker negotiating power.
1 reply →
Why do people insist on this?
A rate of inflation + 0.5% is double of a rate of inflation + 0.25, that is double of a rate of inflation + 0.125%, that is double of...
You can have as many steps as you want.
> Zero interest rate is like steroids.
The problem with your analogy is that paying interest is an active measure. It takes effort. The higher the rate*(outstanding debt), the more effort. This isn't a choice between injecting nothing vs injecting steroids, it's a choice between injecting sedatives vs injecting nothing. Raising the interest rate is like injecting a sedative. How much sedative should we inject? How much sedative can we inject?
I disagree, as this implies that an interest of zero is the normal default. Why would it be? Why would someone lend someone else money, when they get nothing for it?
> Zero interest rate is like steroids
More like adding fat and never burn it. Zero interest means everything stays around, no pressure to produce since there is no expectation of ROI, and then when you suddenly add that pressure a lot of stuff collapses under their own weight since they don't have anything to keep it up.
I'll be the devil's advocate. Zero interest rates means it's easier for startups to raise money. High interest rates locks in the status quo - because of their massive war chests big companies don't struggle because of high interests, but small companies do.
For individuals in the middle class and lower, high interest rates (and the associated inflation) directly lower the quality of life by eroding their purchasing power.
3 replies →
> Economists generally believe the baseline, target rate should be around 2-3%.
If it's lower than inflation, the government is just giving free money to the corporations with access to interbank settlement loans.
And, if you were to balance the Federal budget, you would inflate away 75% of the national debt in 50 years at 3% inflation. But, only a balanced budget amendment to the Constitution could accomplish that.
How are you calculating that? The national debt itself currently has an average interest rate higher than 3%.
1 reply →
>> It makes me really nervous to see people celebrating the fed talking about lowering rates.
One thing I've often thought true but not confirmed is that lowering interest rates has it's own effect on top of the lower rate itself. Lowering rates leads to refinancing for example which is not a thing in a steady state. I'm inclined to think most of the benefit of a rate lowering is in fact transient, while the effects of having low rates are permanent and there are similarly transient costs with raising rates. It's a trap.
You talk about low rates like they are a choice. That's mostly not true. A better way to think about it is that low rates are a consequence of "lots of savings chasing few investment opportunities."
Sure, the fed can buy and sell treasuries and use its magical balance sheet to push/pull on treasury yields, and these in turn are the lowest risk and most liquid mechanism for duration transformation so they tend to serve as a baseline / comparison point for every other kind of investment, transmitting monetary policy into the real economy. However, the fed's magical balance sheet has limits: if they push or pull on treasury yields too hard for too long, people will stop using them as a default point of comparison and put their money somewhere else. See: Bank of Japan and the JPY Carry Trade that everyone became an expert in about 3 weeks ago. Point is: the fed can push and pull, but it can't fight the market-determined macro and win. Not for long, anyway.
Low rates are inevitable between growth sigmoids. Unless you think we can exponentially grow forever, we need to figure out how to cope. What would that look like? How could we possibly cool off the economy without paying people to not invest? Well, I mean, we could raise taxes and spend that on the people who got left behind on the last growth sigmoid, but I can hear the "boos" and "hisses" already. Hey! Tomatoes are for eating, not throwing! Guys, come on! You know it's true.
> Well, I mean, we could raise taxes and spend that on the people who got left behind on the last growth sigmoid, but I can hear the "boos" and "hisses" already.
I mostly agree. The issue comes from how the money gets spent. It costs money to collect money, it costs money to spend money. Most of the spent money is used to "buy solutions" from private industry, so the rich still get richer, and nothing really changes.
Baltimore, MD, USA, spends more per student [1] than almost any other city in the country, and nothing changes. Oh well actually, there is a lot of corruption in the city council and I think over half of the past few mayors have been arrested on criminal charges.
[1] https://foxbaltimore.com/news/project-baltimore/in-baltimore...
4 replies →
> if they push or pull on treasury yields too hard for too long, people will stop using them as a default point of comparison and put their money somewhere else.
Isn't the US kind of protected against this since the US is the global reserve currency?
The long term trend for the Fed is that it raises rates somewhat, and then lowers them even more. There is no reason to think this won't happen again this time, landing squarely in negative rates. It only stops when US dollars are worthless because any Tom, Dick and Harry can get a billion of them for free and even get paid for doing so.
So far, the Fed does a good job of gatekeeping normal people out of the negative rate market even when rates are negative - only rich people are allowed to benefit.
I'm only starting to learn about these things.
From the data I've seen and read it seems like low interest rates are (politically) alluring, because of short term metrics, but will bite back via inflation and bubbles bursting very consistently.
