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« January Employment Report Preview | Main | Weighing the Week Ahead: Time for a Breather? »

February 02, 2012

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Mike C

Joking aside however, is anyone doing it on a similar scale to climate change as an example? Because I think we need a new model. "Everyone" says how this recession is "different" from past ones. Personally I think the economy hit a breaking point where the low interest rates are not having the desired effect.

Actually Robert, it is pretty easy to find a bunch of people who think the last recession was just another post WW2 recession albeit deeper. But they don't grasp the major difference which is the reversal of a 40-50 leveraging up with debt to a reversal to secular deleveraging. Go to Steve Keen's website. There are a lot of garbage models out there where people can't really explain what is happening and why the last 3 years of "recovery" isn't playing out as expected in terms of nominal GDP growth and uemployment. 0% *should be* stimulative as meth, but its not, and truthfully many don't get why. You might find this an interesting read:

http://contraryinvestor.com/mo.htm

Robert Owen

On another, somewhat related note. Who (if anyone) is out there running economic simulations with supercomputers. It seems to me the economy would be at least as easy as climate change to simulate (little joke there).

Joking aside however, is anyone doing it on a similar scale to climate change as an example? Because I think we need a new model. "Everyone" says how this recession is "different" from past ones. Personally I think the economy hit a breaking point where the low interest rates are not having the desired effect.

While the economy is slowly improving I think that, perhaps counter intuitively, higher interest rates might provide just the kick-start needed to get it going faster.

Robert Owen

Thanks for the reply! I did actually think you would have a better answer but am not disappointed that you didn't. It's actually somewhat heartening in a weird way to know it's such a complex issue even for the pros since it confuses the heck out of me!

My finger in the wind analysis is that the gridlock in congress is hurting the economy (in terms of limiting business decisions) more than easy money is helping.

oldprof

DW - I suspect that you are a new reader. I welcome you and hope that you will try a few more articles.

In this one there are two important distinctions that you should consider:

1) The language you don't like is not mine. It is a quote from an article, including the provocative headline written by the folks at Business Insider. Most readers know that I frequently cite others and use the block quote to identify.

2) I am certainly not bashing savers, as you will see if you read the piece more carefully. I am not writing to savers or to any political audience. I do not engage in political arguments or trash-talking. I am writing to investors, trying to help them navigate a difficult market.

When I write to investors, I pretend that I have some important information for a good friend. I try to write as if we were face-to-face. Since I see these people as friends and peers, there is no "down the nose" attitude in my mind.

Regular readers find that I will engage in a polite fashion and also answer questions when possible. Those that want a soap box may get it. I am not very interested in lectures from anonymous commenters, especially those who have not read the work very carefully.

As I said, I hope you read some more pieces, but why don't you dial it back a notch or two until you have a little more information.

Thanks,

Jeff

oldprof

Robert - I understand your argument, but there is no easy way to evaluate it. We do not "see" the effects of easy money, at least not in the ability to trace interest rate effects to particular business decisions. We can see it in a macro sense through econometric studies. The implications are broadly accepted by economists of various policy persuasions.

As to what lower rates have accomplished, you need to compare to what would have happened had the Fed done nothing. As I said, it is not an easy question to answer.

Sorry I can't do better.

Jeff

DW

I want to be clear about this--very clear--calling savers "whiners" is a very dumb idea. Your implication that whining savers aren't realistic is utterly wrongheaded. If you are as apolitical as you say, stop dredging up political trash-talk to bash savers. Oh, and while you're at it, stop looking down your nose at your readers.

ChauncyGardener

However, the Fed has an employment mandate and low interest rates have the effect of forcing gardeners back into the employment arena, driving up unemployment in a time of insufficient employment which has been provided us thanks to...? Right, those low interest easy money policies promulgated by guess who, the Fed, beginning with Greenspan and continued by Bernanke punctuated by the breathless capitulation of W and Congress to big money interests. Once my savings are exhausted I suppose gardeners will get higher interests rates and rapid inflation and will be forced back into the capitalist arena which we mistakenly thought they had escaped.

Robert Owen

Politics aside, I have a (relatively) simple question. There is a theory out there that the low interest rates have cost the "real" economy more money than it has added.

