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Stop saying that the Fed sets interest rates

ResponsiblyIrresponsible
Posts: 12,398
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6/20/2016 2:22:48 AM
Posted: 5 months ago
Interest rates are not presently low because of the Fed. They are low because of the state of the economy and, specifically, as Jim Bullard argues in a recent paper I linked to in my last thread, the current regime in which the economy lies--which is a slow trend-growth, low productivity, low Wicksellian equilibrium rate regime. In that regime, very little change in policy is necessary to maintain "equilibrium," and the Fed has little, if any -- probably no at this point -- ability to move this equilibrium rate upward or downward. There are risks to that low-rate regime -- particularly to the upside in the form of higher trend productivity, a more robust Phillips curve, a pickup in global growth or easing of credit standards, possibly deregulation, etc. -- but the Fed itself cannot affect these risks nor are these risks forecastable such that adjusting policy can make any of these outcomes realizable.

This means that Jeb Bush was wrong in thinking he could generate 4 percent trend growth. Gerald Friedman was wronger in thinking Bernie Sander's policies would generate 3.1 percent trend growth and 5 percent growth over the next decade (as though we'd operate below capacity for the next decade under that kind of fiscal stimulus). Tim Pawlenty was even wronger back in 2012 in thinking he could generate 5 percent trend growth. Mike Huckabee was the wrongest in thinking he could generate 6 percent trend growth.

Further, Donald Trump was wrong in calling Janet Yellen a "low interest rate person" in the same way he was wrong in saying that a higher dollar would *necessarily* hurt US companies, even if it resulted from faster relative growth in the United States or easier monetary policy abroad.

All the goldbugs -- Rand Paul, Ron Paul, Ted Cruz, Ben Carson, and all the rest -- are also wrong, but that's no mystery.

The bottom line is that monetary policy is incredibly complex. Anyone who suggests that there are simple, straightforward and completely unquestionable solutions is either a charlatan or so ignorant that he is ignorant of his own ignorance.
~ResponsiblyIrresponsible

DDO's Economics Messiah
shnarkle
Posts: 68
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7/3/2016 7:55:56 PM
Posted: 5 months ago
At 6/20/2016 2:22:48 AM, ResponsiblyIrresponsible wrote:
Interest rates are not presently low because of the Fed. They are low because of the state of the economy and, specifically, as Jim Bullard argues in a recent paper I linked to in my last thread, the current regime in which the economy lies--which is a slow trend-growth, low productivity, low Wicksellian equilibrium rate regime. In that regime, very little change in policy is necessary to maintain "equilibrium," and the Fed has little, if any -- probably no at this point -- ability to move this equilibrium rate upward or downward. There are risks to that low-rate regime -- particularly to the upside in the form of higher trend productivity, a more robust Phillips curve, a pickup in global growth or easing of credit standards, possibly deregulation, etc. -- but the Fed itself cannot affect these risks nor are these risks forecastable such that adjusting policy can make any of these outcomes realizable.

This means that Jeb Bush was wrong in thinking he could generate 4 percent trend growth. Gerald Friedman was wronger in thinking Bernie Sander's policies would generate 3.1 percent trend growth and 5 percent growth over the next decade (as though we'd operate below capacity for the next decade under that kind of fiscal stimulus). Tim Pawlenty was even wronger back in 2012 in thinking he could generate 5 percent trend growth. Mike Huckabee was the wrongest in thinking he could generate 6 percent trend growth.

Further, Donald Trump was wrong in calling Janet Yellen a "low interest rate person" in the same way he was wrong in saying that a higher dollar would *necessarily* hurt US companies, even if it resulted from faster relative growth in the United States or easier monetary policy abroad.

All the goldbugs -- Rand Paul, Ron Paul, Ted Cruz, Ben Carson, and all the rest -- are also wrong, but that's no mystery.

The bottom line is that monetary policy is incredibly complex. Anyone who suggests that there are simple, straightforward and completely unquestionable solutions is either a charlatan or so ignorant that he is ignorant of his own ignorance.

For quite some time Yellen was speaking of raising interest rates by a whole quarter percent as if we were in the midst of a "recovery". Of course this is nonsense as anything approaching a true recovery wouldn't be characterised by a Fed Chairman talking about something that insignificant. The fact is that she knows that even that small raise could be more than this fragile economy can stand. Why? Probably because of government meddling with the economy in the first place. They've tinkered with it to such a degree that they can't raise interest rates without plunging us into a depression. When the government starts shovelling money hither and thither they create massive bubbles which then burst spotlighting the huge amount of malinvestment that is now built into the system.