Is there any wisdom and data that challenges or expands on this that a layman can understand?
https://www.amazon.com/Price-Time-Real-Story-Interest/dp/080...
So, bubbles are hard, especially when the underlying fundamental thing does not respond well to price increases (NIMBYism, zoning, weaponized environmental legislation, etc.)
https://www.fullstackeconomics.com/p/the-2000s-housing-bubbl...
Tech bubbles are doubly so, because now that "total addressable market" has exploded thanks to the internet everything is a bubble. (Starting with the good old dot-com one, and crypto, and AR/VR/Metaverse, and now AI. Folks are comparing Nvidia stock graphs to Cisco around 2000.)
....
Likely the HN crowd overestimates the effect of ZIRP on tech, because how crazy the last 10-15 years have been. (But we see that the economy in general performed extremely well, real wages increased, etc.)
Yes, of course there were (and are) a lot of scummy ventures, but there will be more.
...
Regarding rates, the picture is a bit more complex. So coming out of the 2008 crash the Obama/ARRA fiscal stimulus was too small. (And of course it got hyper-over-politicized on "both sides".) And the monetary response was also lackluster.
But we also know now (benefit of hindsight!) that the rates before 2008 were too low.
https://www.caixabankresearch.com/en/economics-markets/monet...
One important take-away is that of course everyone wants growth, more growth would help lower taxes, inflate away deficits, yey! Prosperity is good!
But ... we can't simply buy growth with endless loans from our future selves. Real economic growth requires increasing productivity, which requires applying new (better, more suited to the situation, more profitable) technologies, which requires changes (duh), but an aging population is very change-averse. The US with the political gridlock tends to go on wild goose chases, spending enormous amounts of money on bullshitting instead of picking better technology.
(And here technology includes social technology too. From the things like "lack of funding reform for fire departments leads to them going with too large firetrucks everywhere to be able to bill a lot, which leads them to not sign-off on thinner roads, which leads to too wide roads where motorists drive too fast, which leads to too many injuries and fatalities" to all the usual like lack of gun control and bribery rules for the courts.)
I have a slightly different view on this. ZIRP allowed companies to do crazy things when it came to tech investment. For instance, would Kafka (and by extension, Confluent, and much of the distributed-systems landscape) exist if LinkedIn hadn't decided: "you know, let's not think too hard about whether building a custom queue system is fully economically rational, let's just let our engineers do it, and we'll be able to spin it to investors/shareholders as a good use of capital." It's no coincidence that this happened in 2010, the first year that the interest rate dropped below 1% (and substantially so).
https://www.rtinsights.com/the-technical-evolution-of-apache...
https://fred.stlouisfed.org/series/FEDFUNDS
Were the people who worked on that project value-optimal for LinkedIn? Maybe, maybe not. Were they "lazy" and a "waste" in the value they brought to society overall, especially including the spin-offs and startups that members of these teams would go on to build? I don't think that's an accurate characterization.
Zero-interest was an effective way to incentivize public companies, VC-backed companies, and their LPs to spend large amounts of money on speculative engineering work - speculative enough that one might even call it research, but the fact that we could call it something other than research is the entire point.
It's far from the only such incentive, and it came with many, many downsides, including the creation of many over-funded startups that over-promised and caused harm in their under-delivery.
To be sure, startups aren't going anywhere. There are surprisingly fun challenges when profitability and sustainable growth are core requirements for every project, both macro and micro, and it's just an evolution of our hacker mentality to have to deal with these new constraints.
But I fear that we've lost the incentive to have companies invest speculatively in crazy projects without having a sufficient replacement for ZIRP, and it may take a generation before we understand how that will have affected the rate of innovative output for the entire world.
It's a fair perspective, but I'd counter by bringing up the opportunity cost we spent on the incredible amount of trash startups that ZIRP produced. Those Juicero & crypto & NFT people could've been doing something productive with their lives instead of whatever that mess was. Was Kafka worth that cost? I dunno. But seeing the obvious waste and the clowns who profited from it made me, personally, really depressed at the state of our industry. A system that so blatantly does not distribute rewards for real, valuable work really discourages one from bothering to even try putting in the work.
It kinda feels like raising the Temperature of a LLM too high, if you'll forgive the analogy. Yes, there might be occasional-seemingly brilliant-bursts of creativity but most of the output is just going to be nonsense.
I suspect that Kafka paid off for linkedin long before the authors left to start a Kafka company.
RabbitMQ et al were so hard to scale/operate at volume.
Not a fan of the terminology that corporations are people, but stacks of free money will mess up a company much like it will a person.
Elon Musk is very wasteful selling waste due to low interest rates? Please explain or make your point? I don't get how he relates to the rest of your post?