US Households: Interest Burden on Debt Lowest Since 1993

[Wonkish1]

Not really. As much as I dislike proposals to reduce social security benefits, they aren't the equivalent of sovereign default. Most young people today have varying expectations about what benefits they'll actually receive.

I would agree that they aren't the same thing as a sovereign default. But they are currently marked in mandatory spending off budget. Unless you've come to the conclusion that the system is an easy one to fix politically speaking you should count them as liabilities.

I would personally argue that a company can more easily get rid of its pension with its marked liabilities than the US government can even restructure Social Security and the present value of future benefits are not considered liabilities? Doesn't make sense to me!

I think this is a semantical question. You've simply inserted into the discussion a factor beyond the scope of the discussion, as defined. If you goal is simply to throw at this thread "more things to worry about" then we can continually add things to the list. The risk of a natural disaster, global warming, rising health care costs etc. etc. etc. Sure, there are an endless number of things to worry about. But if you are talking about the current debt-to-GDP ratio and current household leverage trends, then projections of future net assets/liabilities fall outside the scope of the discussion.

Those are inherently unpredictable and can't be forecast with much reliability. The CBO is best equipped to do so and even it has made epic mistakes. In 2001, the CBO predicted the entire national debt would be paid off by 2010, based on similar 'projections'. Similarly in 1995 the CBO didn't think that the budget deficit would turn to surplus until 2002 at the most optimistic. The debate over the viability of Social Security will continue and there's definitely a possibility that benefits are cut, but the debate is still ongoing and I'd still say that health care costs are a more pressing stress on the budget at the moment.

That wasn't my intention. I'm just pointing out that the current 350% total credit market debt to gdp understates the risk and implicit leverage in the market. I think that counting intragovernmental debt and at least half of the unfunded pension liabilities between federal, state, local, and corporate is a fair compromise on what a more accurate picture of the current debt picture in the US looks like.

[Beet]

Not really. As much as I dislike proposals to reduce social security benefits, they aren't the equivalent of sovereign default. Most young people today have varying expectations about what benefits they'll actually receive.

I would agree that they aren't the same thing as a sovereign default. But they are currently marked in mandatory spending off budget. Unless you've come to the conclusion that the system is an easy one to fix politically speaking you should count them as liabilities.

I would personally argue that a company can more easily get rid of its pension with its marked liabilities than the US government can even restructure Social Security and the present value of future benefits are not considered liabilities? Doesn't make sense to me!

I think this is a semantical question. You've simply inserted into the discussion a factor beyond the scope of the discussion, as defined. If you goal is simply to throw at this thread "more things to worry about" then we can continually add things to the list. The risk of a natural disaster, global warming, rising health care costs etc. etc. etc. Sure, there are an endless number of things to worry about. But if you are talking about the current debt-to-GDP ratio and current household leverage trends, then projections of future net assets/liabilities fall outside the scope of the discussion.

Those are inherently unpredictable and can't be forecast with much reliability. The CBO is best equipped to do so and even it has made epic mistakes. In 2001, the CBO predicted the entire national debt would be paid off by 2010, based on similar 'projections'. Similarly in 1995 the CBO didn't think that the budget deficit would turn to surplus until 2002 at the most optimistic. The debate over the viability of Social Security will continue and there's definitely a possibility that benefits are cut, but the debate is still ongoing and I'd still say that health care costs are a more pressing stress on the budget at the moment.

That wasn't my intention. I'm just pointing out that the current 350% total credit market debt to gdp understates the risk and implicit leverage in the market. I think that counting intragovernmental debt and at least half of the unfunded pension liabilities between federal, state, local, and corporate is a fair compromise on what a more accurate picture of the current debt picture in the US looks like.

