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Coronavirus Economy will bring Inflation
- Thread starter cpwill
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Firstly, I apologize for the delay in my reply. I have no idea who the folks are complaining about boredom and having nothing to do, but I have to assume they have no children.
The full statement was "Inflation would have a positive effect on government debt, but.... rising interest rates on that debt as a result get pretty ugly pretty fast, as I recall." The point I was making was that, if interest rates increase, the amount we will have to pay to service our debt will increase, in turn increasing the deficit, in turn increasing the future amount we have to pay to service the debt, in turn increasing the deficit.... and so on and so forth.
That is an interesting and rather absolute statement. What did interest rates look like in the 1970s?
Yes, and negative for those holding more retirement-oriented fiscal structures, which includes a higher portion of bonds and cash, as well as:
Which is also a rather more typical scenario for those entering into retirement than it is for those of younger generations.
And are delayed.
If so, it isn't mine, but the author of the article in the OP, which I thought interesting because he argued that multiple major schools of economic thought would, given current conditions, predict inflation.
So far I'm aware of one major economic prediction I made that was indeed quite incorrect, which is that the East Asian debt bubble would start to pop a couple of years ago (IIR, at the end of 2013, I was predicting 18ish months, with it possibly taking 5 years, and was wrong on both accounts, though China did have some problems, they were able to keep the system going; we'll see what the final fallout of all this currently going on amounts to). :shrug:
Interesting - what are you basing that prediction on?
The full statement was "Inflation would have a positive effect on government debt, but.... rising interest rates on that debt as a result get pretty ugly pretty fast, as I recall." The point I was making was that, if interest rates increase, the amount we will have to pay to service our debt will increase, in turn increasing the deficit, in turn increasing the future amount we have to pay to service the debt, in turn increasing the deficit.... and so on and so forth.
That is an interesting and rather absolute statement. What did interest rates look like in the 1970s?
Yes, and negative for those holding more retirement-oriented fiscal structures, which includes a higher portion of bonds and cash, as well as:
Which is also a rather more typical scenario for those entering into retirement than it is for those of younger generations.
And are delayed.
If so, it isn't mine, but the author of the article in the OP, which I thought interesting because he argued that multiple major schools of economic thought would, given current conditions, predict inflation.
So far I'm aware of one major economic prediction I made that was indeed quite incorrect, which is that the East Asian debt bubble would start to pop a couple of years ago (IIR, at the end of 2013, I was predicting 18ish months, with it possibly taking 5 years, and was wrong on both accounts, though China did have some problems, they were able to keep the system going; we'll see what the final fallout of all this currently going on amounts to). :shrug:
Interesting - what are you basing that prediction on?
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If I am on my phone and/or don't have time, I will often let someone else have the last word in a discussion instead of trying to extend one that's going to require actual thought and effort. Debate with you definitely tends to fall into that latter category.
This is an assumption you have yet (as far as I am aware) to actually demonstrate, and seems a rather interesting one.
So, if I lend the government $100,000, your theory is that, had the government not sold me $100,000 worth of bonds.... I would have... withdrawn that money in cash and put it in a Giant Money Silo, a'la Scrooge McDuck? That the only possible way to put $100,000 to use is to purchase bonds from the United States Federal Government?
Perhaps. As I understand it - and, would welcome some source material if I am incorrect - Crowding Out refers to one of three things:
1. Government borrowing raising interest rates, discouraging private borrowing that would have otherwise occurred
2. Government spending making it unprofitable or unnecessary to enter a sector
3. Government taxes removing discretionary income
Of those, #3 is the closest to what I am pointing out. I am saying that Government borrowing constitutes borrowing funds that would have otherwise done something else just as much as government taxes do.
ah. Fantastic. I would very much like to see the multiplier analysis that incorporate "what the funds we are borrowing to finance this would otherwise be doing, and the net gain or loss from taking those resources from the more effiicient market allocation and moving them over to less efficient political allocation", because, again, as far as I can tell, the fact that they are reducing the private sector in order to increase the public one doesn't seem to get mentioned .
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Real life takes precedent.
But you will also be paying the same debt back with a weaker dollar in such a scenario, as inflation growth is the only way we see interest rate increases. However, the money being used to make these repayments is worth less than when it was borrowed. Inflation eats up debt.
That statement was misworded.... Interest rate increases will not occur without the necessary inflation.
