The Dogma of Low Interest Rates Is Wrong

In The Unintended Effects of Bad Policy (May 18th), I wrote that:

[L]ow interest rates often have the opposite of their intended effect. Extremely low interest rates can vacuum liquidity out of nations. Japan has been referred to as a nation where loose monetary policy was like "pushing on a string." There was no push. It was a pull. Liquidity was sucked out of the country as the Yen became the world's carry trade currency of choice. Borrowing in a currency is the opposite of investment. It is liquidity-draining to the carry trade currency nation. For all of the talk about using monetary policy to dampen the business cycle, no result could be more damaging or procyclical.

I concluded the article by saying:

Americans may finally realize that there is a free lunch after all--we will be supplying it as speculators borrow in our low-yielding currency to invest elsewhere.

Yesterday that debate was conclusively laid to rest with the latest numbers from the NSX on net flows into ETFs.

• YTD, $25.264 billion has flowed out of U.S. Equity Long ETFs.
• YTD, over $13 billion has flowed into U.S. Short and Short Leveraged ETFs.

Conversely,

• YTD, over $17 billion has flowed into Global Equity Long ETFs and less than $1billion has flowed into Short and Short Leveraged Global Equity ETFs.
• YTD, over $24 billion has flowed into Commodity ETFs and less than $0.5 billion has flowed into Short Commodity ETFs.

Capital goes where it is treated best, like customers for fine dining. When meal sizes are anemic and interest rates are low, customers leave and head for more hospitable, higher yielding environs, or commodities.

Economists take it as unquestioned dogma that low interest rates are stimulative. Of course, ultra low interest rates are not stimulative to the real economy, they just increase asset prices. Rather than accept conventional arguments using faith based reasoning, a far more scientific approach is to examine the evidence.

I would argue that extremely low interest rates suck investment funds and liquidity out of nations. You heard it here first, and the evidence is clear. Money has flowed out of U.S Equity ETFs and into Global ETFs.

Many argue that the U.S. could never share Japan's experience of a quarter century bear market in which stocks dropped over 75% with interest rates at or near 0%.

If we do not wish to share such an experience, why are we repeating the same policies which led to such results? What policies did Japan pursue? Near zero interest rates, the propping up of zombie banks, and the arbitrage of replacing of managerial competence at financial institutions with political competence aimed at securing taxpayer charity.

Does this sound familiar? Money flowed out of Japan starting in the early 90's and into economies such as ours. The tech boom was supercharged by a massive Japan-funded carry trade. We may be funding such a boom in emerging markets and commodities right now to our detriment. Liquidity and investment funds will continue to flow out of the U.S., as they have, if we do not change policies which are contradicted by logic and clear evidence.

The public needs to understand that good policies are not about slogans, or personalities--they are about sound quantitative practices based upon clear arithmetic. As Keynes said of inflation, less than 1 person in 100 may understand it, but turning the dollar into a carry trade currency is unsound, procyclical, and will suck liquidity and investment funds out of the U.S. to our long term detriment.

For the investor, global macro is about understanding the global flows of capital and the drivers behind them. Sound advice is to follow the money.

Disclosure: Long EEM, FXI, PGJ, FCHI, HAO, EWZ, GXC, GLD. Positions may change at any time.

Comments

[chap08:]

"If we do not wish to share such an experience, why are we repeating the same policies which led to such results? "

We're not repeating the same policies. Japan tacitly accepted deflation for over a decade. It wasn't until 2001 that they started a policy of QE. From that point, they had their longest post war period of economic growth. Our monetary, rather than fiscal, response has been much earlier and much more aggressive. Don't expect the same results as Japan.

As for the carry trade, Japan did not suffer from a lack of funds for investment. What they suffered from was a lack of good investment opportunities at home - the world outside always offered more. The same is currently true for us.

You say that: "extremely low interest rates suck investment funds and liquidity out of nations. You heard it here first, and the evidence is clear. Money has flowed out of U.S Equity ETFs and into Global ETFs." That's not because of low interest rates. That's because a) there are better investments overseas, and b) we have a dollar declining on the back of a declining economy. This will continue, not as long as we have low interest rates, but as long as we have a poor economy and poor investment opportunities at home.

You say that a falling currency is "procyclical". No it isn't. A falling currency will help to reverse our trade deficit, unemployment and deflation. It is countercyclical. That's what floating exchange rates do.

People say that we have had interest rates too low for a decade. Has this starved us of funds for investment? When you look at the last decade of the housing market, do you look at a market starved of funds for investment?? In fact, the reverse is true. We have had over the last decade, and continue to have, too much money chasing too few good investments. That just results in mal-investment, like housing. Low interest rates do not starve you of investment funds.

What we need are better investment opportunities thru an improved economy. Low interest rates and a lower dollar are part of what's necessary to achieve that. High interest rates would do the reverse. This author suggests elsewhere that Australia sets a good example to us by raising rates. This is nonsense. Australia is a totally different economy with much stronger exports, employment and housing. If you want to see the effect of raising rates on a weak economy, look at the US in the early 30s. It was a disastrous policy. The same would be true for all weak economies, such as the US, today.

Oct 07 08:15 AM

[DiggerUK:]

Harry Long quotes from a former article,
"Low interest rates often have the opposite of their intended effect. Extremely low interest rates can vacuum liquidity out of nations."

Reversing that argument shows that high interest rates can flood nations with liquidity via the carry trade.. A liquidity that sucks wealth from the host, with the same concern for the well being of that host, as a leech has for it's host.
It's a sub species of QE that causes the same problems when the time comes to remove the parasite. It can only be seen as QE by the back door.
The rise in $Aus. and $NZ are down to this carry trade, not expanding economies.

Australia and New Zealand are going to have to raise interest rates to dampen inflation at some point, all that will do is pump up the blood volume for the leeches.
Talk about throwing petrol on a fire.

Oct 07 08:36 AM

[Harry Long:]

Post 2001 economic growth? Are you kidding? Let's look at the facts:

Year Average
2009 -7.95 (YTD)
2008 -0.68
2007 2.35
2006 2.03
2005 1.93
2004 2.78
2003 1.40
2002 0.28
2001 0.23

What impressive growth! What a miracle of low interest rates and quantitative easing! Lol.

A weak currency helps to reduce the trade deficit and unemployment? Are you kidding? The Yen has been appreciating vs. the dollar for years and Toyota and Honda cars are still cheaper than American made cars. Dream on. Your arguments don't square with the facts. It's time to embrace evidence-based thinking.