I disagree. I already pointed out why counting intragovernmental debt is a bad idea. And as I pointed out, the net value of liabilities depends on future projections, and in any case aren't debt that is yet booked, any more than future projected income is booked. That's like saying a government worker with a permanent job counts the net present value of his or her future earnings in their present assets. Counting future projected cash flows (positive or negative) in this period's assets or liabilities is Enron accounting to me.

Edit: Upon further thought, I will concede to you that some portion of state, local and corporate unfunded pension liabilities should be included, because it seems that these are indeed used by credit ratings agencies and are incorporated in new international accounting standards.

[Wonkish1]

From the long one...

No it doesn't it depends on an ever increasing nominal rate of return available to be lent to.

I completely disagree that banks need a 500 basis point return in order for "normal velocity" to return. Historically the cost of deposits have been all over the place the last 40 years.

But banks are now paid 25 basis points on their reserves and practically pay 0 to depositors. That actually produces a small but useful 25 basis point return for *not lending*.

At 25 basis points you wouldn't expect much change in behavior from banks, but I can assure you that the 4% inflation isn't bother them that much yet because of how levered they are into their loan portfolios and treasury bonds(yes that is what a lot of banks have been buying).

The problem is when you hit 5% and your raising it to 5.25% and then 5.5% just because you want to "slowly unleash" credit from the banks. That wont happen. And trust me a couple years of high double digit growth in the monetary base does do a lot of damage. Furthermore the RIR is a capital injection courtesy of the Fed. They are printing money and handing the banks an asset that is generating a return for the banks. That is much different than injecting liquidity where all you are doing is increasing credit availability to the banks not capitalizing them courtesy of the American public for not lending.


You misunderstood. The RIR pays banks to not lend so the money supply doesn't grow while its succeeding only Monetary *Base* grows. Its essentially growing its stored kinetic energy if you will. I don't need to make an assumption that their will be an unlimited amount of 5, 6, 7% loans at all. All I have to point out is that the RIR will create a floor in the interest rate a bank is willing to pay because they if it were to be lower the bank would just run to the Fed to collect the RIR. But some debt will come available at 5% and the RIR will cease to be as effective as the money starts flowing out again. So the Fed will have to raise the RIR to 6% to prevent inflation. Then at that new floor some credit will become available that is attractive at more than 6% and banks will start lending again. So a feedback loop of raising the RIR, creating a base rate in bank interest rates, and then credit ends up rising enough to meet and surpass the RIR. If lets say banks aren't able to find credit at the current RIR if the Fed lowers it at all then the floodgates open, inflation rises and then they are back to raising the RIR again. Once you fall in that trap there is no getting out of it.

Only real economic growth can absorb a large FFR hike as in the case of the housing bubble or any bubble since the beginning of the time malinvestment cannot withstand the shock of a large FFR hike.

The Philips Curve isn't real. As you engage in inflation(because you pick unemployment) the curves shifts upward to an equal degree and your right back where you started from.


I wouldn't call inflation a pot of gold. I'm well aware that the money multiplier is way down right now, but these things can change very quickly.


That is not accurate. That purely depends on A) how much debt the US government has if there is viable sovereign alternatives at that point(the Bund might be a good option in 5-7 years) and B) if high cost of capital and servicing causing large spending cuts can actually put a damper on the market in general assuming its growing nicely. I would argue the case of B would be true. Furthermore, if the amount of treasuries plateaued and started falling private investors wouldn't pile into them they would go in search of yield and find it in higher risk places.


You actually think that just because we have the power to monetize that it means than we can just do it whenever we want. There are constraints to that as well. Chairman Volcker figured that out for himself at an international meeting in 1978 where the bankers of the world told them that if the US didn't get inflation under control they were going to start ditching the Dollar very soon. Volcker came back and said his hands were tied. So yes a France situation can easily happen if you can't monetize because inflation is running to high.


I definitely don't think that raising the FFR is even close to the end of the world. But mark my words if they don't raise some time in the near future when that day does come a lot of people are going to act like its the end of the world to raise it including the Federal government.