I don't pretend to understand the intricacies of banking or the economy, but even I can see the writing on the wall. Our economy is essentially a house of cards, and why should that be so surprising when the banks have taken our money to cover their gambling debts, the government, with a few keystrokes, creates money out of thin air, and then spends it like a drunk sailor? Uncle Sam knows how much money is in circulation, and also knows that it isn't circulating quite fast enough for his liking which means only one thing; people are hoarding money. The only thing keeping this going is the black market, and Uncle Sam wants his cut so we see cash becoming "dangerous", and something only terrorists make use of so now they're talking of getting rid of the 100 dollar bill which would take over a trillion dollars worth of money out of circulation, but more importantly make it impossible to pull your money out of the banks without loading it into a truck. Once they go that route they can impose negative interest rates and there's really not much anyone can do about it. Of course this overlooks the already dismal fact that real inflation is eating away at probably close to 10% of your money as it sits idle in a savings account, or any account that isn't earning at least 10% interest.

Look at the difference between how much an employer pays his employees and how much his employees actually get. Then look at what the employees gets for his money in health care, dental benefits. Here's a prime example from my own life: i went to see about getting my wisdom teeth removed. The cost was $1,200.00, then a few years after my dental had kicked in a decided to get them taken out. This is after a couple years of my employer paying $100.00 a month for my dental. I hand them my card and the bill: $1,100.00. Wow a massive savings of a whole $100.00 dollars! What a deal! My employer is out over $2,500.00, and the insurance company has made a cool grand or more off of him and kicked the dentist a few bucks to keep him in the scam.

Insurance companies are already talking about offering maintenance insurance which is going to take the price of an oil change into orbit. They're getting the government into the act so they can outlaw changing your own oil without a license. Yeah, it's complicated, but then when has anything the government touched ever been simple or efficient?
A1tre
Posts: 223
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7/5/2016 3:34:20 PM
Posted: 5 months ago
At 6/20/2016 2:22:48 AM, ResponsiblyIrresponsible wrote:
Interest rates are not presently low because of the Fed. They are low because of the state of the economy and, specifically, as Jim Bullard argues in a recent paper I linked to in my last thread, the current regime in which the economy lies--which is a slow trend-growth, low productivity, low Wicksellian equilibrium rate regime. In that regime, very little change in policy is necessary to maintain "equilibrium," and the Fed has little, if any -- probably no at this point -- ability to move this equilibrium rate upward or downward. There are risks to that low-rate regime -- particularly to the upside in the form of higher trend productivity, a more robust Phillips curve, a pickup in global growth or easing of credit standards, possibly deregulation, etc. -- but the Fed itself cannot affect these risks nor are these risks forecastable such that adjusting policy can make any of these outcomes realizable.

I just wanted to ask: Are these reasons you listed not for why the Fed should optimally set low interest rates? And if yes, is it wrong to say the Fed sets them? I know this is a minor point but it seems your title is misleading.

This means that Jeb Bush was wrong in thinking he could generate 4 percent trend growth. Gerald Friedman was wronger in thinking Bernie Sander's policies would generate 3.1 percent trend growth and 5 percent growth over the next decade (as though we'd operate below capacity for the next decade under that kind of fiscal stimulus). Tim Pawlenty was even wronger back in 2012 in thinking he could generate 5 percent trend growth. Mike Huckabee was the wrongest in thinking he could generate 6 percent trend growth.

Further, Donald Trump was wrong in calling Janet Yellen a "low interest rate person" in the same way he was wrong in saying that a higher dollar would *necessarily* hurt US companies, even if it resulted from faster relative growth in the United States or easier monetary policy abroad.

All the goldbugs -- Rand Paul, Ron Paul, Ted Cruz, Ben Carson, and all the rest -- are also wrong, but that's no mystery.

The bottom line is that monetary policy is incredibly complex. Anyone who suggests that there are simple, straightforward and completely unquestionable solutions is either a charlatan or so ignorant that he is ignorant of his own ignorance.

Well it's always hard to know what you don't know ;)
BillSPrestonEsq
Posts: 134
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7/5/2016 11:09:55 PM
Posted: 5 months ago
At 6/20/2016 2:22:48 AM, ResponsiblyIrresponsible wrote:
Interest rates are not presently low because of the Fed. They are low because of the state of the economy and, specifically, as Jim Bullard argues in a recent paper I linked to in my last thread, the current regime in which the economy lies--which is a slow trend-growth, low productivity, low Wicksellian equilibrium rate regime. In that regime, very little change in policy is necessary to maintain "equilibrium," and the Fed has little, if any -- probably no at this point -- ability to move this equilibrium rate upward or downward. There are risks to that low-rate regime -- particularly to the upside in the form of higher trend productivity, a more robust Phillips curve, a pickup in global growth or easing of credit standards, possibly deregulation, etc. -- but the Fed itself cannot affect these risks nor are these risks forecastable such that adjusting policy can make any of these outcomes realizable.


What about QE? The fed created a ton of new money and set the interest rate to nearly zero. How again are they not setting rates? When you create an enormous supply of money and set the interest rate really low you are attempting obviously to get money into circulation to stop a deflationary spiral. To say it is 'the state of the economy' is to ignore how the fed has influenced the economy up until now. Without all the stimulus and lowering Fed interest rates the state of the economy would be different.

