The fed is in a box. If they raise interest rates, they will have to service their $18 trillion national debt and expose a lot of malinvestment in the private sector. If they don't raise interest rates, their only tool to fight the next recession will be to print money, which could cause the currency to collapse. Choose your poison.
The existing national debt already has an interest rate attached to it. It's cheaper to buy that back once you raise interest rates because its value goes down immediately! The US will always be able to pay back its US dollar debt. That is not a factor here. It is true that new debt will have a higher rate attached to it but the US has served debt with rates of over 10% in the past with no problem (wish I could have gotten my hands on some of those).
You can't cause the currency to collapse simply by printing money. That money has to go somewhere. As long as the government isn't spending money it doesn't make a difference. We've been printing money for almost 10 years now and giving it away as loans with very low interest rates. This is what many people also call pushing on a rope, there's no uptake for that money in the real economy. Higher inflation is what the Fed wants and has been unable to achieve.
You're right though that the Fed does have a dilemma but it's not the one you mentioned. The real problem is that higher interest rates cause other asset prices to go down. I.e. the stock market will go down, real estate will go down etc. That can do damage to the real economy. This is the real problem here. Even the hint of raising interest rates sends the stock market into a spiral. The other thing higher rates do is strengthen the dollar. This makes the US economy less competitive and adds a deflationary pressure. Those are the two things the Fed is concerned about.
You're right about having less bullets in the chamber, so to speak, for dealing with future emergencies when the rates are already so low. There's still QE to the rescue and negative interest rates though.
>That is not a factor here. It is true that new debt will have a higher rate attached to it but the US has served debt with rates of over 10% in the past with no problem (wish I could have gotten my hands on some of those).
Yes, but rolling over debt at those same higher interest rates, today, would mean an huge increase in expenditures.
Interest on debt is about 7 percent of outlays. [1] The average interest rate is 2.4%. [2] if that returned to something more historically sane, it could be tough to manage.
Isn't it 'technically' in the economy's best interest, in the long run, to expose the malinvestment in the private sector? The longer it continues, the more painful it's going to be when we rip off the band-aid that is historically low interest rates.
Didn't we just read about China's stock exchange practically collapsing due to easy money being pumped into poorly vetted investments? True, the regulations are much different, but the lesson at the heart of it appears to be the same: the party can't go on forever.
The debt could easily be serviced by raising taxes on those who could afford it (i.e., high income) and to de-emphasize the kind of things that don't service the markets (i.e., HFT & front-running) by introducing a small financial transaction tax.
The country doesn't have a debt problem - it has a revenue problem.
We're so adverse to raising taxes in the US, we're raiding the Federal Reserve to pay for road repairs instead of raising the insanely low gas tax (which hasn't been raised in almost two decades).
There's too much supply and not enough demand in the world (speaking macro economically). You can't "push the string" and force demand, even with zero interest rate policies (you'll just get an asset bubble; witness housing and equity prices). The developed world's future is Japan, and frankly, that's not such a bad thing.
This doesn't mean those giant pools of money aren't hungry for returns though. Notice how quickly those funds in developing countries floods back to the US at the slightest hint interest rates are headed back up.
If you haven't read up on the high yield/junk bond slow motion train wreck occurring, you should.
> Debt of struggling companies has slumped, with one market gauge falling to a six-year low, as declining energy and commodity prices hit producers just as the Federal Reserve prepares to raise borrowing costs for the first time in almost a decade. Scott Minerd, global chief investment officer at Guggenheim Partners, predicts 10 percent to 15 percent of junk bond funds may face high withdrawals as more investors worry about getting their money back. He joins money managers Jeffrey Gundlach, Carl Icahn, Bill Gross and Wilbur Ross in warning of more high-yield trouble ahead.
TL;DR Janet Yellen either a) waited too long to raise short term interest rates or b) raising them at anytime was going to break the bank.