On Oct 07 08:15 AM chap08 wrote:

> "If we do not wish to share such an experience, why are we repeating
> the same policies which led to such results? "
>
> We're not repeating the same policies. Japan tacitly accepted deflation
> for over a decade. It wasn't until 2001 that they started a policy
> of QE. From that point, they had their longest post war period of
> economic growth. Our monetary, rather than fiscal, response has been
> much earlier and much more aggressive. Don't expect the same results
> as Japan.
>
> As for the carry trade, Japan did not suffer from a lack of funds
> for investment. What they suffered from was a lack of good investment
> opportunities at home - the world outside always offered more. The
> same is currently true for us.
>
> You say that: "extremely low interest rates suck investment funds
> and liquidity out of nations. You heard it here first, and the evidence
> is clear. Money has flowed out of U.S Equity ETFs and into Global
> ETFs." That's not because of low interest rates. That's because a)
> there are better investments overseas, and b) we have a dollar declining
> on the back of a declining economy. This will continue, not as long
> as we have low interest rates, but as long as we have a poor economy
> and poor investment opportunities at home.
>
> You say that a falling currency is "procyclical". No it isn't. A
> falling currency will help to reverse our trade deficit, unemployment
> and deflation. It is countercyclical. That's what floating exchange
> rates do.
>
> People say that we have had interest rates too low for a decade.
> Has this starved us of funds for investment? When you look at the
> last decade of the housing market, do you look at a market starved
> of funds for investment?? In fact, the reverse is true. We have had
> over the last decade, and continue to have, too much money chasing
> too few good investments. That just results in mal-investment, like
> housing. Low interest rates do not starve you of investment funds.
>
>
> What we need are better investment opportunities thru an improved
> economy. Low interest rates and a lower dollar are part of what's
> necessary to achieve that. High interest rates would do the reverse.
> This author suggests elsewhere that Australia sets a good example
> to us by raising rates. This is nonsense. Australia is a totally
> different economy with much stronger exports, employment and housing.
> If you want to see the effect of raising rates on a weak economy,
> look at the US in the early 30s. It was a disastrous policy. The
> same would be true for all weak economies, such as the US, today.

Oct 07 09:12 AM

[Tony Petroski:]

I think Chap08 has it right and the author has it wrong.

Money flows to emerging markets and China because (the author knows this but didn't put it quite right) the potential returns are much larger even given larger risks. It may be that financing such outflows with extremely low interest rates may pave the way for continuing the outflows, but you don't stop the outflow by raising interest rates. You stop the outflow by creating conditions for stable and profitable growth.

Oct 07 09:21 AM

[Harry Long:]

Where do I begin?

No investment opportunities in Japan? Oh, I forgot, Toyota and Honda aren't real companies like GM, Ford, or Chrysler.

Ineffective action by the gov and BOJ? It was very effective, if keeping zombie banks alive and not forcing them to write down loans is the goal (hence, my point).

To your point about the 30's, low interest rates do not stimulate the real economy, they affect prices. Half of the U.S. monetary base was wiped out when banks failed. You blame the weak economy on interest rates against that backdrop? Wow. It's time to embrace evidence-based thinking.

On Oct 07 08:15 AM chap08 wrote:

> "If we do not wish to share such an experience, why are we repeating
> the same policies which led to such results? "
>
> We're not repeating the same policies. Japan tacitly accepted deflation
> for over a decade. It wasn't until 2001 that they started a policy
> of QE. From that point, they had their longest post war period of
> economic growth. Our monetary, rather than fiscal, response has been
> much earlier and much more aggressive. Don't expect the same results
> as Japan.
>
> As for the carry trade, Japan did not suffer from a lack of funds
> for investment. What they suffered from was a lack of good investment
> opportunities at home - the world outside always offered more. The
> same is currently true for us.
>
> You say that: "extremely low interest rates suck investment funds
> and liquidity out of nations. You heard it here first, and the evidence
> is clear. Money has flowed out of U.S Equity ETFs and into Global
> ETFs." That's not because of low interest rates. That's because a)
> there are better investments overseas, and b) we have a dollar declining
> on the back of a declining economy. This will continue, not as long
> as we have low interest rates, but as long as we have a poor economy
> and poor investment opportunities at home.
>
> You say that a falling currency is "procyclical". No it isn't. A
> falling currency will help to reverse our trade deficit, unemployment
> and deflation. It is countercyclical. That's what floating exchange
> rates do.
>
> People say that we have had interest rates too low for a decade.
> Has this starved us of funds for investment? When you look at the
> last decade of the housing market, do you look at a market starved
> of funds for investment?? In fact, the reverse is true. We have had
> over the last decade, and continue to have, too much money chasing
> too few good investments. That just results in mal-investment, like
> housing. Low interest rates do not starve you of investment funds.
>
>
> What we need are better investment opportunities thru an improved
> economy. Low interest rates and a lower dollar are part of what's
> necessary to achieve that. High interest rates would do the reverse.
> This author suggests elsewhere that Australia sets a good example
> to us by raising rates. This is nonsense. Australia is a totally
> different economy with much stronger exports, employment and housing.
> If you want to see the effect of raising rates on a weak economy,
> look at the US in the early 30s. It was a disastrous policy. The
> same would be true for all weak economies, such as the US, today.

Oct 07 09:30 AM

[Harry Long:]

A main condition for stable and profitable growth is low inflation.

The effect of inflation is to penalize the virtue of savers, who are caught in the double-whammy of the debasement of the currency and ridiculously low interest rates, thereby earning highly negative returns on their savings. This is not just China. These savers are ordinary Americans who do not over leverage and did all the right things. They are often the elderly on fixed incomes. This inflation is a taking (theft) from savers and a gift to all those who have borrowed money. Their debts are fixed, but the money they must repay in becomes steadily less valuable. It is yet another form of wealth transfer (theft) from those with virtue to those with vice.

But you may say, "sure these savers lose out, but we can increase employment with some inflationary increases in the money supply." This seeming "logic" is as widespread as it is wrong. Inflation kills demand in terms of the aggregate quantity of goods citizens can afford. It doesn't spur it.