If it wasn't for a low cost of capital a lot of the spending over the last 2 years wouldn't even be thought of without corresponding spending cuts.

[Wonkish1]

Edit: Upon further thought, I will concede to you that some portion of state, local and corporate unfunded pension liabilities should be included, because it seems that these are indeed used by credit ratings agencies and are incorporated in new international accounting standards.

That's the whole point. I'm doing the same thing with social security that they are doing with an unfunded pension liability.

[Beet]

No it doesn't it depends on an ever increasing nominal rate of return available to be lent to.

And your evidence for this???

You must be logged in to read this quote.

Yes, historically the rate has often been higher than 5% at an annual basis...

You must be logged in to read this quote.

Yes, that is the point.

You must be logged in to read this quote.

Well, sure. At 25 basis points, you would only expect banks to hold reserves against an opportunity cost of less than that at the overnight rate. But I don't see how this contributes to your argument.

You must be logged in to read this quote.

First of all, I strongly disagree that if you raised the overnight lending rate to 5-5.5%, this would not cause a relative contraction of credit. There is a lot of lending going on right now where the risk-adjusted return is well below that level. If the Fed were to announce such a hike tomorrow you would see a terrific drop in credit over the next 6-9 months, relative to what it would have been without such a raise. That applies to the interest on reserves as well as the Federal Funds rate.

The interest on reserves is not funded by 'printing money', it is funded by what the Fed earns on its assets. As long as the Fed earns a positive return on its assets, it will not have to print money to pay this interest. The amount of 'capitalization' is negligible. The MB has not grown as a result of this payment, it has grown largely out of the Fed's deliberately purchasing of assets to grow the MB deliberately. By selling these assets, its impact on the MB would overwhelm any affect of even a sharp rise in the reserve interest rate.

You must be logged in to read this quote.

Actually that is exactly how I understood it. Is it possible you have misunderstood my response?

You must be logged in to read this quote.

I think this is the key. Debt will only be available at 5% if a 5% real return is available somewhere. But absolute quantity of these opportunities is limited, and furthermore, the more opportunities there are at a certain level of return, and the higher that level of return, all it means is the more investment opportunities there are in the economy. This would only happen if the economy were booming in the first place, and good investment opportunities were abounding everywhere. Generally that's a very good thing.

You must be logged in to read this quote.

Again, you're positing an unlimited amount of debt being available at an unlimited interest rate.
 Where are all these great investments paying out super high rates of return for no risk? Tell me what they are.

You must be logged in to read this quote.

At each level of interest, there are a fixed number of worthwhile investment for your standard risk-averse actor. The higher the interest, the fewer the investments, and the lower the interest, the more investments. But it is not infinite in either direction.

You must be logged in to read this quote.

Well bubbles will collapse whether or not there is an interest rate hike or not. If you think there is an economy-threatening bubble, then it does not matter what the FFR does, because we have a problem, in that case regardless.

You must be logged in to read this quote.

Well sure, a meteor could strike the earth tomorrow.

You must be logged in to read this quote.

Now you're talking about capital flight. I said from the beginning that is the real risk. But the main way to protect against that is to keep a low current account deficit, because the balance of payments equations are what ultimately define our net dependencies to foreign countries.

You must be logged in to read this quote.

Errr... what are you talking about? Why would a contraction in the supply of treasuries drive down its price? Supply and demand, man ...

You must be logged in to read this quote.

Again, you're talking about capital flight. But I'm beginning to suspect that you are throwing up smoke here, because I can't really see where this anecdote and your previous argument really fits into the discussion.

You must be logged in to read this quote.

Well of course. In times of economic hardship, you have easy monetary policy to try and stimulate things. If the FFR had been high for the past couple years and the Fed had not grown the monetary base, you could see unemployment at 16-20% instead of the current 9%.