Never been to the States, but wouldn't that be a regressive tax? And regressive taxes are morally bad, as in they hurt the poor more than they hurt the rich. I'm saying this because if you work a McDonald's job in Europe (from where I'm from) you don't probably have a car, you live in the city, and have the benefit of having access to relatively cheaper public transport, but if you have a McDonald's job in the States chances are big that you're going to work by car.
It doesn't have to be a regressive tax. We have sales tax here in Ontario, Canada which is "regressive" but then in April, if you earn less than $XX per year, the government gives you a refundable tax credit (read: a check) for the estimated sales taxes you paid during the year.
The US should do the same thing with gasoline. Let the rich people with premium-gas-guzzling V8s pay through the nose for the luxury of polluting and use the money to wean the country off of oil.
Good luck with your taxes. Wealthy people are quite mobile, and HFT doesn't make that much money (and is very elastic, ie there will be less of it when taxed).
> Good luck with your taxes. Wealthy people are quite mobile
But their wealth is not. If it moves through a financial network, it can be found and taxed. Unless you're going to carry it around in cash. Which then causes you to run afoul of civil forfeiture laws.
I agree that a land tax would be helpful; it would allow for property currently being used unproductively to launder developing country wealth (Toronto, Vancouver, Sydney, Melbourne, London, and now parts of Texas) to be used by actual residents.
> I agree that a land tax would be helpful; it would allow for property currently being used unproductively to launder developing country wealth (Toronto, Vancouver, Sydney, Melbourne, London, and now parts of Texas) to be used by actual residents.
Yes, and no. The foreigners can still buy up land (and why not?), but with the land value tax they'd be actively losing money, if they don't rent it out or otherwise use it productively.
Because a country's land should not go to the world's highest bidder:
Thailand gets this right:
"Under Thai laws, foreign nationals are not allowed to own residential land. They can, however, buy apartments so long as no more than 49 per cent of a development is owned by foreigners. They can also purchase detached villas, but while they can own the house, they cannot own the land the house is on and are only able to lease it for 30 years at a time."
In Toronto property taxes pay for a lot of services. Let the rich Chinese foreigners subsidize those services; I'll continue to rent from them at monthly rates I know they're losing money on (after taxes, maintenance, and opportunity cost).
Owning a home is a poor investment, there's a good reason companies lease office space and don't waste their time and capital owning and maintaining it themselves.
Depends on the tax treatment. Lots of places have tax breaks for owner occupied property; and some places like Australia go really crazy. (https://en.wikipedia.org/wiki/Negative_gearing)
Yes, just the guy who "happens" to have been born there (or to be accepted as a national), "happens" to share the culture, "happens" to speak the language, "happens" to have relatives there and "happens" not to be from an adversary country...
You know, like people giving their inheritance first and foremost to the children that "happen" to be theirs instead of random people.
So? Strangers are people too, but you don't put just anyone in your house. E.g. family and friends get a prefferential treatment.
People living in a country are its collective owners. If they want to have those laws or these customs, that's their choice.
And the situation in places like Thailand, where citizens share a common history and civilization that goes thousands of years in the past, is difficult to be understood by people from a "melting pot" place, which was established a mere 3-4 centuries ago, and which consists of all kinds of immigrants coming over and helping create a country.
And even there, the fate of the original inhabitants (native americans) is maybe telling of why the Thais might not want foreigners coming in and buying the land. Thais would be the "native americans" in that scenario.
There's a difference between normal `owning' of property and sovereignty.
The people living in a country might be the collective sovereigns, and the laws they decide upon apply.
> And the situation in places like Thailand, where citizens share a common history and civilization that goes thousands of years in the past, is difficult to be understood by people from a "melting pot" place, which was established a mere 3-4 centuries ago, and which consists of all kinds of immigrants coming over and helping create a country.
You mean like Germany where I am from? Depending how you count, it's been around for longer or shorter. But the borders were never very stable, and neither were the different states. So nationality is a weird and muddled there.
Oh, just found this on Wikipedia:
> Thai people, who originally lived in southwestern China, migrated into mainland Southeast Asia over a period of many centuries. The oldest known mention of their existence in the region by the exonym Siamese is in a 12th-century inscription at the Khmer temple complex of Angkor Wat in Cambodia, [...]