For instance, for families with fixed budged constraints (a fancy term for incomes), if the price of Tide goes up by 20%, the family either buys 20% less quantity of Tide, or less of something else in order to still afford it. But their income is unchanged. They can afford less of everything. The economy is hurt, not helped. When citizens can afford less goods, businesses lay off even more workers. Less quantity of goods can be afforded, businesses earn less or go broke, more workers are laid off. It' a simple and vicious cycle.

But, the socialists will proclaim, incomes will rise as well, negating this effect. Go to your boss and ask for a raise. See what happens. Inflation kills economies. As Milton Friedman recollected of du Pont's famous adage "we do not have to be gracious at all to inconsistent logic or absurd reasoning. Bad logicians have committed more involuntary crimes than bad men have done intentionally." No society has ever prospered from inflation.

I agree that China has great potential, and have argued that in previous articles, such as "It's Not Just the Carry Trade."

However, I would encourage you to examine emerging market returns during U.S. interest rate tightening cycles.


On Oct 07 09:21 AM Tony Petroski wrote:

> I think Chap08 has it right and the author has it wrong.
>
> Money flows to emerging markets and China because (the author knows
> this but didn't put it quite right) the potential returns are much
> larger even given larger risks. It may be that financing such outflows
> with extremely low interest rates may pave the way for continuing
> the outflows, but you don't stop the outflow by raising interest
> rates. You stop the outflow by creating conditions for stable and
> profitable growth.

Oct 07 09:38 AM

[Alphameister:]

I can't add anything to the superb reply by Chap08 who clearly understands the issues so much more deeply than does the author of this article. That being said, the US will be very fortunate to achieve, in the years ahead, the levels of growth realized by Japan between 2001 and 2007. The socialists in power are doing all the wrong things to promote investment and entrepreneurial opportunity in this country.

Oct 07 09:53 AM

[Harry Long:]

Alphameister, the facts speak for themselves. The Yen has appreciated for years against the USD and Japanese car manufacturers still put out a more competitive product at a more competitive price.

A deep understanding of the issues is evidenced by facts, not feelings.

Oct 07 10:09 AM

[Tony Petroski:]

Harry Long. I think we are allies and as such, shouldn't snipe at each other. You've asserted a theory about interest rates that shouldn't obscure your basic (and correct) view that economic security and prosperity is based on the production of goods and services that free people want to buy--that such production creates its own demand, and that prosperity isn't achieved by financial manipulation done by the Fed or Wall Street.

The production of such goods and services do depend on government creating conditions in which it is profitable to do so.

Oct 07 10:12 AM

[Harry Long:]

Tony, I apologize if I have offended. I don't mean to snipe. I always enjoy the give and take of a good debate.

Oct 07 10:15 AM

[chap08:]

Harry, try to be less emotional and as you say "look at the facts".

There was growth in Japan post 2001. It's there in your figures. Compare that growth with what they achieved in the previous decade. Note also that they stopped QE in 2006 when they thought they had beaten deflation.

Also note that Japanese bond yields remained very low throughout this time, despite massive government debt. If "liquidity had been sucked out of the country" then WHAT WAS ALL THIS MONEY DOING IN JAPANESE GOVERNMENT BONDS?

As for a weak currency helping the trade deficit and unemployment - yes it does! Of course there's standard economic theory to back this up, but I see that you don't care for standard economic theory. So let's look at another example - China. China have a policy of deliberately holding their currency down exactly for this reason. You know what, it works!

I could go on, but when you start saying things like "low interest rates do not stimulate the real economy" then your thinking gets so far away from the "facts" and "evidence" that it is, to be frank, laughable.

On Oct 07 09:12 AM Harry Long wrote:

> Post 2001 economic growth? Are you kidding? Let's look at the facts:
>
>
> Year Average
> 2009 -7.95 (seekingalpha.com/symbo...;br/>2008
> -0.68
> 2007 2.35
> 2006 2.03
> 2005 1.93
> 2004 2.78
> 2003 1.40
> 2002 0.28
> 2001 0.23
>
> What impressive growth! What a miracle of low interest rates and
> quantitative easing! Lol.
>
> A weak currency helps to reduce the trade deficit and unemployment?
> Are you kidding? The Yen has been appreciating vs. the dollar for
> years and Toyota and Honda cars are still cheaper than American made
> cars. Dream on. Your arguments don't square with the facts. It's
> time to embrace evidence-based thinking.

Oct 07 10:23 AM

[Harry Long:]

Again, going back to facts, you are not responding to specific examples I have given multiple times. I would appreciate it if you would respond to my arguments point by point.

Again, the Yen has appreciated against the dollar for years, yet they still have a large trade surplus with the U.S. and their car companies have gained market share, putting out cheaper, higher quality cars. You have not contradicted this point.

Jim Rogers has made the same argument repeatedley.

Second, you keep mentioning deflation. I agree that interest rates affect asset prices. I have argued that consistently.

If you disagree when I say that interest rates do not affect the real economy, it should be easy for you to contradict my aggregate demand/budget constraint argument and tide example, but you don't.

If my arguments are laughable, it should be easy for you to contradict them, point by point, starting with the tide example.

In a fair debate, silence is consent, so I encourage you to refute my examples, rather than just saying that I am wrong without contradicting my arguments. I have and will continue to do you the courtesy of responding to your arguments point-by-point.

Furthermore, you contradict you own points. You point out the QE took place in Japan, then you seem to suggest that it is a contradiction that interest rates remained low. Low interest rates are consistent with QE.


On Oct 07 10:23 AM chap08 wrote:

> Harry, try to be less emotional and as you say "look at the facts".
>
>
> There was growth in Japan post 2001. It's there in your figures.
> Compare that growth with what they achieved in the previous decade.
> Note also that they stopped QE in 2006 when they thought they had
> beaten deflation.
>
> Also note that Japanese bond yields remained very low throughout
> this time, despite massive government debt. If "liquidity had been
> sucked out of the country" then WHAT WAS ALL THIS MONEY DOING IN
> JAPANESE GOVERNMENT BONDS?
>
> As for a weak currency helping the trade deficit and unemployment
> - yes it does! Of course there's standard economic theory to back
> this up, but I see that you don't care for standard economic theory.
> So let's look at another example - China. China have a policy of
> deliberately holding their currency down exactly for this reason.
> You know what, it works!
>
> I could go on, but when you start saying things like "low interest
> rates do not stimulate the real economy" then your thinking gets
> so far away from the "facts" and "evidence" that it is, to be frank,
> laughable.
>
> On Oct 07 09:12 AM Harry Long wrote:

Oct 07 10:48 AM

[Harry Long:]

I think I am also tapping into emotional discomfort you have with logical criticisms of economic orthodoxy.