Excess cash accounts earn interest, and government bonds are always redeemable at par value.
Cost of living adjustments are derived from changes in the CPI-W for the third quarter of the year prior. So if inflation was 3% YoY for Q3 2020, benefits for 2021 will be increased by more than 3%.
You've been predicting stagflation for over a decade.
Remember this little gem of a thread?
Nothing you have ever argued for has ever come to pass, because you are making these positions on the basis of emotion. There was no stagflation, Japanese bonds sell at a negative interest rate, and the Chinese real estate market is as sound as it was back in 2013 when you claimed it was going to pop. It's nothing to be ashamed of, as you're not a professional economist or financial analyst. But i would think you are more than capable of learning from your mistakes.
Well, I predict the unemployment rate will come in above 16% Friday morning. Aggregate output is likely to slump by double digits for Q2 and possibly Q3 2020. The economy is going to hell in a handbasket... and oil is currently cheaper than water. Every single economic indicator points to the contrary, and what is the best way to finance $30 trillion in public debt? NIRP....
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Had you not chosen to purchase $100000 in government bonds, you would have $100000 to spend/invest/save.
In this scenario, you were not going to put that $100000 to use. Instead, you purchased government bonds for liquidity, security, and a hedge against inflation.
I am not sure why you are having such difficulty with this concept. That these funds weren't going to be used for doing something else is precisely the reason why they were used to purchase government debt. Are there instances where government borrowing could cause a private investment shortage? Absolutely!!! But again, that will show up with respect to the cost of borrowing, i.e. private debt will require an additional premium to attract investment. It's almost as though you're operating from the perspective that investors are forced to purchase government bonds at gunpoint.
I would very much like to see the multiplier analysis that incorporate "what the funds we are borrowing to finance this would otherwise be doing, and the net gain or loss from taking those resources from the more effiicient market allocation and moving them over to less efficient political allocation", because, again, as far as I can tell, the fact that they are reducing the private sector in order to increase the public one doesn't seem to get mentioned
Here is a more relative example: As of right now, there is a tremendous supply of loanable (supply) funds, and even if there is someone looking to invest money in the private sector, there are simply not as many companies looking to expand their operations (demand). And to compound the situation further, the supply of loanable funds has actually increased.
So here's where we are left.
A shrinking private sector demanding less investment.
A growing public sector demand more investment.
There isn't any crowding out because there is enough money within the system to satisfy all investment demand. If not, you will see this show up in fixed income markets. Hopefully, the public sector borrows enough money to ensure that the the sum of those two segments (private investment + public investment) is not significantly lower than it was before.
(private investment[SUB]0[/SUB] + public investment[sub]0[/sub]) > (private investment[sub]1[/sub] + public investment[sub]1[/sub]) : the natural rate of interest will fall.
If the sum of both public and private investment falls, financial and economic pain are sure to follow.
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Precisely. That $100K would have been doing something else.
Incorrect. As you so ably pointed above, I would have saved/invested or spent (or given) it. Even had I merely kept it in the bank, it would have been available for lending to another.
....no. There are other ways to seek
even if there weren't other motives for putting 100K into federal bonds.
On the contrary, I am saying that government debt soaks up cash that would otherwise have been used for something else, shifting the apportionment of those funds from market mechanisms to political ones. If I have to decide who can put $2 Trillion to its most effective use and my options are
A) the private market
or
B) Trump, Pelosi, Schumer, McConnel, & Co.
I'm probably not betting on B.
The $2 Trillion is going to get put to use.
:shrug: I don't think those two mechanisms are equal when it comes to the productive allocation of resources. In this model, it seems, if the government were to seize control of 100% of available funds for investment, the output would be the same.
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This is circular reasoning. The government is borrowing money that is not seeking a higher ROI... investors sometimes desire liquidity and security.
But you didn't. In this scenario, you chose to lend it to the government for less ROI than could have been achieved by lending to private borrowers. Furthermore, banks don't lend deposits....
You're just disagreeing without reason.
ROI from the private sector investment vehicles will always be more than what's derived from lending to the government. It just depends on your risk tolerance.
Maybe, maybe not. Unfortunately for your argument, there is not enough information to make such a determination. There would need to be more demand from private investment, and when this happens, the economy typically expands at such a pace that tax revenue grows in tandem.