> A land value tax (LVT), also called a site valuation tax, split rate tax, or site-value rating, is a levy on the unimproved value of land. It is an ad valorem that, unlike property taxes, disregards the value of buildings, personal property and other improvements.
Let me try to explain the orthodox economic rationale:
The idea is that we can tax land values like crazy without distorting investment decisions, if we are very careful not to tax improvements to the land like buildings. That's because the supply of land is in some sense the most inelastic economic commodity there is: they stopped making it, and you can't hide it. But, you have to be very careful not to tax the buildings---otherwise you end up with less buildings than is optimal for society.
See the Economist or Wikipedia or Google for more explanation. It's one of the few taxes that don't distort the economy.
Which is why one shouldn't make a career out of being a politician.
Perhaps we need more regular, able to work in an industry other than lobbying after holding office folks run for office and not worry if they don't get re-elected.
>and to de-emphasize the kind of things that don't service the markets (i.e., HFT & front-running) by introducing a small financial transaction tax.
You will not make a dent in the debt by taxing HFT. If you introduce a tax, people will stop doing it. (Maybe that's what you're after, but that's an entirely different problem than repaying the national debt).
Why can't everyone afford it, or at least middle class and above? The US is already the "1%" right? So we all can take a hit to solve this problem now. It may be politically unpopular, or even politically nonviable but it can be done.
Leave the high income people alone. Someone living hand to mouth is already doing his best to prop the economy, no matter what his income level is. Tax high property people instead. Progressively.
Are you equating HFT with front-running? Because it's not true. That aside, HFT is such a tiny fraction of the economy that taxing it wouldn't make one sliver of a dent in the national debt.
Your ignorance on this topic which you confidently expound on is deplorable.
If they raise interest rates, they will have to service their $18 trillion national debt and expose a lot of malinvestment in the private sector.
1. I think the Fed wants to "expose malinvestment". There's some debate about whether avoiding bubbles (i.e. malinvestment) should be a formal part of the Fed's mandate. IIRC, as it currently stands avoiding bubbles isn't a formal part of the Fed's mandate but it would certainly be a desirable policy goal (i.e. the Fed wants to prevent malinvestment from running to far). Also, wrt to servicing debt, the article was about how interest rates are likely to remain low.
If they don't raise interest rates, their only tool to fight the next recession will be to print money, which could cause the currency to collapse.
2. Your claim implies that the Fed raises rates so they have a tool to fight economic slowdowns. That's wrong. The Fed has 2 mandates: stable inflation and full employment. The Fed is raising rates to avoid inflation. You also claim that the Fed will "print money" which could cause the currency to collapse. Its astounding that we literally just went through this scenario, the Fed printed money, the currency didn't collapse. However people haven't re-examined their beliefs. We've now had 2 episodes where major economies resorted to "printing money" (Japan in the 1990's, US in 2000s) ... no currency collapses. In fact, as far as I'm aware, there's no precedent for a country that issues their debts in their own currency having a currency "collapse".
> Well, I suppose that if you don't have a theory to make sense of the data, you can say that about everything.
Even more general: You can't say "X is false because it didn't happen until now" because it can still happen.
You're right, technically they can't default if they issue their debt in their own currency.
But practically I doubt the creditor had payment in a devalued currency in mind when he bought the bond. I myself for sure wouldn't like it (which is why I don't buy bonds) but I'm aware that I generalize here.
I guess it's a matter of definition, in the contract is probably written that the principal + interest must be repaid (so devaluation is ok) but the creditor probably wanted principal + interest @ comparable purchasing power.
Unfortunately, today's creditors often work with other people's money (think pension funds) and just pass on the devaluations. So the pension fund itself doesn't care and the common guy should but doesn't.
"but the creditor probably wanted principal + interest @ comparable purchasing power."
When you are buying a bond, you know exactly what you will get in return. Bonds are a govern liability expressed in a govern unit of account. In a sense they are money:
https://petermartin2001.wordpress.com/2015/04/03/3320/
You are not entitle to anything else that a return in the government unit of account.