[Beet]

Edit: Upon further thought, I will concede to you that some portion of state, local and corporate unfunded pension liabilities should be included, because it seems that these are indeed used by credit ratings agencies and are incorporated in new international accounting standards.

That's the whole point. I'm doing the same thing with social security that they are doing with an unfunded pension liability.

Well the difference between corporate pension funds and things like social security is their legal status. Corporate pension funds are a legally signed contract that the corporation can't get out of, except in bankruptcy court. Government programs like social security, on the other hand, are existing statutes that Congress may change at any time in a completely legal manner. Further, the debt owed is in the same currency the government has the power to issue. State and local pension funds are somewhere in the middle. I don't understand well enough their legal status to decide which side they go on. But if it's something that the legislature and Governor can legally change without declaring bankruptcy (as it sounds is the case from you bringing up Christie's actions) then it shouldn't be considered debt.

Edit: Another problem you run into when comparing future liabilities to present GDP, is that you're pardon the expression comparing apples to oranges. Future liabilities will come due when GDP is different than today- probably higher. So a debt to GDP ratio that includes future liabilities makes no sense. You would have to take future GDP into the denominator as well.

Thirdly, besides legally revising benefit levels, we're forgetting the power to tax:
From the CBO:
'The term "unfunded liability" has been used to refer to a gap between the government's projected financial commitment under a particular program and the revenues that are expected to be available to fund that commitment. But no government obligation can be truly considered "unfunded" because of the U.S. government's sovereign power to tax--which is the ultimate resource to meet its obligations. [Congressional Budget Office, September 2004]'

[Wonkish1]

Because for someone that has studied monetary policy as much as I have its common sense.

I don't see how you could possibly say that 500 basis points is needed. Historically central bank rates have been between 3-4% by themselves and the cost of borrowing short term has been 2-4 against 6-7% long term collateralized lending.

My argument doesn't have to do with 25 basis point RIR it has to do with raising the RIR to "try to combat inflation". I think that is dangerous.

Your assumption is today. The only way the Fed has "already" raised the RIR to 5.5% is if inflation and interest rates are rising and are just below that.

Your wrong about the Fed not printing money to pay the RIR. When the Fed prints to buy an asset the interest payments is supposed to be destroyed money otherwise when the the bond is either sold or matures you haven't successfully even come close to removing the same amount from the money supply(and its reinvestment) that you put in when you purchased it. So if the Fed uses the interest payments they are using money that would have otherwise been destroyed. I'm not saying that 25 basis point RIR is having much of an effect. I'm saying that a mid single digits RIR would have an effect and that not only is it a problem from a monetary policy perspective but also from an ethical/corruption one because you are paying bankers for just being bankers.

Absolute quantity of debt at a particular interest isn't stagnant or finite. Inflation, r*, prevailing rates, etc. have a big effect on *changing* the entire market of debt to accept higher interest rates on credit. High amounts of new credit at previous RIR's can easily be causing malinvestment instead of plentiful "great investments".

You keep on acting like I'm talking about today. I'm not. In the event that inflation starts rising a 3% investment today could be just as attractive to the borrower several years from now at 7% if inflation is actually running high enough.

If you were to operate at a 0% inflation assumption you would be right, but since you can't then no the quantity of fixed investments at different interest rates fluctuates based on certain conditions.

You need liquidity to be shut off for a bubble to shut off. Just take a look at China today and the level that bubble grew to until the access to loose credit was turned off and with it the ability to prolong indefinitely the day of reckoning for your company or government.

Sorry I guess that was confusing. Essentially I don't believe the notion that a large cut in spending and slow fall in new treasury issuance will cause a flight to treasuries. Instead it will cause a slow increase in the value of treasuries while forcing investors to go seek higher yield elsewhere. Didn't say it would drive down its price.

In the previous case I mentioned capital flight as an option. Remember I picked B not A. In the case of the Volcker comment I'm referring to only to the extent that the risk of capital flight do to monetization can keep a central bank a little more honest. Otherwise I'm not talking about capital flight.

