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naraburns  nihil supernum  1yr ago (text post)   31672 thread views

Culture War Roundup for the week of December 5, 2022

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I am not confused by what banks do, and I doubt the OP is either. Yes, I am aware that it is not banks that control interest rates, just as gas stations do not control oil prices. I was speaking in the context that everyone understands we are really talking about Federal Reserve and government policy. If not, I apologize for contributing to a banal discussion about banks.

Federal Reserve does NOT control interest rates. People who know monetary policy know the fed can maybe manipulate rates for 6 months but they have zero control over what the average real rate will be over 30 years.

Maybe not officially, but they absolutely have been controlling (or at least strongly influencing) interest rates via setting the FFR and also QE. If the Fed didn't step up to buy trillions in treasuries during Covid, who would have bought them at the comically low interest rates that were on offer?

And why do you think the market will jump 6% on news about Fed policy? The Fed has immense power.

They act second. It’s like you get -20 degree day and the Fed puts on a coat. That doesn’t mean the fed is controlling rates (putting on a coat) it just means natural rates moved (weather changed) and the fed followed the weather.

Are you a Scott Sumner fan? This reminds me of his arguments, and which I always found to be just plain wrong. But in order to actually have a productive conversation about it we need to go in full "rectification of names" mode.

Then I am confused by your comment. Your comment makes it seem like you have an expectation that you ought to be able to put money in a bank account and thereby be able to exchange it for certain particular goods at particular rates at some future time that are similar to the rates when you put it in. Even in a world that was absent the Federal Reserve and an inflationary government policy this would not be the case. It's not like individual bank-issued currencies held their value particularly constant against classes of goods in a pre-Federal-Reserve world.

Your comment makes it seem like you have an expectation that you ought to be able to put money in a bank account and thereby be able to exchange it for certain particular goods at particular rates at some future time that are similar to the rates when you put it in.

We would have the expectation that we should be able to save and be able to preserve our claim on a share of the economy. If output genuinely falls, if there was a grain famine, then we would not expect our purchasing power of grain to hold steady. But if output increases greatly, then we should benefit from that too.

Why? You say should, so I assume this is a values based claim, ought rather than is, so what is the underpinning to this belief?

Not to say I disagree necessarily, but I am interested in where this value comes from, more so than the value itself.

I feel like this comment evinces an even more confused conception of the economy. Why does being compensated some number of dollars at time t_0, which could be exchanged for some fraction of total economic output, entitle you to a similar share of total economic output at time t_1? Are you under the impression that large increases in output, under the current system, have not generally resulted in benefits to individuals due to inflation? I think that would be a pretty hard case to make!

Your comment makes it seem like you have an expectation that you ought to be able to put money in a bank account and thereby be able to exchange it for certain particular goods at particular rates at some future time that are similar to the rates when you put it in.

And that's just what I was able to do for much of the 20th century in the United States. Sometimes, I would even came out ahead.

I am confused by your objection. Perhaps you don't realize the role of the Federal Reserve in controlling interest rates. For example, in the Post-WWII period, the fed used Yield Curve Control to maintain low rates in the face of high inflation. This allowed the government to deflate the substantial debt it had accrued during the war. The patriots who bought war bonds lost out big time.

While the Fed is not explicitly using yield curve control now, the unprecedented government stimulus during Covid drove real interest rates to extremely low levels, reaching something like negative 8% at one point. Europe, of course, is much worse, and countries like Argentina, Venezuela, and Turkey have destroyed their currencies through political interference in central bank policy. That is starting to become a possibility in the United States as well with both Trump and several prominent Democrats calling on the Fed to lower interest rates to give a short-term boost to the economy at the expense of savers.

The fleecing of bond investors to reduce the US war debt was done through capital controls and other regulations, not monetary policy.

Gillitrut's objection is the overwhelming consensus among people who have researched monetary policy. A possible explanation for why you do not follow this objection is that you do not understand this research.

You sound pretty sure, but the U.S. did indeed use YCC to maintain hugely negative interest rates after WWII.

https://www.stlouisfed.org/on-the-economy/2020/august/what-yield-curve-control

YCC in the U.S.

The U.S. incurred massive debt expenditures to finance World War II, and the Fed capped yields in order to keep borrowing costs low and stable. In April 1942, short- and long-term (25 years and longer) interest rates were pegged at 3/8 percent and 2.5%, respectively. These rate caps were largely arbitrary and were set at approximately pre-1942 levels.

As the U.S. continued to incur debt, the Fed was obligated to keep buying securities to maintain the targeted rates—forfeiting some control of its balance sheet and the money stock. The public generally preferred to hold higher-yielding, longer-term bonds. Consequently, the Fed purchased a large amount of short-term bills, which also increased the money supply, to maintain the low interest rate peg.

After the war ended, FOMC members grew more concerned with addressing the rapid inflation that materialized. However, President Harry S. Truman and his treasury secretary still favored a policy that maintained YCC (which also protected the value of wartime bonds by implying a price floor). By 1947, inflation was over 17%, as measured by the year-over-year percent change in the consumer price index (CPI), so the Fed ended the peg on short-term rates in an attempt to combat developing inflationary pressures.

In combination with rising debt from the U.S. entering the Korean War in 1950, the peg on longer-term rates contributed to faster money growth and increased inflationary pressures. In 1951, annualized inflation was over 20%, and monetary policymakers insisted on combating inflation. Against the desires of fiscal policymakers, interest rate targeting was brought to an end by the Treasury-Fed Accord in March 1951.

Yes, that describes exactly the mechanism by which the Fed cannot fix nominal interest rates. As soon as these became binding, it rapidly faced a choice between accelerating inflation and the interest rate target.

By the way, note how the peg was of nominal rates, not real (ex post) interest rates.

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