Never claimed that productivity would necessarily be equal. However, we do know that there isn't as much demand for investment as there was prior. And if the government wasn't borrowing these funds, total output would decline.
I've also left out foreign investment for the sake of simplicity (but in our current environment there is a plunge in investment demand so it doesn't change the outcome). Hopefully you'd agree that during an economic downturn, demand for investment begins to evaporate as businesses on the aggregate are not trying to expand. They are laying off workers and trying to build fortress balance sheets.
You are still operating under the notion that investors are forced to buy government bonds, and are doing so at their own expense. Again, you are engaged in circular reasoning.
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Shukran. It's been an odd, heavy season.
True, which is my original statement started by acknowledging that: "Inflation would have a positive effect on government debt, but.... rising interest rates on that debt as a result get pretty ugly pretty fast, as I recall."
Fair enough.
Ah. Do you mean to say that interest rate hikes will cause the inflation, that inflation of necessity is the only cause for rising interest rates, or that it is merely the most likely?
And will both be depreciating assets.
Yup. And are therefore - as pointed out - delayed. Single item example: the price of eggs and some other basic goods has jumped up lately. Those impacts won't be reflected in benefits for another 7 months, and, in the meantime, purchasing power is reduced.
That is a quote that seems to suggest I have consistently been predicting stagflation over the past 10 years instead of what you actually did which was:
Find a thread from 2011 discussing the fact that inflation was rising at a time when unemployment was also high and growth was low.
:shrug: It's quite possible that emotional inclinations steer my assessments - that is true of all humans, and overcoming that deficiency takes deliberate effort and (usually) training and technique.
Yup. As I said - I was wrong about the timing of the East Asian bubble popping, and we'll see what the fallout is from the shock provided by COVID in China.
And what will you say if deflation does not materialize?
I understand that was the market prediction, and it came in at 14.7%. What's the ICOD on those things?
Outside of periods of extreme uncertainty, when growth is rocking again, who is going to pay us for the privilege of holding our debt?
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We've been through this... it's a net wash at the very worst. If interest payments are 1% and total stock debt is 100, and inflation (combined with nominal economic growth) goes to 5% driving interest rates to 5%... what happens in year 2?
100 * (1 +0.01)[SUP]1[/SUP] + 100 = 101 total debt at the beginning of year 2.
but currency is now only worth 95% of what it was in year 1, therefore, even if interest rates increase from 1% to 5%, repayment looks like this in year 2:
101 * (1 + 0.05)[SUP]1[/SUP] + 101 = 106.05
But purchasing power has declined by 5%, so even after accounting for the rise in interest, the real amount of debt (in year 1 currency) is now 100.7475
by year 2, the real value of debt is actually less than year 1
And i assumed zero real growth.
Nope! If i meant to say that i would have said that.
Economic growth drives inflation, outside of shocks (temporary) to the system.
Cash will depreciate. Government debt sells at face value and will depreciate a little less.
But the price of everything is actually down:
No... less than 9 years ago, you thought the expansion in debt and deficits combined with various credit easing policies were going to lead to stagflation. It didn't materialize and so you had to abandon the notion.
So you choose not to grow?
What about Kyle Bass?
:lol:
It already has materialized. But if the government pumps enough money into the economy, it won't be as much of a problem moving forward.
Statistical sampling error is larger for the population survey than it is for the establishment survey
. The consensus expected the labor force to contract more than it did, which goes to shows the benefit of unemployment insurance is during times like these.Net exporters into the U.S. economy for one, and the same type of institutions who might need to park $100 million for the month of February 2024. You don't fully appreciate how the Treasury market is used in financial transactions and investment vehicles.
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Printing money isn't going to drive inflation. The lion's share of that money never makes it down to John Doe and his family. And the velocity of money is much more important than the amount of money. And velocity is dead in the water. Add to that the fact that technology is inherently de-flationary (makes everything cheaper) and you don't have much inflation push. What will raise prices is supply chain problems and the collapse of China.
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Have you abandoned this discussion?
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I'll take your silence as a yes. Hopefully you've allowed yourself to learn from this exchange.
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It wasn't intended to be - but I let it slip away.
But, in the interest of brevity, I will leave the discussion of inflation/interest rates/etc. for another day and let you capture the last word there.
How about we focus down on the question of whether or not government allocation of resources represent resources that would otherwise have been doing other things instead being allocated according to political incentives?