By definition, new theories of how the world works--in any discipline--contradict old theories.

Your challenge, if you dislike my theories, is to debate them using logic and evidence.

On Oct 07 10:23 AM chap08 wrote:

> Harry, try to be less emotional and as you say "look at the facts".
>
>
> There was growth in Japan post 2001. It's there in your figures.
> Compare that growth with what they achieved in the previous decade.
> Note also that they stopped QE in 2006 when they thought they had
> beaten deflation.
>
> Also note that Japanese bond yields remained very low throughout
> this time, despite massive government debt. If "liquidity had been
> sucked out of the country" then WHAT WAS ALL THIS MONEY DOING IN
> JAPANESE GOVERNMENT BONDS?
>
> As for a weak currency helping the trade deficit and unemployment
> - yes it does! Of course there's standard economic theory to back
> this up, but I see that you don't care for standard economic theory.
> So let's look at another example - China. China have a policy of
> deliberately holding their currency down exactly for this reason.
> You know what, it works!
>
> I could go on, but when you start saying things like "low interest
> rates do not stimulate the real economy" then your thinking gets
> so far away from the "facts" and "evidence" that it is, to be frank,
> laughable.
>
> On Oct 07 09:12 AM Harry Long wrote:

Oct 07 10:54 AM

[a fat panda:]

"I could go on, but when you start saying things like "low interest rates do not stimulate the real economy" then your thinking gets so far away from the "facts" and "evidence" that it is, to be frank, laughable."

Harry, The problem with low interest rates is more than just the carry trade. It lowers the cost of risk, and encourages people who have no business owning a business to go into business. If you look at the house flippers, as an extreme example, they surely stimulated the economy, but did so by pushing demand forward and pulling resources away from productive uses. That is to say, that it creates a "real" economy that isn't real.

The cost of this is much more than the loss in the house. The cost is going to be terrible once you factor in the retraining costs to get these 'business people' back in the workforce. People who left real jobs to become house flippers now have stale resumes. They are going to have to re-invent themselves. This can be a trival cost in some industries, but for people who work in say the IT world a year off is a killer.

Oct 07 11:04 AM

[JeffDB:]

On Oct 07 08:15 AM chap08 wrote:
> You say that: "extremely low interest rates suck investment funds and liquidity out of nations. You heard it here first, and the evidence is clear. Money has flowed out of U.S Equity ETFs and into Global ETFs." That's not because of low interest rates. That's because a) there are better investments overseas, and b) we have a dollar declining on the back of a declining economy. This will continue, not as long as we have low interest rates, but as long as we have a poor economy and poor investment opportunities at home. >
---

But "poor investment opportunities" is not an inherent property of the United States economy. I would submit that the "poor investment opportunities" vis a vis alternatives elsewhere is a direct *result of* those low interest rates and the monetary policy used to achieve them. Funds are moving from debt instruments in the U.S. *because* of the relatively low interest rates here, and because of the declining value of the dollar and the expectation that that decline will continue. The devaluation of the dollar is itself a direct result of the loose fiscal policy inherent in pushing interest rates to exceptionally low levels.

How else would you explain the big jump in money flowing into GLD and similar ETFs that buy physical gold, have it delivered to their vaults and pay guards to protect it and insurance companies to insure it? Is there a good reason why investors should think that is a better investment than in U.S. companies producing goods and services on the world market?

Oct 07 11:14 AM

[Harry Long:]

Fat Panda, I agree with you, it encourages excessive risk. Great point.

Oct 07 11:16 AM

[bearfund:]

chap08, the money that went into JGBs was something of a remnant. I don't think the author meant to suggest that ALL the borrowed cheap money leaves the country, only that most of it does and that most of what remains does little or nothing to generate real growth. The Treasury and JGB markets feature tremendous leverage. The value of the currency - relative to other currencies, to gold, or in purchasing power terms - does not affect the directional outcome of a highly leveraged government bond position. Since there is also no credit risk, the only variable that affects the directional outcome is the change in interest rates over time. If you own JGBs purchased with free short-term yen, the only way you can lose money is if overnight yen interest rates rise above your yield on cost. The same is true of Treasuries purchased with the flood of cheap dollars.

That is why we have lately been seeing Treasuries, US stocks, and commodities moving together in dollar terms. Normally we would expect Treasuries to fall in value during a real recovery as investors looked for better returns elsewhere. The reality is that there are no returns of any kind anywhere; there is no yield. It is all speculation fueled by free dollars and leverage. Under those circumstances, it doesn't much matter what you buy; anything is better than holding those declining dollars. Many will indeed look to higher-yielding currencies and foreign assets. Others seek value in commodities. And some - those whose privileged position allows them to do so - will gear up big time and purchase Treasuries. These trades are all likely to be winners as long as overnight rates never rise. Which happens to be exactly what the Fed keeps telling everyone each time the FOMC issues a statement.

The behaviour of these markets right now is an extreme danger signal for the FOMC. There is no possible way that any unleveraged participant can increase or even maintain his purchasing power over the lifetime of a 30-year Treasury bond he purchases at a yield of 4%. Not when the dollar is losing several percent of its value each month. That fact that anyone is willing to pay so much for that bond is a clear signal about the kind of participant that does so, and therefore about the amount of dollar liquidity in the system. And when you see that coupled with universally-rising dollar asset prices, you should be terrified. This is not a recovery trade, it's a dollar debasement trade. When you price these assets in anything else you see the truth. No one who sees these charts should feel anything but cold, naked fear.

Oct 07 11:17 AM

[Harry Long:]

Jeff, you're exactly right. Thanks for the reality check.


On Oct 07 11:14 AM JeffDB wrote:

> On Oct 07 08:15 AM chap08 wrote:

Oct 07 11:17 AM

[JeffDB:]

On Oct 07 08:15 AM chap08 wrote:

> People say that we have had interest rates too low for a decade. Has this starved us of funds for investment? When you look at the last decade of the housing market, do you look at a market starved of funds for investment?? In fact, the reverse is true. We have had over the last decade, and continue to have, too much money chasing too few good investments. That just results in mal-investment, like housing. Low interest rates do not starve you of investment funds.

