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naraburns  nihil supernum  2yr ago (text post)   32352 thread views

Culture War Roundup for the week of December 5, 2022

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I feel like a key issue in the "theft" metaphor is a distinction between the literal property (some number of dollars) and what that property can be exchanged for (its purchasing power). The "theft" that happens due to inflation does not actually entail taking any of my literal property, just a decrease in what that property can be exchanged for. The "theft" accomplished by FTX and other crypto exchanges involves the taking of actual property. The same logic that says inflation is "theft" to people who save currency would suggest it is "theft" from homeowners when the Federal Reserve raises interest rates and causes home prices to fall or that Elon Musk "steals" from $TSLA owners when his own sales decrease the price of the stock.

That aside, I also don't see how the conclusion follows from the premises or arguments. "We shouldn't put more regulations on cryptocurrency or banks because consumers don't have a risk-free way to preserve their purchasing power over some time horizon" is how I would summarize that final paragraph in the quote (and penultimate paragraph in the article). I just don't see how the argument connects to the conclusion.

It could be considered theft of wages.

I work, and rather than immediately spend my money, I save it in a bank account hoping to spend it later. However, due to negative real interest rates, the value of my savings goes down 40%. And what's more, it is reckless government spending that is responsible for much of the devaluation.

Sure I could gamble on stocks, or hoard gold in my basement, but one of the advantages of living in a society is the ability to save my wages for later when I need them. Losing this ability is a strong negative. Just ask people in Argentina or Venezuela.

I feel like there's a confusion in both this post and the OP about what banks do. What banks do is play custodian for certain kinds of assets and give you access to those assets on particular terms. The interests rates that banks pay for being that custodian is compensation for the risk of having a third party be custodian of your assets. The interest rate is small because the risk is small. What banks do not (and cannot) do is save the purchasing power of your assets (i.e. some rate of relative exchange between your assets and other assets) at some time t_0 so it has the same power at time t_1.

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.

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.

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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