In fact, this is the reason that bonds are considered safe assets, because they can always be payed.
If you consider money as a claim over the real economy, a bond grant you that you will have a claim in the future about a percentage of the real economy. How big is this claim depends on what the real economy did in the time to maturity.
The responsibility of a government should be with the real economy (physical capital, knowledge, etc.. ) not with the return of rentiers.
payment in a devalued currency in mind when he bought the bond
This is why developing countries issue bonds priced in dollars. That therefore is why worrying about Zimbabweisation of the US is silly: you can force a printing race but not an absolute devaluation on a huge scale.
Inflation can also be the other side of a forex coin: you can't print other countries currency, and if your trade balance is bad then printing results in the cost of imports soaring.
The US is the country least likely to have this problem, as the countries where it is a problem (e.g. Argentina) use the dollar as hard currency to buy imports.
It's a complicated question, but in my world I'll take higher interest rates!
In my world, the only people, I know, who have benefitted from these rediculiously low interest rates, are rich people(entities that were doing great before the ression, and will probally still do well in a depression?). I've heard if you have a great job, and great credit, and you live on the right zip code; you can get some of this free money? (yes--I believe they still redline.)
In my world, my cd is making nothing. I pay to just cash a check.
Supposedly the economy is doing great because of these low interest rates? In my world, a lot of people just stopped looking for work, or work that payed a livable wage. (I know Obama administration didn't have any solution, but to lower interest rates. Yes--I know the federal reserve is a separate entity.)
I, and a lot of people like me, didn't benefit from these low interest rates. Yes--there are those that did. I see it in tech, and I'm glad!
Granted my world is small. I'm a nobody, and close to being homeless. I guess the part of the low interest rate dilemma(the one "I'm experiencing" is partially due to Dodd-Frank? It's too strict? I guess? I really don't know. I know when they make it easier for guys like me to get low interest rates, Rebublicans try to make it more difficult to file for Bankruptcy.
As to more gas taxes--no. Poor, middle class have to commute. Now if we could tie all fees/fines to income; I'd be doing backflips. A rich man gets a ticket. He tells the wife over dinner. A poor man gets a $600 red light fine; that just might be the final straw?
As I said earlier, it's complicated, but these low interest rates did not benefit me. They benefitted my wealthy neighbors. I don't want to argue with anyone--I'm a nobody. So, my opinion really doesn't matter. I just question exactly who benefitted from this free money?
You are implicity assuming that the fed actually has the power to control interest rates in a meaningful way. However, in the end, the fed cannot depart too much from the "natural rate of interest" and there are hints that this natural rate currently is lower than ever before.
Wait, this is exactly backwards. The Fed explicitly controls interest rates because they control the supply of money. It's that simple. They do this by setting the federal funds rate, open market operations (direct bond purchases), and so on.
They control nominal interest rates, but not real interest rates. In a world without real growth, you won't get significant real interest rates regardless of money supply.
the graph is a little bit deceptive; Before Nixon, dollars were more-or-less tied to the value of gold; sometimes more, sometimes less, and yeah, you can point at the "greenback" and a few other times we left the reservation, but... more or less, before nixon, the dollar had something to do with gold. After Nixon, that went out the window.
Now, some of you like the gold standard... me, I don't, but whatever you think about the gold standard, you can't really compare the interest rate on gold-backed currency to the interest rate on currency that isn't backed by gold. They are qualitatively different things.
Go back and look at the graph from, say, 1968 to now, and, well, it shows that we know a lot less than we think we know, or at least we have a lot less history to draw lessons from than we think we do.
Heavy burden (and power) given to the Fed knowing that with every rise or decrease in the interest rate, even the slightest, can economically impacts every corner of the world.
The low interest rates will stick around until the dollar stops being the world's reserve currency in about 25 years, taking the US economy down with it.
They Fed needs to get a grip. Interest rates cannot sustain a functioning economy at near 0 percent rates. This is getting ridiculous already. If they do not raise the rates on Wednesday they will have lost a lot of legitimacy