This means that Jeb Bush was wrong in thinking he could generate 4 percent trend growth. Gerald Friedman was wronger in thinking Bernie Sander's policies would generate 3.1 percent trend growth and 5 percent growth over the next decade (as though we'd operate below capacity for the next decade under that kind of fiscal stimulus). Tim Pawlenty was even wronger back in 2012 in thinking he could generate 5 percent trend growth. Mike Huckabee was the wrongest in thinking he could generate 6 percent trend growth.


And how many politicians or even economists have got it right?

Further, Donald Trump was wrong in calling Janet Yellen a "low interest rate person" in the same way he was wrong in saying that a higher dollar would *necessarily* hurt US companies, even if it resulted from faster relative growth in the United States or easier monetary policy abroad.

All the goldbugs -- Rand Paul, Ron Paul, Ted Cruz, Ben Carson, and all the rest -- are also wrong, but that's no mystery.

The bottom line is that monetary policy is incredibly complex. Anyone who suggests that there are simple, straightforward and completely unquestionable solutions is either a charlatan or so ignorant that he is ignorant of his own ignorance.

It is simple when you isolate variables, except that's nearly impossible, it is in fact so complex that no one should be setting rates, and yes they do set rates. To say otherwise makes no sense. And that is what is simple, you lower rates, you raise the quantity demand for capital. All other things equal. I know you know that but yet you ignore the simplicity of these kinds of things. That is what we understand, isolating the thousands of other variables is very complicated. You just let me know what someone gets it right.
Chang29
Posts: 732
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7/6/2016 8:16:43 AM
Posted: 5 months ago
At 7/5/2016 11:09:55 PM, BillSPrestonEsq wrote:
At 6/20/2016 2:22:48 AM, ResponsiblyIrresponsible wrote:
Interest rates are not presently low because of the Fed. They are low because of the state of the economy and, specifically, as Jim Bullard argues in a recent paper I linked to in my last thread, the current regime in which the economy lies--which is a slow trend-growth, low productivity, low Wicksellian equilibrium rate regime. In that regime, very little change in policy is necessary to maintain "equilibrium," and the Fed has little, if any -- probably no at this point -- ability to move this equilibrium rate upward or downward. There are risks to that low-rate regime -- particularly to the upside in the form of higher trend productivity, a more robust Phillips curve, a pickup in global growth or easing of credit standards, possibly deregulation, etc. -- but the Fed itself cannot affect these risks nor are these risks forecastable such that adjusting policy can make any of these outcomes realizable.


What about QE? The fed created a ton of new money and set the interest rate to nearly zero. How again are they not setting rates? When you create an enormous supply of money and set the interest rate really low you are attempting obviously to get money into circulation to stop a deflationary spiral. To say it is 'the state of the economy' is to ignore how the fed has influenced the economy up until now. Without all the stimulus and lowering Fed interest rates the state of the economy would be different.


This means that Jeb Bush was wrong in thinking he could generate 4 percent trend growth. Gerald Friedman was wronger in thinking Bernie Sander's policies would generate 3.1 percent trend growth and 5 percent growth over the next decade (as though we'd operate below capacity for the next decade under that kind of fiscal stimulus). Tim Pawlenty was even wronger back in 2012 in thinking he could generate 5 percent trend growth. Mike Huckabee was the wrongest in thinking he could generate 6 percent trend growth.


And how many politicians or even economists have got it right?

Further, Donald Trump was wrong in calling Janet Yellen a "low interest rate person" in the same way he was wrong in saying that a higher dollar would *necessarily* hurt US companies, even if it resulted from faster relative growth in the United States or easier monetary policy abroad.

All the goldbugs -- Rand Paul, Ron Paul, Ted Cruz, Ben Carson, and all the rest -- are also wrong, but that's no mystery.

The bottom line is that monetary policy is incredibly complex. Anyone who suggests that there are simple, straightforward and completely unquestionable solutions is either a charlatan or so ignorant that he is ignorant of his own ignorance.

It is simple when you isolate variables, except that's nearly impossible, it is in fact so complex that no one should be setting rates, and yes they do set rates. To say otherwise makes no sense. And that is what is simple, you lower rates, you raise the quantity demand for capital. All other things equal. I know you know that but yet you ignore the simplicity of these kinds of things. That is what we understand, isolating the thousands of other variables is very complicated. You just let me know what someone gets it right.

Great point about the models. My favorite is the Phillips Curve, that even textbooks have a problem justifying. This fictional curve is key to the Feds dual mandate. Someday, historians will look back, laughing at people attempting to use monetary policy to smooth economic cycles. Until then, we are forced at gun point to ride this central bank created roller coaster together.
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If it can be de-centralized, it will be de-centralized.