In the lead up to all these Fed meetings, I always see plenty of articles talking about why the Fed should hold rates steady (or drop). I still remember reading a weather article that included a random quote from the weather company CEO about interest rates.
I’ve come to associate it with an attempt to will the Fed into doing what they want.
Not that I know anything, but I’m wondering if the Fed is just going to keep doing it until everyone is resigned to continued increases. The Fed won’t stop until rich people stop asking them to stop. (Yes I know I’m probably dead wrong)
I think the substack article linked here [0] is pretty good at addressing what you need to know.
It used to be that money - capital - was used for value creation like a better product or service or some public good in the commons. Now the most crucial use of capital is to generate (further) wealth for those already wealthy. And since "conventional wisdom" of the economics kind blames higher wages as an impetus for inflation, "hurting" those wage earners is the key via higher rates to reign in said inflation. But real wages are and have been falling. Thus, because the economy is biased towards enabling and sustaining the making of money with money, in other words continuing to generate and increase wealth for the wealthy at the expense of others, the system will continue to reward the needs and wants of the wealthy.
Inflation is also good for those that own assets as their relative value to dollar increases.
Everyone has a mix of:
Debts, money they've loaned to others, amount of assets owned, and amount of dollars owned and wages (recurring income in dollars).
So, inflation is most harmful to wage earners with few assets - and most helpful to non-wage earners with many assets.
Increasing wealth disparity between workers (most people) and those who own the most assets. Those who own large amounts of assets largely don't own dollars - they own real estate, securities, etc..
The bank issue is a strawman - simply a matter of SVB (and others) making bad interest rate bets and losing.
> Inflation is also good for those that own assets as their relative value to dollar increases.
That's not "good", it's just less bad, because as soon as they want to turn those assets liquid they run into the same problem. Their assets are not gaining value, they're just not losing it.
Physical assets generally lose "real" value on their own too, because they degrade or need maintenance. The asset prices might go up but if you sell them to buy other stuff, that other stuff also went up in price (probably higher).
However, high enough inflation does benefit people who borrowed tons of money to hoard more physical assets than they can afford.
"high enough inflation does benefit people who borrowed tons of money to hoard more physical assets than they can afford"
If their salary keeps up with inflation yes. The trouble with relying on RSUs for comp is that when the fed raises rates to fight inflation, it ensures your total comp doesn't keep up with inflation.
> Inflation is also good for those that own assets as their relative value to dollar increases.
I'm not sure what type of assets you're referring to, but I haven't exactly noticed stocks skyrocketing along with inflation. If anything they seem to have dropped in value.
With inflation, the price level increases. This means that firms' input and output prices, and as a consequence, also their profits, will increase. Unless stock prices are in a bubble right now, this should make them rebound in value later on in a way that cash won’t.
If inflation was running hot persistently at like 6% then long term interest rates would be higher and housing prices would fall in nominal terms compared to wages.
The low-inflation, low-interest rate environment has produced high asset valuations due to the cheapness of borrowing money.
There is an important distinction on the spectrum between consumable things bought with wages and investments bought with borrowed money, and the rise in prices in those categories are different.
If you want to play the semantic game that all rises in any prices are inflation there is a real distinction that you're missing -- in which case we should talk about asset inflation vs. price inflation vs. wage inflation as being different inflations and stop talking about it like its the same thing (which economists would tell you it isn't by arguing that you're talking about assets and not inflation, but now we've just gone in a circle talking past each other because of definitions).
> If inflation was running hot persistently at like 6% then long term interest rates would be higher
This is not true.
> housing prices would fall in nominal terms compared to wages
I suggest you reconsider your assertion that 6% inflation would result in lower housing prices.
> The low-inflation, low-interest rate environment has produced high asset valuations due to the cheapness of borrowing money.
The high asset valuations as a result of low interest rates is textbook monetary inflation.
> There is an important distinction on the spectrum between consumable things bought with wages and investments bought with borrowed money, and the rise in prices in those categories are different.
The prices in both those categories are affected by dilution of value as a consequence of monetary expansion and that increase in prices has a name, 'inflation'.