But what you end up stimulating is false allusions like $500k homes that only cost a couple thousand a month is debt service and increases in Federal government spending that isn't sustainable. Once the rate returns to normal the allusion is no longer there. The "stimulating" just creates suckers who take out debt thinking that its cheap. That isn't good for the economy.

That is your opinion.



Since your missing the point allow me to recenter it for you.

-Eventually growth will return
-As that is occurring banks will releverage out their reserves
-That will cause inflation and more asset bubbles
-If the Fed tries to respond by utilizing the RIR it will unleash an eventual disaster on the markets as that tool will have to continue to ratchet up to hold back reserves
-As either inflation or the FFR rise considerably the cost of debt servicing placed on the US federal government will be such an increase that they will be forced in to making some very tough cuts
-If it raises the FFR well above the inflation rate then reserves become hot potatoes, demand for credit will shut off and banks will incur losses(losses that will actually contract the money supply again when that day happens)
-If that happens the likely outcome is at first a slow move up in treasury prices(down in yields), investors will seek yield elsewhere until the FFR increase causes another batch of bank losses which pus the economy back into recession.

I just detailed you numerous things that will happen in very different periods of time. The stuff at the top is maybe in 2-3 years. The stuff in the middle is maybe 5-6 years. And crash date is probably 7-8 years. These are all just guesses, but I felt I had to make that clear because you keep on bringing up now, and tangling events that occur a couple years apart together.

[Wonkish1]

So a debt to GDP ratio that includes future liabilities makes no sense. You would have to take future GDP into the denominator as well.

Good point!

[Beet]

@Huge mass of commentary at the top. Only two points.

1, If the Fed buys Treasuries on the open market, and holds them to maturity, after maturity if the Fed does not buy a new Treasury to replace its existing holding but merely takes repayment from the government, then it is not increasing the amount of money in the economy overall, even if it holds onto the interest payments. Those interest payments would have eventually been paid to the private institution. Instead it is being paid to the Fed. The only difference is who pockets the difference.

2, You are assuming your argument. There is always a limited number of risk-adjusted investment opportunities at every real interest rate. Investors can go search for yield in the debt market as much as they want, but they won't find it if it's not out there. If the inflation rate is high, say 7%, then investors may find more opportunities at a 9% nominal rate, but this assumes that inflation gets to 7% in the first place. The whole point of raising the reserve rate is to prevent that from happening.

Even if there is an asset bubble and investors are hoping to see very high returns from the bubble, marginal investors will still weigh the price of acquiring the asset to the opportunity cost. The higher banks can earn risk-free on reserves, the less they will pile into a risky asset bubble. Margin requirements can also be raised in the event of an asset bubble to tamp down on speculation. But there aren't many assets in the economy that can suck in the vast amounts of money that we're talking about. Housing was just about the biggest one. Determined governments have never failed to kill a bubble. The problem is dealing with the aftermath, depending on the nature of the bubble.

You must be logged in to read this quote.

Dude, I know your story. You just haven't proved it. I disagree that raising the reserve rate will unleash "disaster" on the markets. Even if it did, it's not the Fed's only tool, as I pointed out long ago.

You must be logged in to read this quote.

So basically you're worried that the economy will recover, and then it will slip back into recession. Who the cares? Even if you were right on every single thing, I'm not worried, because all you're saying is that the next upswing will be followed by a downswing. Right now I'm worried about more pressing matters, such as the 14 mio Americans unemployed, poverty, and headwinds from the European crisis.

[Beet]

You must be logged in to read this quote.

General fighting the last war. A housing bubble isn't coming back (at least for a long time).

[Wonkish1]

@Huge mass of commentary at the top. Only two points.