What we need are better investment opportunities thru an improved economy. Low interest rates and a lower dollar are part of what's necessary to achieve that. >

In the first sentence above you implicitly admit that interest rates have been abnormally low for a decade, and yet in the next paragraph you contend that "What we need are better investment opportunities thru an improved economy." If abnormally low interest rates are so good for an economy why hasn't a decade's worth worked its magic for us yet? I think you answer that question in your 3rd & 4th sentences above:

"In fact, the reverse is true. We have had over the last decade, and continue to have, too much money chasing too few good investments. That just results in mal-investment, like housing."

Oct 07 11:20 AM

[Harry Long:]

Bearfund, that was very articulate, great points, I wish I had made them myself.


On Oct 07 11:17 AM bearfund wrote:

> chap08, the money that went into JGBs was something of a remnant.
> I don't think the author meant to suggest that ALL the borrowed cheap
> money leaves the country, only that most of it does and that most
> of what remains does little or nothing to generate real growth. The
> Treasury and JGB markets feature tremendous leverage. The value of
> the currency - relative to other currencies, to gold, or in purchasing
> power terms - does not affect the directional outcome of a highly
> leveraged government bond position. Since there is also no credit
> risk, the only variable that affects the directional outcome is the
> change in interest rates over time. If you own JGBs purchased with
> free short-term yen, the only way you can lose money is if overnight
> yen interest rates rise above your yield on cost. The same is true
> of Treasuries purchased with the flood of cheap dollars.
>
> That is why we have lately been seeing Treasuries, US stocks, and
> commodities moving together in dollar terms. Normally we would expect
> Treasuries to fall in value during a real recovery as investors looked
> for better returns elsewhere. The reality is that there are no returns
> of any kind anywhere; there is no yield. It is all speculation fueled
> by free dollars and leverage. Under those circumstances, it doesn't
> much matter what you buy; anything is better than holding those declining
> dollars. Many will indeed look to higher-yielding currencies and
> foreign assets. Others seek value in commodities. And some - those
> whose privileged position allows them to do so - will gear up big
> time and purchase Treasuries. These trades are all likely to be winners
> as long as overnight rates never rise. Which happens to be exactly
> what the Fed keeps telling everyone each time the FOMC issues a statement.
>
>
> The behaviour of these markets right now is an extreme danger signal
> for the FOMC. There is no possible way that any unleveraged participant
> can increase or even maintain his purchasing power over the lifetime
> of a 30-year Treasury bond he purchases at a yield of 4%. Not when
> the dollar is losing several percent of its value each month. That
> fact that anyone is willing to pay so much for that bond is a clear
> signal about the kind of participant that does so, and therefore
> about the amount of dollar liquidity in the system. And when you
> see that coupled with universally-rising dollar asset prices, you
> should be terrified. This is not a recovery trade, it's a dollar
> debasement trade. When you price these assets in anything else you
> see the truth. No one who sees these charts should feel anything
> but cold, naked fear.

Oct 07 11:21 AM

[thiazole:]

Good response. Saying that Japan's monitary policy caused their deflation is equivalent to saying cancer drugs cause cancer, or dieting makes people fat. Just because people who have cancer take cancer drugs or people who are fat often diet doesn't mean the treatment caused the disease.


On Oct 07 08:15 AM chap08 wrote:

> "If we do not wish to share such an experience, why are we repeating
> the same policies which led to such results? "
>
> We're not repeating the same policies. Japan tacitly accepted deflation
> for over a decade. It wasn't until 2001 that they started a policy
> of QE. From that point, they had their longest post war period of
> economic growth. Our monetary, rather than fiscal, response has been
> much earlier and much more aggressive. Don't expect the same results
> as Japan.
>
> As for the carry trade, Japan did not suffer from a lack of funds
> for investment. What they suffered from was a lack of good investment
> opportunities at home - the world outside always offered more. The
> same is currently true for us.
>
> You say that: "extremely low interest rates suck investment funds
> and liquidity out of nations. You heard it here first, and the evidence
> is clear. Money has flowed out of U.S Equity ETFs and into Global
> ETFs." That's not because of low interest rates. That's because a)
> there are better investments overseas, and b) we have a dollar declining
> on the back of a declining economy. This will continue, not as long
> as we have low interest rates, but as long as we have a poor economy
> and poor investment opportunities at home.
>
> You say that a falling currency is "procyclical". No it isn't. A
> falling currency will help to reverse our trade deficit, unemployment
> and deflation. It is countercyclical. That's what floating exchange
> rates do.
>
> People say that we have had interest rates too low for a decade.
> Has this starved us of funds for investment? When you look at the
> last decade of the housing market, do you look at a market starved
> of funds for investment?? In fact, the reverse is true. We have had
> over the last decade, and continue to have, too much money chasing
> too few good investments. That just results in mal-investment, like
> housing. Low interest rates do not starve you of investment funds.
>
>
> What we need are better investment opportunities thru an improved
> economy. Low interest rates and a lower dollar are part of what's
> necessary to achieve that. High interest rates would do the reverse.
> This author suggests elsewhere that Australia sets a good example
> to us by raising rates. This is nonsense. Australia is a totally
> different economy with much stronger exports, employment and housing.
> If you want to see the effect of raising rates on a weak economy,
> look at the US in the early 30s. It was a disastrous policy. The
> same would be true for all weak economies, such as the US, today.

Oct 07 11:21 AM

[Harry Long:]

Thiazole, the medical analogy does not hold here, because we do not have a closed economic system.

Our economy is part of a larger, linked system. In this system, money goes where it is treated best.

If you understand the structure of incentives (risk/return), then you can understand money flows.


On Oct 07 11:21 AM thiazole wrote:

> Good response. Saying that Japan's monitary policy caused their deflation
> is equivalent to saying cancer drugs cause cancer, or dieting makes
> people fat. Just because people who have cancer take cancer drugs
> or people who are fat often diet doesn't mean the treatment caused
> the disease.

Oct 07 11:25 AM

[Harry Long:]

Exactly, Chap08 contradicts himself multiple times.


On Oct 07 11:20 AM JeffDB wrote:

> On Oct 07 08:15 AM chap08 wrote:

Oct 07 11:26 AM

[thiazole:]

You mean people like Bill Gates? It only takes a handful Microsofts or Apples to give the economic boost required for several years of economic growth.