> If you want to play the semantic game that all rises in any prices are inflation there is a real distinction that you're missing -- in which case we should talk about asset inflation vs. price inflation vs. wage inflation as being different inflations and stop talking about it like its the same thing (which economists would tell you it isn't by arguing that you're talking about assets and not inflation, but now we've just gone in a circle talking past each other because of definitions).
The point of semantics is to enable us to communicate by having mutually understood meanings for the words we use. If you want to talk about price increases that are not a result of monetary factors, then you can just talk about the price of things going up without misappropriating the word 'inflation' and making it seem like you don't understand what the word even means.
The distinction you speak of was cleverly crafted by the rich to provide cover for them because they own most of those assets and wage earning people can no longer afford them.
In the end who gives a shit if you dissect inflation into categories or not if my standard of living keeps dropping, which is what inflation does. Robs purchasing power from the people.
“Real distinction” is a semantic game. In fact how we label the numbers is all semantic games.
We’re insulating an aging gerontocracy at the expense of the next generation.
That’s ageism.
We’re on the hook for their contracts, their businesses agreements. I never signed anything.
They’ve successfully leveraged their propaganda spewing media companies to convince us to coddle them and fuck the next generation; no one else matters!
That’s the only real thing going on here. Everything else is semantic games.
A bunch of elders raised in a more religious era built “flocks” of employees whose agency they exploit to avoid real work.
I have a small heloc, about 50k. It’s all I have left on my house, mortgage wise. Currently trying to slap as much principal down on it as possible as it’s still in its “interest only” phase. Come 2024, it’ be interest and principal.
Was told last year the payment will be abt 500. I reckon after rate jumps it’ll be closer to 800.
I agree with this take. Being a builder does not generate predictable returns like an index fund or the S&P over the last 100 years. They tell you in school that you should invest money early and watch it accrue, but if we all do that collectively as a society then who is going to build.
The people who get funding will build, presumably? Investing doesn’t prevent people from building. Investments fund building. (Among other things.) This happens literally when banks loan money to real estate developers or other large projects.
But we’re in a situation where there was, until quite recently, both too much consumer demand (inflation) and too much investment (lots of wasted investment on silly things).
Higher interest rates are an incentive to slow investment and consumption and park money in government funds, where it‘s presumably more inert.
I think the answer to “what if everyone does it” is that everyone doesn’t do the same thing. If you have a good idea then you can spend your own money on it, and sometimes you have to, but if it’s expensive then it’s probably better to try to raise money from other people.
It is pointless and Mindless to save money purely for the purpose of having more. The point of investing and saving is to have money to spend. When money is spent, it goes to the person who built something, provided a service, or has a good.
I disagree. Money buys you recognition, influence and power. There is no fixed price for these. It's an auction where the rewards go to the highest bidder.
More to your core point, you only make money investing if someone is building. Talking to S&P 500 goes up because those companies are building something and the stockholders get a piece of profit when the things that are built sold. If no one builds and no one buys, stocks are worthless and are not an investment.
I think there's an element of educating the younger generation to invest. If you can bring in more investors than are leaving, supply and demand will ensure that prices will keep increasing.
Freedom. Having money in the bank allows you to control your circumstances. It gives you time to wait for and consider multiple job opportunities. It gives you time to re-skill if the economy shifts or move if your region undergoes an economic depression.
Different people may indeed have different values, but when we are talking about most people and what they are taught, I think this is true. People are thinking about retirement, buying a house, or paying for their kids education and this is why they save.
> Being a builder does not generate predictable returns like an index fund or the S&P over the last 100 years.
Sure but investing a modest sum in the S&P 500 as a wage earner, salary earner, or otherwise also requires you to work for someone else your whole life and never get wealthy. That incentive kesp people starting new companies and doing other things - i.e. taking risks.
When valuations are high, companies IPO, founders cash out and hopefully go on start new companies. People on the street buy companies for 3x their annual earnings but the stock market regularly buys companies for 8x, 20x, even 80x their annual earnings. This is expressed in each stock’s P/E ratio.
What percentage of 30 year spans give a 1.4% return or less? Better question: what's the cumulative distribution function of a 30 year investment span on an S&P 500 index fund?