My layman's understanding goes something like this. The low interest rates have cost relatively well off retirees and near-retirees enough in income to hurt their confidence significantly. These people are not spending nearly the amount they normally would which is costing the economy a great deal of consumer spending. And relatively smart spending at that.

In addition, from my layman's point of view, I don't see much economic activity being generated by all the easy money. Demand for loans is still low and credit is still relatively tight. So where's the benefit?

So to summarize: What do you think of the argument that higher interest rates might be a bigger "stimulus" to the economy in terms of saver spending power than the current "easy money" policy which, frankly doesn't seem to be doing much?

Dave

One question which begs an answer is :

"Are there limits to the FED's
ability to purchase T-Bonds ? ".

If the FED exhausts its' ability to leverage itself, then what's the expectation for the future course of rates ?

Savers will win when rates rise ... eventually... as the FED unwinds its' balance sheet or we enter a new crisis, similar to EUROPE - rising rates and austerity.

oldprof

War -- I am permitted to establish a hypothetical comparison by specifying the terms. You are permitted to disagree.

The point is about investments, and you are the one who is missing it!

This is not a blog about politics, but I do consider the impact of policies on our investments.

oldprof

Jeff -- I thought that this was pretty clear. I was clearly drawing a contrast using the policy preferences of both Bushes. I did this since these were known. I preferred this hypothetical comparison to speculating about McCain, since the Bush policies were already known: stimulus and low rates through his appointee, Ben Bernanke.

My guess is that McCain policies would have been similar, but my evidence for that is less persuasive than the actual course taken by Bush Jr.

I think most readers understood what I was doing. After all, I used to be a poli sci prof and I can still do a good recounting of Presidential elections for several decades.

For history buffs, there was a feeling among Republicans that Bush Senior was undermined by Fed policy.

Sorry for any confusion:)

Jeff

Waronsavers

You miss the point entirely ... The Fed is robbing from Main Street to save banks and wall St. ... And it comes right out of the pockets of Main St - the poor, the elderly, savers, the middle class, taxpayers.

Many believe that is foolish, dangerous and insidious.


Also, if you are going to write articles, try to have accurate facts.

Bush was not running for President and could not possibly be re- elected.
Paul Ryan is not running for V P, although he would make a good one, or even better, President.
Bernanke is a Republican ? How do you know this and is it relevant. If in fact he is or was registered as a Republican offers little insight into his political leanings. more can be learned from his actions and statements at the Fed, and in academics.

Jeff

I will add a hypothetical prediction. If president Bush were to have been reelected his running mate would thank God for the consitutional amendment limiting presidents to two terms.

Pacioli

@ Jeff:

Great post. This point does not seem complicated (and you make it very succinctly). But nonetheless so many seem to run afoul of this guideline. I presume it relates to entitlement mentality, but I'm not really sure.

@ John G:

You say "The Fed is wrong to set interest rates under the rate of inflation. Negative rates discourage savings and capital formation."

Yet these actions by the Fed are consistent with its dual mandate. If you have a problem with the mandate, then you need to complain about legislators' failure to modify the law, but not the Fed.

Money Tips

I agree with John. At the end of the day the burden of the bailout will go to the savers and taxpayers only. Its not done.

Lou

Again, a good job Jeff!!!
Being a political agnostic is the single most important concept for financial success.

oldprof

John G -- Mostly I am describing what is happening, and why we should deal with the reality. Please note the distinction between defending the Fed and defending the policy. If you want a minimum interest rate, it requires a change in the law.

Mostly, I want to make sure that investors do not make poor personal choices because they disagree with Fed policy.

Thanks for joining in, expressing what many feel.

Jeff

John G

The Fed is wrong to set interest rates under the rate of inflation. Negative rates discourage savings and capital formation. Furthermore savers should be angry... they understand they being punished to bailout those who took on too much debt. It is more of the same... banks and the indebted being bailed out by the savers and taxpayers. Govt. policy should aim to encourage savings and discourage reckless malinvestment. We have the opposite... and it sounds like you're defending it.

burke

and yet Bernanke talks all the time about wanting higher stock prices - so no 3rd mandate for savers, but a 3rd mandate for those who wish to speculate in shares.

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