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Crowding out has already been addressed in this thread.
If the federal government didn't initiate a $2.2 trillion stimulus package, the economy would have had contracted by roughly $2.2 trillion more than it is currently contacting.
Why do you disagree with this statement?
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No worries. We were already in a liquidity trap before COVID. I doubt the stimulus will unstick us, may even make it worse, but time will tell.
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Because I do not accept that the government is getting that $2.2 trillion from nowhere. Had they not spent $2.2 Trillion additional dollars, those $2.2 Trillion would have simply done something other than go into government coffers to be allocated according to political incentives.
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If what you say is true, we wouldn't have economic downturns. You continue to operate under the false assumption that bondholders were forced to purchase treasury securities rather than invest in the private economy.
You are wrong. Without this stimulus, output falls by at least $2.2 trillion more than it would have sans stimulus.
The hardcore MMT crowd has a similar hangup but from the operate perspective. They believe the economy can't grow without deficits where as you belive the economy is growing less because of deficits. Both positions are invalid.
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This is incorrect. Private sectors are fully capable of participating in bubbles.
That is not my assumption at all. My assumption is simply that, if bonds were not issued, they would not exist to be purchased.
You have not shown such to be true, and it seems that you are insisting that, had government not created and sold bonds, the wealth used to purchase them (which, as a necessity, pre-existed their issuance) would somehow not exist.
....no. I believe that, when we shift resources from more efficient modes of allocation to less efficient modes of allocation, we reduce productivity, and that when we set ourselves up to have to increase future tax burdens, we reduce future productivity. Increasing deficit spending in an economic downturn can help us reduce temporary human suffering - but it is not a free lunch, it comes with unintended negative consequences.
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In the absence of government debt, where does the funding go that would have gone into private domestic investment in the event of an economic downturn?
False. I have stated... repeatedly... that during an economic contraction, private domestic investment declines. It is your argument that is incoherent. In one hand, you want to claim that the existence of debt necessarily reduces the total level of private domestic investment, as those same funds would have been put to work in the absence of debt. In the other, as stated above, you believe the private sector is capable of contracting.
Where does the money go?
Again... crowding out is certainly a possibility, but that it will be reflected in interest rate differentials. However, you've completely rejected the notion of crowding-in, such that because of a government backstop, guarantee, initial investment, etc... private investment growth exceeds levels where government did not spend money.
Military tech is a major source of crowding in private investment.
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Into something else. What it doesn't do is cease to exist or get pulled out into cash and stored in a giant gold vault a'la Scrooge McDuck.
And so you wish to exacerbate that?
These two things are not contradictory at all. If the Housing market collapses, and I am looking for somewhere to put a million dollars cash, does that million dollars disappear if I don't by federal bonds? Or do I have to find something else to put it in?
Precisely. It doesn't disappear, as your statement that, had the government not borrowed 2.2 Trillion, GDP would have been 2.2 Trillion smaller seems to suggest.
Crowding out is a series of indirect impacts, and yes, does happen (and, I suspect, those differentials are something you are going to see more in a scenario where we aren't in a downturn and capital isn't seeking greater relative safety). However, what I am pointing out here is not an indirect impacts, but the direct one which precedes them.
I have not. I simply argue that it comes with large, unseen costs.
Sure. So is private investment in towns dominated by government functions, such as large military bases. The Washington DC area isn't as rich as it is because of the fantastic climate and and charming local customs.
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You can't give an example.
This is a strawman. I've never claimed anything you've stated above.
Government spending during an economic downturn keeps investment higher than it would be in its absence.
Your strawman has no power. Investment collapsing during economic contraction is precisely the reason the downturn occurs in the first place! Companies are not looking to grow their operations. I am going to take it as you are unaware that your argument inherently claims private investment cannot decline in the absence of government borrowing. If you're struggling to see why, review the national income product accounts subset for investment and how it is derived from the difference between output and consumption + taxes.
I have never claimed money disappears. At any given time, they're is more money in the economy (M2) than government expenditures + investment. Furthermore, banks create money.
When the Treasury auctions off debt, the broker dealers who purchase this debt instantly create new money and hold treasuries as assets on their balance sheets. Private money only enters the situation after the fact, as banks seek these treasuries to investors.
Private investors are able to make investments at any time regardless of government debt issuance.