No one is saying the system is nonsense. They are saying returns aren't predictable over decades. Buffett highlighted this a few years back: the returns from 1964-81 - zero. From 1981-99 - up about 12x.
These periods highlight that the returns don't meet any common sense definition of "predictable". Maybe if everyone was more precise on the definition of predictable it would resolve the discussion, but it doesn't appear that the common sense definition of predictable is met here.
Looking back it might appear so, but looking forward over any time horizon it is not predictable. Happy to arrange a long-term bet at even money - I'll guess you can't predict within 3% annualized what the total returns are over any time horizon for any of the common indices. And the difference between 4% or 7% over a long time is a lot.
Broadly, no [1]. There was some weirdness around the pandemic, but real wages today are flat with 2019 which, apart from the interceding era, was and is an all-time high.
> number is meaningless unless compared to productivity
No, it's not. Productivity adds a dimension to the question: it tells us the pie got bigger without more ingredients. But that isn't relevant to the absolute size of one's slice. Real wages are meaningful without preference to productivity.
> wages have comparatively been flat since the 1970s
Flat isn't falling. Taking into account benefits, per your Pew article [1], they're up. (Barely.)
The real economy grew in that time, and the rich got richer with it. That's a problem. But it's not a problem of falling real wages.
If wages stay flat and capital makes gains, then in the most true general sense wage-earners are earning less of a % than before. Also what’s the story with purchasing power which seems to be way down.
I think those are much more important to highlight and less pedantic.
> in the most true general sense wage-earners are earning less of a % than before
Yes. The fraction of GDP paid out to labour has fallen. This is a problem. But it's a problem of dividing gains, not of anyone being materially worse off than they were before.
> what’s the story with purchasing power which seems to be way down
It's not. It's flat to slightly up over the last half century. That's what real wage measures: the real purchasing power of the median earner's wage.
But there are tricks there aren't there? I'd want to look at home and car purchasing power, education, healthcare. If it's bundling in some tricks around technology as I've seen, it's very misleading IMO. And also the bundling of weird home tricks like nicer technology in the home is another misleading factor. Ultimately I think people are happiest with sq foot and location. From what I've seen a single wage earner in the 50s was far wealthier than even double wage of equivalent prestige jobs today, I don't really think a bigger and brighter TV even begins to touch the happiness achieved by having your family in a bigger house.
Productivity increases may be mostly due more to improvements in capital vs improvements in labor, though. If I make my peasants plow the field by hand, and then buy a horse, I'm not going to pay the peasants more for that. Rather I'm going to tell them they should be glad they are able to use the horse, as their muscles are less strained. I may even pay them less as it's less intensive.
That assumes possibly the most ancient, menial task, and assumes the peasants always do it the same way (i.e., it circularly assumes that labor productivity doesn't increase).
Educating and training people, giving them general and specific skills, makes them much more productive.
I'd argue the educational gains in the past 30 years have been negative.
The markets appear to indicate the worker value hasn't improved much lately, but capital has.
>Educating and training people, giving them general and specific skills, makes them much more productive.
And yet if you talk to almost any American, they will explain that the educational system has gone downhill. If the product produced through education is of lower quality, I would not expect the wage demanded to be higher.
Lots of people saying something doesn't at all make it true; in fact, it should make you skeptical that they are following a mis/disinformation herd and don't know what they are saying.
Education isn't the only source of skills, of course. There is training, and also people are far better informed now, for example, due the the Internet (or disinformed).
Even if the quality of education is reduced, it's not nearly zero. Partly because of education (and health, freedom, political stability, etc.) we are far more productive than illiterate neolithic peasants farmers.
Also, the quality could go down, but may more people could be educated, resulting in a large net gain.
>Also, the quality could go down, but may more people could be educated, resulting in a large net gain.
That's an aggregate gain, why are you comparing this to per capita gains.
>Even if the quality of education is reduced, it's not nearly zero. Partly because of education (and health, freedom, political stability, etc.) we are far more productive than illiterate neolithic peasants farmers.
Worker earns more real value than neolithic farmer, but I don't think anyone was saying they weren't.