But there is more to lower interest rates than making innovation cheaper. Many businesses get loans to stock inventories, etc. Lower interest rates lowers their costs and allows them to pass those costs on to consumers. This increases spending and profit margins allowing companies to hire more increasing the confidence of consumers and getting the economy moving at a less suppressed pace. While we need to deleverage, it won't happen if we suppress the the economy to a point where no one can afford to pay their bills. That is the shorter term effect of lowering interest rates does. It helps to maximize the rate of economic growth for the economic fundamentals in place. You can't say that it isn't warranted when the unemployment rate is fastly approaching 10%.


On Oct 07 11:04 AM a fat panda wrote:

> Harry, The problem with low interest rates is more than just the
> carry trade. It lowers the cost of risk, and encourages people who
> have no business owning a business to go into business.

Oct 07 11:33 AM

[thiazole:]

Here is the simple answer for why lowering interest rates doesn't cause deflation (a picture is worth a thousand words):

research.stlouisfed.or...

Oct 07 11:57 AM

[Harry Long:]

Again, I agree that changes in interest rates affect prices. They do not stimulate the real economy.


On Oct 07 11:57 AM thiazole wrote:

> Here is the simple answer for why lowering interest rates doesn't
> cause deflation (a picture is worth a thousand words):
>
> research.stlouisfed.or...

Oct 07 11:59 AM

[thiazole:]

Well, it is kind of like the saying "the enemy of my enemy is my friend". The enemy of the economy is deflation, which is a clear and present risk. Monetary stimulus is the enemy of deflation and is therefore the friend of the economy.


On Oct 07 11:59 AM Harry Long wrote:

> Again, I agree that changes in interest rates affect prices. They
> do not stimulate the real economy.

Oct 07 12:22 PM

[chap08:]

Harry, I didn't want to go thru all of this, but since you ask me for a point by point response, here goes:

1.You say: "the Yen has appreciated against the dollar for years, yet they still have a large trade surplus with the U.S. and their car companies have gained market share, putting out cheaper, higher quality cars"

What is your point exactly? Your fundamental argument was that low interest rates hurt the countries that adopt them. So this evidence about Japan's auto industry contradicts your thesis. How have they been so successful if they have been starved of investment funds? It's not actually true to say that the Yen has appreciated against the dollar for years. In 2007 it was the same level that it was 20 years earlier. It has appreciated more recently as a result of general dollar weakness. But the explanation of these "facts" is that 1) The currencies have not readjusted enough to close the trade gap. Reasons for this include the Japanese carry trade and Japanese buying of US treasuries; and 2) The Japanese auto makers are good companies and ours are s**t.

2. You say "Second, you keep mentioning deflation. I agree that interest rates affect asset prices. I have argued that consistently."

The reason I mentioned deflation is that it is a problem faced both by us and Japan. Like Japan, if we had not taken some kind of action, it would have been a very serious problem. Deflation is not asset prices. You can define that either in terms of the money supply, or consumer prices as you chose, but it is not asset prices. Reducing interest rates is an appropriate response and will reduce deflation. Raising interest rates is an inappropriate response and will increase deflation.

3. You say "it should be easy for you to contradict my aggregate demand/budget constraint argument and tide example". I think you are referring to where you said:

"For instance, for families with fixed budged constraints (a fancy term for incomes), if the price of Tide goes up by 20%, the family either buys 20% less quantity of Tide, or less of something else in order to still afford it. " etc.

Your point seems to be that inflation destroys demand, but what you are talking about here is inflation - not interest rates. You can have inflation with high interest rates or you can have inflation with low interest rates. Equally, you can have low interest rates leading to high inflation, or low interest rates leading to lower deflation. Inflation and interest rates are not the same. Currently we have severe deflationary forces in the economy, in the same way that Japan did. Low interest rates do not imply inflation in that environment. Look again at Japan, how much inflation, over 20 years, did low interest rates produce there? What is inflation now? Consequently, your example is irrelevant.

4. You say that "interest rates do not affect the real economy".

I am sorry, but this statement is so far out of line with economic theory and all the evidence of history that the burden of proof is on you. What basis do you have for saying that such a basic economic truth is wrong?

5. You say: "Furthermore, you contradict you own points. You point out the QE took place in Japan, then you seem to suggest that it is a contradiction that interest rates remained low"

I don't suggest that it is a contradiction. Far from it, low interest rates are wholly consistent with a policy of QE.


I think that covers the points you asked me to respond to.

On Oct 07 10:48 AM Harry Long wrote:

> Again, going back to facts, you are not responding to specific examples
> I have given multiple times. I would appreciate it if you would respond
> to my arguments point by point.
>
> Again, the Yen has appreciated against the dollar for years, yet
> they still have a large trade surplus with the U.S. and their car
> companies have gained market share, putting out cheaper, higher quality
> cars. You have not contradicted this point.
>
> Jim Rogers has made the same argument repeatedley.
>
> Second, you keep mentioning deflation. I agree that interest rates
> affect asset prices. I have argued that consistently.
>
> If you disagree when I say that interest rates do not affect the
> real economy, it should be easy for you to contradict my aggregate
> demand/budget constraint argument and tide example, but you don't.
>
>
> If my arguments are laughable, it should be easy for you to contradict
> them, point by point, starting with the tide example.
>
> In a fair debate, silence is consent, so I encourage you to refute
> my examples, rather than just saying that I am wrong without contradicting
> my arguments. I have and will continue to do you the courtesy of
> responding to your arguments point-by-point.
>
> Furthermore, you contradict you own points. You point out the QE
> took place in Japan, then you seem to suggest that it is a contradiction
> that interest rates remained low. Low interest rates are consistent
> with QE.

Oct 07 12:25 PM

[chap08:]

What contradiction???

This seems to be a reference to JeffDB's statement: " If abnormally low interest rates are so good for an economy why hasn't a decade's worth worked its magic for us yet? "

I don't know why we have to discuss such basic points, but - clearly low interest rates are not ALWAYS good for an economy, just like high interest rates are not ALWAYS good for an economy. High interest rates were good for us in the 70s when Volcker had to beat inflation. Low interest rates are good for us now that we have to beat deflation. We should have had higher interest rates in previous years, but that is a totally specious argument for having higher interest rates now. Is that clear?


On Oct 07 11:26 AM Harry Long wrote:

> Exactly, Chap08 contradicts himself multiple times.

Oct 07 12:37 PM

[Harry Long:]

1. You argued that a devaluing currency improves exports and helps the balance of trade. I brought up the example of Japanese car companies, because it contradicts your point.