You simply don't know what you're taking about.
This isn't even a response... just another hollow claim.
Another empty claim.
It doesn't follow that investment would be greater in the absence of government debt. This can be the case in certain circumstances, as I've already outlined. Your claim that crowding out occurs when government borrows money is void of macroeconomic reasoning, accounting, and the mechanics of our banking system.
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:raises eyebrow: there are plenty of options - other debt instruments, blue chip stocks, real estate, a mixture of those and money markets. The point is simply that if that money did not purchase government debt it would do other things, and "Multiplier Effect" formula's (as far as I have seen, and there may very well be conscientious models that take this into account) do not account for the loss of what that other thing would have been likely to be. :shrug:
:roll: fair about the silos - you've never said anything about money silos - that is my joking description of a world in which money does nothing. As for money disappearing, however:
But that seems to be exactly what you are claiming when you suggest that, had the government not borrowed $2.2 Trillion and spent it, the GDP would have contracted by $2.2 Trillion, and that is exactly what is definitely required for an assessment of a multiplier effect that assumes that money that is not borrowed and spent would not have an impact if the government did not borrow and spend it.
So, you claim that you don't argue that money wouldn't exist without Government borrowing it, but, when asked what it would otherwise be doing:
You declare the question a strawman.
:roll:
It's one or the other. Either the money borrowed and spent by government would exist and be doing something else in the absence of its being borrowed and spent by government, or it wouldn't. You don't get to insist on both, depending on what is most convenient at the moment.
No - Government spending during an economic downturn can keep investment higher in the short term if a large-enough majority of the funds it sucks up were idle savings such that it overmatches the decreased efficiency of government action.
:shrug: that is not what I'm arguing at all.
Don't have a good answer, huh?
Not at all - that is indeed my argument. But I accept that you don't have a response on hand.
I think that is often a likely result, but I wouldn't say it's an absolute. However, I don't really see how this is a response to the point you were quoting.
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Debt instruments, blue chip stocks, real estate, money market accounts, bank accounts, etc... don't contribute to GDP as they are not a component of the investment identity.
Take real estate for example: if you simply purchase land, nothing is being produced. It takes the transformation of the land by hiring surveyors and contractors, purchasing materials like concrete, wood/steel, installation of electrical / water infrastructure, etc.... Those things add to the economy. The purchase of land is simply shifting money from one bank account into another.
As i suspected, you don't know what you're talking about, which is why you've put forth such an argument.
And here is where your confusion lies: Money exists regardless... that it is used for the production of goods and services is precisely my contention. I am talking about investment in the macro sense. Investment is simply goods and services produced in the span of a year that are not consumed in that same time. The amount consumed is referred to as depreciation.
When private domestic investment declines, it's because firms are no longer willing to spend money to produce fixed capital or acquire circulating capital in an effort to grow their productive capacity. And when this happens, less people work, less income is earned, and less production occurs. The existence of bonds doesn't change a companies desire to grow... that's a market determinant. As stated earlier, government spending can however crowd-in investment that otherwise would have been forsaken. And again... crowding out can only occur when the economy is operating at it's potential. You seemed to have grasped the concept in the previous response, so i'll take it as a sign that it doesn't warrant further explanation.
I was giving you far too much credit. You are not familiar with what constitutes economic growth. Of course your argument is going to be derived from confusion. Go back and review what investment means within the context of our discussion.
:lol:That money exists doesn't' equate to it being used in the economy. Your entire argument is completely invalid. I did consider your premise a strawman because i believed you to be aware of the underlying terminology and mechanics behind macroeconomic output (GDP). But i was indeed wrong.
The instance of an economic downturn is precisely that... idle savings. Firms would rather hold onto their money than purchase goods and services to be consumed at a later date. It's called foregoing investment, and it is the main contributor of the business cycle.
Yes you are... but you're simply unaware because you are not familiar with the topic. You attribute buying stocks as investment in the macro sense. Which is fine, as this is certainly not a mainstream subject. You don't know what it means when investment declines, as you believe it means firms are buying government debt at the expense of their own operations. When businesses buy Treasury securities, they are effectively saving their money. It's more secure than a bank account, and the market for these securities is the most liquid in the world.
The question is, do you have the capacity to understand your errors and admit you are wrong?
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Hey look at that... no real inflation yet, shocking!