1, If the Fed buys Treasuries on the open market, and holds them to maturity, after maturity if the Fed does not buy a new Treasury to replace its existing holding but merely takes repayment from the government, then it is not increasing the amount of money in the economy overall, even if it holds onto the interest payments. Those interest payments would have eventually been paid to the private institution. Instead it is being paid to the Fed. The only difference is who pockets the difference.

2, You are assuming your argument. There is always a limited number of risk-adjusted investment opportunities at every real interest rate. Investors can go search for yield in the debt market as much as they want, but they won't find it if it's not out there. If the inflation rate is high, say 7%, then investors may find more opportunities at a 9% nominal rate, but this assumes that inflation gets to 7% in the first place. The whole point of raising the reserve rate is to prevent that from happening.

Even if there is an asset bubble and investors are hoping to see very high returns from the bubble, marginal investors will still weigh the price of acquiring the asset to the opportunity cost. The higher banks can earn risk-free on reserves, the less they will pile into a risky asset bubble. Margin requirements can also be raised in the event of an asset bubble to tamp down on speculation. But there aren't many assets in the economy that can suck in the vast amounts of money that we're talking about. Housing was just about the biggest one. Determined governments have never failed to kill a bubble. The problem is dealing with the aftermath, depending on the nature of the bubble.

You must be logged in to read this quote.

Dude, I know your story. You just haven't proved it. I disagree that raising the reserve rate will unleash "disaster" on the markets. Even if it did, it's not the Fed's only tool, as I pointed out long ago.

You must be logged in to read this quote.

So basically you're worried that the economy will recover, and then it will slip back into recession. Who the cares? Even if you were right on every single thing, I'm not worried, because all you're saying is that the next upswing will be followed by a downswing. Right now I'm worried about more pressing matters, such as the 14 mio Americans unemployed, poverty, and headwinds from the European crisis.

Thanks for consolidating that was taken quite a long while to answer those.

1) Your down playing the effect that the new money the Fed creates in the system then multiplies in the period between the Fed's decision to buy and sell(or mature). Interest payments are normally considered money taken out of circulation.

2) And there is the clincher!!! You would be absolutely right if the RIR was ***Real***(inflation adjusted), but its not. That is what I covered in the first sentence a while back "No it doesn't it depends on an ever increasing nominal rate of return available to be lent to". The RIR is a nominal interest rate. So that means that as inflation rises new interest rates will be tolerated by the borrower.

The RIR is designed to slow the inflation. But as soon as you let it drop inflation will shoot up fast. You then re raise it and inflation stops getting worse. You lower it again and inflation shoots up even worse this time. If you become reliant on it then the RIR has to ratchet up because any time you drop it you just raised the effect of inflation on interest rates and anytime you raise it the amount of new loans being issued slows down as MB builds. The next time a smaller cuts in the RIR leads to another flood and the RIR has to be raised even higher the following time to cut off the lending. It is a disaster of policy.

You would be surprised what can suck in massive amounts of money. I mean in 1999 it was margin accounts that people were using to bet on dot com stocks. The 1970s and early 80s showed us that the money can just give up the US all together and the lending can leave the country for Latin American governments.

I have never seen a bubble controlled through fiscal policy that didn't sprout into something else right in its wake. The only thing that kills asset bubbles is to shut off the flow of easy of money.


I'm okay with FFR, reserve, and capital requirements. I am definitely not okay with trying to use the RIR to combat inflation. It would be an evil little tool.


I think your forgetting how this discussion got started. It got started by talking about treasury interest rate rises and what their likely causes were. You believed that the only real one was capital flight. I said I wasn't as worried about that and instead said that when if finally does happen it will be inflation and central bank policy trying to combat that inflation that will drive up those treasury yields.

The topic wasn't about the 14 million uninsured, poverty, EU, etc.

[Wonkish1]

You must be logged in to read this quote.

General fighting the last war. A housing bubble isn't coming back (at least for a long time).

No I'm not, I'm just using it as an example. In the late 90s it was margin accounts and today its government debt, government backed debt, universities, factoring, PM, AC, VC, and pre-IPO tech. Just to name a few.