>Education isn't the only source of skills, of course. There is training, and also people are far better informed now, for example, due the the Internet (or disinformed).
There was also training in the 1960s and 1970s. The median worker likely has more optionality to become an above median worker now, although whether the median worker themselves has better training today than in the past decades is debatable.
>Lots of people saying something doesn't at all make it true; in fact, it should make you skeptical that they are following a mis/disinformation herd and don't know what they are saying.
This is true, but if everyone is saying US high schools produce dogshit, the world is not going to be inclined to pay a reputational premium to US workers graduating from high school. Perception is part of value, and in markets indeed the buyers believing something has value creates real positive demand. This can be seen elsewhere i.e. felons get depressed wages, even if their conviction was bogus or not something that effects their work. The very fact our education is seen as going downhill creates lower value/quality for our workers -- so as you can see what I said was highly relevant.
As I mentioned in that thread, this is an extremely disingenuous take. The Federal Reserve has no interest in "hurting wage earners." Before the rate hikes, wage earners had already been hurt because inflation was outpacing wage growth. A wage-price spiral would only exacerbate this pain for those who aren't in a good position to switch jobs or negotiate with their employer.
Also, "the wealthy" isn't a monolithic group that all have the same interests. People who got rich off of cheap money, like Elon Musk, are asking for the Fed to lower interest rates as well.
It's extremely disingenuous to act like these tendencies are new, or as if anything has fundamentally changed. It hasn't. 150 years ago, Karl Marx articulated all of these characteristics of capitalism, including the tendency of capital to accumulate, the tendency of the rate of profit to fall, the contradictions and complexities of financialization, and much more.
A couple weeks back as the SVB story was breaking, someone here on HN said (and I paraphrase): "okay. that's it. there's no way the fed will raise rates now that they're destroying the banks."
And I was thinking... "I'm not sure 'destroying the banks' is a metric the fed tracks. Unemployment and inflation are."
But the earnestness with which the comment was offered. It was, as you say, like the commenter was willing the fed to do what they wanted. I guess magical realism isn't just a literary genre.
The Fed is the central bank. Its primary purpose has always been to be the lender of last resort and provide liquidity to the banking system. Of course they track the health of the banking system.
It's often stated that their two goals are to maximize unemployment and minimize inflation, but those are ultimately secondary to maintaining the overall health of the banking system and financial sector (although it's generally thought that aiming for those two goals help achieve that stability).
> And I was thinking... "I'm not sure 'destroying the banks' is a metric the fed tracks. Unemployment and inflation are."
It's interesting you say that. Putting on my tinfoil hat for a second.
People who have been making their fortunes on easy access to capital, VCs and the tech sector, are now mad that the rates are going up and it is starting to kill their golden gooses. Since the fed isn't listening to them they are going to force the Fed to listen to them by laying people off to increase unemployement and will continue to do so until the Fed relents to their demands.
> Since the fed isn't listening to them they are going to force the Fed to listen to them by laying people off to increase unemployement and will continue to do so until the Fed relents to their demands.
That would be threatening the Fed with a good time! The Fed has lower consumer demand as a target metric, and laying people of is one way to achieve that goal (roughly speaking).
So there is a strong argument that the construct the Fed chose for the SVB depositor bailout was very much designed to give them free hand to continue rate hikes.
> I’ve come to associate it with an attempt to will the Fed into doing what they want.
They kind of got what they wanted. IIRC, before SVB collapsed, it was widely believed the Fed was planning to hike rates by far more than they just did (IIRC, 0.75%).
> I’m wondering if the Fed is just going to keep doing it until everyone is resigned to continued increases.
In a way, that's the idea. Inflation is a psychological phenomenon. People raise prices, etc. because they expect inflation. The Fed needs to keep raising rates until people expect that the Fed will continue to raise rates until prices stabilize (if that sentence makes sense).
> I’ve come to associate it with an attempt to will the Fed into doing what they want.
Because that's what it is. Powell tried to raise rates early in the pandmeic and wall st. meltdown successfully got him to lower them back down. It worked before so they're trying again.
mmm.. I think the 2020 Taper Tantrum was a bit more complex than you're giving it credit for, but the end result was indistinguishable from the simple cause(s) you propose, so maybe it wasn't that complex.
