A weekly thread to discuss financial matters - from personal all the way up to global.
Ground Rules
*Remember that we're all just Internet randos. Don't bet your life savings on a hot tip from this thread.
- Keep culture war in the culture war thread. Yes, global events may impact our personal finances, but that does not mean we have to incessantly harp on culture war aspects here. If you are going to discuss it, please stick to the practical impacts of it on an individual level.
- Be kind. Remember that everyone here comes from different circumstances. We all have different resources available and different risk tolerances.
- Don't let the perfect be the enemy of the good. Better is better. Celebrate people when they take a step up and work to move their finances in the right direction. Don't flame out because they haven't followed what you consider the optimal path. Everybody has to start somewhere.
Jump in the discussion.
No email address required.
Notes -
Over the course of this Qeek, I've been learning about the concept of fiscal dominance.
Do you think that we are starting to see that phenomenon in the United States? It seems like the symptoms of said event line up with what we're seeing: stubborn inflation, ripping equities, increasingly schizophrenic Treasury behavior. On the other hand, I'm always suspicious of something that fits a little too well.
If it is happening, what should private American citizens expect, other than high inflation? How would an Argentinian prepare for their fiscal dominance scenario if a time traveler warned them ahead of time?
Same as it ever was, really. People in the last 50 years really wanted to think of central bankers as our modern wizards, fine-tweaking the economy with their monetary policy dials, while we breathlessly hang on every word of their forward guidance. But they've been more accurately caricatured as the kid in the passenger seat with a fisher-price steering wheel & pedals who thinks they're the one driving. The only awkward part is that the adult who is actually driving (fiscal policy of spending & taxing, which have enormous clear 1st-order effects) is often actually looking at the kid and also thinks they're the one controlling the car.
As for "monetization" inflation theories: Anyone who still thinks of interest-bearing government debt in the form of central bank reserves as "money" but interest-bearing government debt in the form of treasury securities as "not-money" has been exposed as having an incoherent understanding of the accounting fundamentals. QE not being stimulative or inflationary broke a lot of those brains awhile back, but people come up with cope or just conveniently forget about it and go back to their old textbook understanding years later ('gasp, you shouldn't monetize the debt, that would be inflationary!'). Some mainstream economists like Summers & Krugman finally came around in the mid/late 2010s to notice that in a zero-rate environment, there is no 'money' difference, and the deficit is effectively printing money regardless of what form it ends up in, be it reserve balances, securities balances, physical coins/notes, etc. They still didn't seem to note that in the post-2008 world, the monetary policy regime switched to hitting their interest rate target by paying interest on reserves directly (a much better & simpler system than using reserve requirements and OMOs to drain all excess reserves all the time from the banking system), so there's no 'money' difference between reserves and securities even if the policy rate isn't zero.
Fiscal dominance for American citizens has been happening for 250 years, so I would anticipate more of that general trajectory. Especially similar is the last 90 years with a central bank that got modernized based on the experience of the great depression, and the introduction of income taxes which are a massive fiscal automatic stabilizer where taxes paid go up & down with the state of the economy without any active intervention needed by congress. Just because it's the water we swim in, doesn't mean it's less important; that's the steering wheel that's actually attached to something.
To the extent that you actually have to check empirically to find that raising the policy interest rate to 50% (meaning the government effectively increases the size of all bank accounts constantly with a bunch of free money), turns out to shocked pikachu drive inflation up to 50% rather than 'taming' it down to 0...well I would say you're learning which 'channels' are more powerful in the real world, free money vs cost-of-borrowing, rather than needing to get too creative speculating about whether we've transitioned between monetary vs fiscal dominant worlds at any given moment. And it starts to click why the Fed couldn't get inflation up to 2% no matter how low they set rates, and now can't get it down to 2% no matter how high they set them. I haven't read the econ blogs in awhile, but I know of at least John Cochrane as still trying to get the 'fisherian' word out that interest rates are positively causally correlated with inflation, as well as MMT's Warren Mosler.
I'm willing to believe. What concrete predictions should one make if this model is correct?
On the surface, it would seem this model implies our fiscal problems are easily fixable by monetizing the debt and lowering interest rates. Once interest payments are removed, the deficit to GDP falls to reasonable numbers.
What do you make of Japan's currency devaluation over the last 15 years?
What are the fiscal problems we're looking to fix? Trying to get inflation back down to roughly 2%, and optimistically try to get unemployment down a bit more, to like 3%?
I would definitely give the neo-fisherians a shot, and try dropping the policy rate to somewhere around 0-1.5%. Cochrane's modeling also supports Bessent's moves to phase out longer-maturity securities in favor of shorter bills, in order for interest rate changes to have fewer conflicting effects. Any debt monetization beyond that is pointless, and under current various rules there are probably enough institutions that prefer/need the bonds that I wouldn't suggest bothering with more QE.
Predictions based on the supposed perpetual dominance of fiscal policy over monetary policy? I guess stuff like the prediction that the eurozone was set up poorly and would dramatically struggle to deal with the first big crisis, that you should prepare for a crash if austerity politicians start winning again and fomenting a fear of large numbers, and that otherwise the US with a demonstrated willingness to keep running large deficits (to supply the desired savings to the domestic private sector and the rest of the world while maintaining solid aggregate demand) is exactly where you want to be for the best economic growth & business investing environment.
No idea about Japanese exchange rates, looks like they started accumulating US treasuries again in '09/10, which would be intentionally devaluing the yen to make their exports more competitive? And this year they finally did a massive sell-off of some of their foreign reserves to push the yen back up? I'm more of a fan of just leaving exchange rates purely floating, but I'm open to some mercantilist wisdom of keeping your industrial base stronger than what might happen naturally.
I have to admit you've given me some interesting food for thought.
Unemployment and inflation are low, so no problems there.
The bigger issue would be a sort of economic constitutional crisis. Government services are supposed to be paid for by taxes. When taxes are inadequate to cover expenses, then Congress is supposed to raise taxes or cut services. At some point debt grows to the point where Congress is forced to confront this. No one ever voted on "let's just keep printing money forever to pay for it".
Using only taxes to pay for services, then there is a hard cap on "Boomer luxury communism". Using taxes + money printing, then this cap is much higher. This money printing is a form of tax, and the government spending is a form of non-productive consumption. In the end, higher taxes and greater non-productive consumption will lead to lower economic growth.
More options
Context Copy link
More options
Context Copy link
More options
Context Copy link
More options
Context Copy link
More options
Context Copy link