But the cause is the same. Its back to loose money.

[opebo]

You guys are making excellent arguments for direct redistribution instead of loose money.

[Beet]

2) And there is the clincher!!! You would be absolutely right if the RIR was ***Real***(inflation adjusted), but its not. That is what I covered in the first sentence a while back "No it doesn't it depends on an ever increasing nominal rate of return available to be lent to". The RIR is a nominal interest rate. So that means that as inflation rises new interest rates will be tolerated by the borrower.

The RIR is designed to slow the inflation. But as soon as you let it drop inflation will shoot up fast. You then re raise it and inflation stops getting worse. You lower it again and inflation shoots up even worse this time. If you become reliant on it then the RIR has to ratchet up because any time you drop it you just raised the effect of inflation on interest rates and anytime you raise it the amount of new loans being issued slows down as MB builds. The next time a smaller cuts in the RIR leads to another flood and the RIR has to be raised even higher the following time to cut off the lending. It is a disaster of policy.

Except MB is always building. It's not a disaster of a policy at all. First of all,

(1) it isn't even a policy, it's just a hypothetical policy. And second of all,
(2) you're not even talking about the hypothetical policy directly, you're talking about a hypothetical reversal of a hypothetical future policy
(3) in the event of a future hypothetical recovery.
(4) And you're theory isn't even right. The Fed has a ton of tools to control the money supply, which have already been discussed. These include tools which far outweigh the slight rises in the MB from the hypothetically higher reserve rate. Furthermore,
(5) banks won't lend money, no matter how large the MB is, if the economy is not growing somehow, and there is some sense of a worthwhile investment area to buy debt from. Whether or not the growth is from an asset bubble is irrelevant, because asset bubbles are problematic no matter what monetary policy is. They originate from structural problems in the economy, not the level of the MB. Also, it should be noted that even during the housing bubble, banks did not engage in direct asset speculation. The leverage was fueled by the search for a relatively low amount of yield that could be extracted from CDO's. A reserve rate higher than the rate paid out by CDO's could have drawn capital away from the CDO market.
(6) even without all of the logical leaps, factual errors and theoretical problems in your argument, it still isn't very interesting because all it says is that eventually there will be another credit cycle with an upswing and a downswing.
(7) You haven't been on topic for practically any of your posts, so I've long since given up trying to keep topicality. I've been entertaining your fantasies....

[Beet]

You guys are making excellent arguments for direct redistribution instead of loose money.

He's constructed a fantasy world in which the economy is doing a LOT better than it is now, and then deriving a trivial result from it using extremely speculative theory, to be generous. The entire exercise is pretty bizarre; (1) why would you think about potential challenges in the event that the economy gets much better? That's like an unemployed sitting around thinking about whats his problems would be if he had a job. (2) why would you derive such a trivial result? That's like worrying that if he had a job, the unemployed person would eventually tire of it and perhaps be laid off or quit. (3) why draw such incoherent conclusions? That's like insisting that he will get into a car accident even though he knows about breaks, the steering wheel, traffic signs, etc.

[Beet]

You must be logged in to read this quote.

Except in that case they wouldn't be real yields, they would only be nominal yields. It wouldn't pinch the government if it was inflation driven because revenues would be driven higher by inflation as well. And it would be in an expansionary context, which practically by definition means it isn't a reason to worry. The reason why capital flight is the only real risk is because it's the only scenario where interest rates are forced up in a contractionary environment, and outside the control of the government. Your 'inflation' is a boogeyman, and a particularly crazy one at that, given the problems that we're facing today.

[Beet]

You must be logged in to read this quote.

Well then the entire discussion is moot, b/c as soon as RIR starts to cause problems (which I don't think it will), the other tools can be used instead.

You must be logged in to read this quote.

That was only an almost insignificant portion of the economy, actually.