They outsell us, because they make better cars, more cheaply, even with a strengthening Yen, not because of interest rate manipulation. A weakening dollar does not change that dynamic in the real economy where you have to make real goods. You yourself concede the point.

2. You say, " Deflation is not asset prices." Asset prices do reflect inflation or deflation. Apparently, this fact is inconvenient for you. Again, to the evidence, Japan has had interest rates at zero and deflation. The U.S. has had interest rates at zero and has experienced deflation in the housting market. Dropping assets are deflation. When asset prices such as gold increase, they signal an increase in the money supply, but no increased demand for real goods and services. Remember the inflation equation? It has two components: money supply and the velocity of money. I think this basic relationship is at the center of your confusion about asset prices the quantity of goods demanded in the physical economy.

The government can affect the money supply by lowering interest rates. The government does not affect the quantity of goods demanded long term (even if they try to directly with cash for clunkers).

3. You quote my third point, but again do not argue against my Tide aggregate demand/budget constraint argument. You just wave your hands around other issues.

4. The basis is clear, interest rates are down and the stock market is up (asset prices). Quantity of goods demanded is down (cars, etc). My evidence is right in front of you. Record low interest rates have not created record demand for cars.

5. You did suggest it was a contradiction. To quote you, "Also note that Japanese bond yields remained very low throughout this time, despite massive government debt. If "liquidity had been sucked out of the country" then WHAT WAS ALL THIS MONEY DOING IN JAPANESE GOVERNMENT BONDS?".

Again, I invite you to enter into a real debate by responding to my specific point about aggregate demand/budget constraints.

Oct 07 12:43 PM

[Harry Long:]

You start out with an illogical statement, which is the source of your troubles.

Think clearly: deflation is not the enemy of the economy. Deflation benefits savers by making their savings more valuable. Deflation hurts those who borrow by making their borrowings more difficult to repay.

Inflation hurts savers by making their savings less valuable. Inflation helps borrowers by making their borrowings cheaper to repay.

As Milton Friedman recollected of du Pont's famous adage "we do not have to be gracious at all to inconsistent logic or absurd reasoning. Bad logicians have committed more involuntary crimes than bad men have done intentionally."


On Oct 07 12:22 PM thiazole wrote:

> Well, it is kind of like the saying "the enemy of my enemy is my
> friend". The enemy of the economy is deflation, which is a clear
> and present risk. Monetary stimulus is the enemy of deflation and
> is therefore the friend of the economy.

Oct 07 12:49 PM

[Arthur Hau:]

Two points:
1. There is something known as the "liquidity trap".
2. The current problem faced by Americans is not a macroeconomic one, but a microeconomic one. The unemployment is structural. Most of the unemployed are blue-collar workers whose jobs are displaced by their cheap counterparts in China and similar countries. A low interest rate will never be able to attract business to invest in the U.S. to hire these people.

Oct 07 01:10 PM

[woodsey:]

Could we have an examination of employment ? I believe that wealth is created by work.

Why go in circles ?

Oct 07 01:26 PM

[thiazole:]

What savers? We are a debt ridden economy. Deflation would DESTROY our economy, worse than the Great Depression and it would also KEEP us in debt for much longer than otherwise. Seriously you know better than that.


On Oct 07 12:49 PM Harry Long wrote:

> You start out with an illogical statement, which is the source of
> your troubles.
>
> Think clearly: deflation is not the enemy of the economy. Deflation
> benefits savers by making their savings more valuable. Deflation
> hurts those who borrow by making their borrowings more difficult
> to repay.
>
> Inflation hurts savers by making their savings less valuable. Inflation
> helps borrowers by making their borrowings cheaper to repay.
>
> As Milton Friedman recollected of du Pont's famous adage "we do not
> have to be gracious at all to inconsistent logic or absurd reasoning.
> Bad logicians have committed more involuntary crimes than bad men
> have done intentionally."

Oct 07 01:51 PM

[Harry Long:]

It is not the government's job to penalize virtue (savers) and reward vice (borrowers).

As Munger has pointed out, economists have been terrible at examining the ethical component of human behavior, but nothing is more central.

I should know better? As we say in Texas, "that dog don't hunt." If you would like to promote inflation in a reckless bid for affirmative action for people to borrow beyond their means, be my guest--personally, I do know better


On Oct 07 01:51 PM thiazole wrote:

> What savers? We are a debt ridden economy. Deflation would DESTROY
> our economy, worse than the Great Depression and it would also KEEP
> us in debt for much longer than otherwise. Seriously you know better
> than that.

Oct 07 01:56 PM

[chap08:]

1. I see. So your argument is that because Japan has a better auto industry than us, this one fact disproves all the other economic theory and evidence which shows that a lower currency boosts exports. Really Harry, this is priceless. If you want to make the argument that a lower currency does not help your exports then please produce 1) a theory as to why standard economic theory is wrong and 2) some decent statistical evidence.

2. I agree with you that "asset prices reflect deflation". This is not "inconvenient for me". Why on earth should it be? But I disagree with your statement that "Dropping assets are deflation". They are not. Some assets increase in value thru deflation e.g. cash and bonds. Again, it is you that needs to explain yourself. If you're saying that mv=pq explains asset prices then you need to say why.

3. I did not just "wave my hands". I showed that your discussion on inflation and Tide is irrelevant to the subject of this debate. I showed that inflation is not the same thing as interest rates. Do you not understand that? See below.

4. I agree with you that "Record low interest rates have not created record demand for cars". This does not in any way prove your thesis that "interest rates do not affect the real economy". All the evidence of economics suggests that if interest rates were higher then demand for cars would be lower still. In your point above you say that "The government can affect the money supply by lowering interest rates". So the logic of your argument must be that money supply doesn't affect the real economy either. Again, you are way out on a limb and need to justify and provide some evidence for your thesis.

5. My statement "Also note that Japanese bond yields remained very low throughout this time, despite massive government debt. If "liquidity had been sucked out of the country" then WHAT WAS ALL THIS MONEY DOING IN JAPANESE GOVERNMENT BONDS?" does not suggest a contradiction between QE and low interest rates. It suggests a contradiction between your thesis and the evidence i.e. if "liquidity had been sucked out of the country" then there would not be the wall of money required to support all these JGBs. The reality was that there was plenty of liquidity left in Japan - enough to drive record levels of debt down to record low yields.

