Comment by phkahler
1 year ago
>> 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...
> 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.
I'm not connected to Maryland, but is there a reason, other than history that the school board is appointed by the mayor and not elected? Everywhere I've lived, school districts have been independent from the cities they operate in, and supervised by a state education organization and perhaps mildly supervised by the county board of supervisors in the counties they operate in (or city councils when operating in cities that are counties). Then you could have corrupt city governance without necessarily having corrupt school governance; although you could still have both if that's what your local electorate chooses.
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> 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?