[Wonkish1]

Well then the entire discussion is moot, b/c as soon as RIR starts to cause problems (which I don't think it will), the other tools can be used instead.

I'll just say that since the RIR makes matters worse, if it actually gets used a decent amount I'm not counting on the rest of the tools to make things better. The end of the RIR will come when the Fed realizes they cannon just keep on raising to pay banks to not lend.

After that I'm not going over all of this anymore. I've maintained "topicality" just fine. Its not like I'm rooting against a recovery because of what it will do on the inflation front, I'm just pointing out that headline inflation will be an issue when we're seeing a strong recovery. Being aware of what to expect when a recovery happens is pretty important actually when you consider my job.

Alright if you don't get the issue of the RIR after all this I don't know much more that I can say. I mean at the beginning of this whole thing you were talking about the Fed charging interest to banks for placing money at the Federal Reserve and right after that you acted like an expert on the RIR. I started looking at this issue within days of the RIR being announced a couple years ago.

[Beet]

I'll just say that since the RIR makes matters worse, if it actually gets used a decent amount I'm not counting on the rest of the tools to make things better. The end of the RIR will come when the Fed realizes they cannon just keep on raising to pay banks to not lend.

So even if the Fed raises the reserve requirement to 100% money will still flood out because the RIR has exploded the MB? The broader monetary aggregates are many times the size of the MB. Even if the Fed increased the interest on reserves by 20-fold to 5%, it would still take 14 years to double the MB. And the Fed could reserve that simply by selling the assets it built up over 2008-09.

You must be logged in to read this quote.

The topic was household debt service ratios. We haven't maintained topicality since the very first posts-- neither of us.

You must be logged in to read this quote.

It might be an issue; it might not. The quality of the evidence you've presented here is not all that convincing.

You must be logged in to read this quote.

I started looking at this issue a couple years ago as well. I'm not trying to be an 'expert', I was trying to follow your argument but it was really incredulous from multiple sides. You're literally trying to say that this tiny increase in the MB is going to cause uncontrollable inflation when there's absolutely no evidence for that and plenty of very obvious evidence against it, which I've tried to point out. And even if one accepts all of your conclusions I still don't see anything really significant about their implications, except that the Fed will use one tool instead of another.

[Wonkish1]

So even if the Fed raises the reserve requirement to 100% money will still flood out because the RIR has exploded the MB? The broader monetary aggregates are many times the size of the MB. Even if the Fed increased the interest on reserves by 20-fold to 5%, it would still take 14 years to double the MB. And the Fed could reserve that simply by selling the assets it built up over 2008-09.

I started looking at this issue a couple years ago as well. I'm not trying to be an 'expert', I was trying to follow your argument but it was really incredulous from multiple sides. You're literally trying to say that this tiny increase in the MB is going to cause uncontrollable inflation when there's absolutely no evidence for that and plenty of very obvious evidence against it, which I've tried to point out. And even if one accepts all of your conclusions I still don't see anything really significant about their implications, except that the Fed will use one tool instead of another.

Obviously 100% reserve would stop the flow, but lets be realistic even saying the Fed will increase reserve requirements beyond 25% is pretty radical.


Where did I say that "this tiny increase in the MB is going to cause uncontrollable inflation"? I said that the monetary base has already doubled. I've called the RIR a delaying mechanism while the FFR actually cuts off demand for new debt. I've said that once its in place it will take higher ratcheting of the RIR to keep inflation at bay and I've said that the longer that it is kept in check the faster it will release on the markets(which has nothing to do with the % of the RIR). So I'm not worried about the 25 basis points today. I'm not even worried that 200 basis points will effect the size of the MB(even though I think its morally wrong to pay bankers to not lend). I'm just worried about it being used as a delaying mechanism and the risk of having the RIR ratcheted to a % that actually could seriously grow the MB.

[Beet]

Fair enough. You've had your say and I've had mine. We'll just leave it at that.