Somewhat related to weather articles commenting on interest rates, I found it was fascinating that in Powell's opening statement he blamed the rise of consumer spending partially on the weather.
>Consumer spending appears to have picked up this quarter, although some
of that strength may reflect the effects of swings in the weather across the turn of the year.
I'm not proficient enough in monetary and fiscal policy to comment on the accuracy of drawing that conclusion, but I found it hysterical nonetheless.
It has, at least in my part of the country, been the most mild winter in my memory. We hit the 70s the majority of the days in February, with overnight lows in the 50s. I'm in North Carolina, not Florida! We're supposed to have mild winters, but this year, other than that one weekend where much of the south saw negative temperatures... it's like we skipped right from fall to spring. I've barely even worn long pants.
Nice weather leads to more travel, outdoor activity, more shopping, more going to restaurants. If it's cold and rainy, you stay home more.
I'm in Southern California, and my parents visited from Virginia this February. It was rainy with highs in upper 50s lower 60s. Meanwhile it was 78 back in VA...
You're actually onto something, I think. Half of the fed's job is setting interest rates, but the other half is setting interest rate _expectations_. If people expect rates to hold steady or decrease, they may not change their behavior (e.g. slow hiring or spending) to the extent needed to reduce inflation. But if they do expect rates to stay high or go higher, then they will act on those expectations, and the effects will ripple through the economy.
And yes, it is by and large "rich people" the fed needs to convince, specifically business and capital owners.
Because they're human and humans are weak. The "right thing" involves a lot of pain for a lot of people. OR, they can attempt to kick th can further down the road, be a hero, and let the next Board deal with it.
> The Fed won’t stop until rich people stop asking them to stop.
I think the most negatively affected by these rises is going to be the US middle-class, i.e. the people who have to pay mortgages (the same goes for the middle-classes based in Western countries more generally speaking). Higher interest rates means higher mortgage rates, and taking into consideration that those mortgages were signed when the effective rate was close to zero we're talking about a devastating effect on those people's finances.
Of course, VCs and capitalists somehow also negatively affected by these rises will have the louder voices, they're the ones controlling the discourse.
> taking into consideration that those mortgages were signed when the effective rate was close to zero
Most mortgages rates are locked in when you buy the house (unless you get an adjustable-rate mortgage, which is only about 9% of applications in the US as of September 2022)[1]. Like my mortgage payment hasn't changed hardly at all since I got it 5 years ago (it went up $100 because I have a PMI, but that's it, and that predated any rate increases).
What it's actually caused is it's kind of locked millions of people into their existing mortgages, because they got in while rates were so low, they don't want to buy a new home at the much higher rates (especially considering home prices are still super inflated over the past couple of years), so they're kind of stuck.
We kind of wanted to move but didn't buy a new home fast enough during the pandemic (we were looking late 2021, but didn't pull the trigger), so now it just doesn't make sense, the new rates would almost double our current mortgage payments, especially considering we'd have to buy a house at about +50% of our original purchasing cost. Selling our also inflated home will help towards that a bit, but not enough.
So now we can't really afford to move, even though we'd like to.
Yup. As long as this crowd can keep making their mortgage payments they will never really be motivated to sell and move into a larger home. This will keep inventory low on what used to be called "starter" homes for likely the rest of this (millennial) generation in most US metro areas.
If you could not buy into an expensive market then, you likely never will barring some huge windfall like doubling your salary or inheritance. Guessing most of Gen Y will be renting condo's or living with their parents until the homes are passed on to them. A dumpy 3/2 1400-1600 sq ft. in the south bay area is like $8000+/mo with taxes and $360,000 down payment. Good luck.
Lets be real here. If someone took out an adjustable rate mortgage with the lowest rates in history then they likely have many issues beyond their house payment.
I’ve come to associate it with an attempt to will the Fed into doing what they want.
Not that I know anything, but I’m wondering if the Fed is just going to keep doing it until everyone is resigned to continued increases. The Fed won’t stop until rich people stop asking them to stop. (Yes I know I’m probably dead wrong)