Again, on your point about "aggregate demand/budget constraints", I showed that it was irrelevant to this discussion about low interest rates. To repeat, I said that:

"Your point seems to be that inflation destroys demand, but what you are talking about here is inflation - not interest rates. You can have inflation with high interest rates or you can have inflation with low interest rates. Equally, you can have low interest rates leading to high inflation, or low interest rates leading to lower deflation. Inflation and interest rates are not the same. Currently we have severe deflationary forces in the economy, in the same way that Japan did. Low interest rates do not imply inflation in that environment. Look again at Japan, how much inflation, over 20 years, did low interest rates produce there? What is inflation now? Consequently, your example is irrelevant."

Do you understand this? Do you understand that Japan has no inflation despite low interest rates for such a long time? Therefore, do you understand that your example is irrelevant?


On Oct 07 12:43 PM Harry Long wrote:

> 1. You argued that a devaluing currency improves exports and helps
> the balance of trade. I brought up the example of Japanese car companies,
> because it contradicts your point.
>
> They outsell us, because they make better cars, more cheaply, even
> with a strengthening Yen, not because of interest rate manipulation.
> A weakening dollar does not change that dynamic in the real economy
> where you have to make real goods. You yourself concede the point.
>
>
> 2. You say, " Deflation is not asset prices." Asset prices do reflect
> inflation or deflation. Apparently, this fact is inconvenient for
> you. Again, to the evidence, Japan has had interest rates at zero
> and deflation. The U.S. has had interest rates at zero and has experienced
> deflation in the housting market. Dropping assets are deflation.
> When asset prices such as gold increase, they signal an increase
> in the money supply, but no increased demand for real goods and services.
> Remember the inflation equation? It has two components: money supply
> and the velocity of money. I think this basic relationship is at
> the center of your confusion about asset prices the quantity of goods
> demanded in the physical economy.
>
> The government can affect the money supply by lowering interest rates.
> The government does not affect the quantity of goods demanded long
> term (even if they try to directly with cash for clunkers).
>
> 3. You quote my third point, but again do not argue against my Tide
> aggregate demand/budget constraint argument. You just wave your hands
> around other issues.
>
> 4. The basis is clear, interest rates are down and the stock market
> is up (asset prices). Quantity of goods demanded is down (cars, etc).
> My evidence is right in front of you. Record low interest rates have
> not created record demand for cars.
>
> 5. You did suggest it was a contradiction. To quote you, "Also note
> that Japanese bond yields remained very low throughout this time,
> despite massive government debt. If "liquidity had been sucked out
> of the country" then WHAT WAS ALL THIS MONEY DOING IN JAPANESE GOVERNMENT
> BONDS?".
>
> Again, I invite you to enter into a real debate by responding to
> my specific point about aggregate demand/budget constraints.

Oct 07 01:57 PM

[Harry Long:]

I am especially amused by your acceptance of the notion that the government can magically make problems go away,

You don't get something for nothing. Increasing the money supply increases dollars, not wealth.

Japan already tried it with QE. It doesn't work. Cry me a river, build a bridge, and get over it.

The sooner you accept reality, the better.


On Oct 07 01:56 PM Harry Long wrote:

> It is not the government's job to penalize virtue (savers) and reward
> vice (borrowers).
>
> As Munger has pointed out, economists have been terrible at examining
> the ethical component of human behavior, but nothing is more central.
>
>
> I should know better? As we say in Texas, "that dog don't hunt."
> If you would like to promote inflation in a reckless bid for affirmative
> action for people to borrow beyond their means, be my guest--personally,
> I do know better

Oct 07 01:58 PM

[pacalis:]

Virtuous Americans? How absurd!! :)

Seriously, while the argument you make below is certainly true for a small faction of Americans, it doesn't represent Americans as a whole. If you didn't jump between micro and macro levels of analysis, you would realize that Americans as a whole are debtors and that inflation helps us as a whole pay for all the crap that we bought, either as individually as consumers through collectively through expenditures made by our elected and non-elected masters.

I agree with chap08s original post regarding investment opportunities, and I would stress that you pay attention to his later comments regarding inflation and interests rates. You seem confound the two to suggest that there's something about LOW interest rates that punishes savers. However people on fixed income are at ANY interest rate, punished by inflation.


On Oct 07 09:38 AM Harry Long wrote:

> The effect of inflation is to penalize the virtue of savers, who
> are caught in the double-whammy of the debasement of the currency
> and ridiculously low interest rates, thereby earning highly negative
> returns on their savings. This is not just China. These savers are
> ordinary Americans who do not over leverage and did all the right
> things. They are often the elderly on fixed incomes. This inflation
> is a taking (theft) from savers and a gift to all those who have
> borrowed money. Their debts are fixed, but the money they must repay> in becomes steadily less valuable. It is yet another form of wealth
> transfer (theft) from those with virtue to those with vice.
>

Oct 07 02:18 PM

[William Dav...:]

Harry you can't use the performance of the US car industry v Japan's, to say devaluing a currency to does not stimulate an economy. The US car industry has behaved like lemmings for years, hiding behind SUV sales instead of competing in the main world car markets.

After all Japan's currency was under valued until the 1980's, the rapid economic growth slowed once the Yen increased to a more realistic value against the Dollar. As China may well discover in 10 years time.

Oct 07 02:23 PM

[Harry Long:]

OK, Chap08, I will humor you. Hopefully, you will learn something about economics.

I. Zimbabwe has the weakest currency on earth, with inflation hitting
the thousands % mark. They, consequently, have very cheap labor and goods. Unfortunately, this hyperinflation, has drastically increased prices, hurting the poor, but has not helped the real economy. Real GDP contracted at 14.1% in 2008. The government had your idea of debasing the currency, and it didn't work.

An historical example is the Weimar Republic. Money was so worthless that people needed wheel barrels full of it to pay for a loaf of bread. Economic activity ground to a halt, because no one could effectively save. Therefore, they could not rationally plan for the future, or invest. Waiters would encourage people to order dessert when first ordering appetizers, because prices might change before dinner was over. Young people loved it, because they were forced to spend their money instantly, but older people who had saved for years and behaved responsibly were left with worthless savings and could no feed themselves in many cases.

Inflation is serious, it's not a joke. Anemic interest rates create the risk of inflation. Wrap your mind around that reality.

II. You seem to conceded the second point. Increasing the money supply affects prices, but doesn't spur demand. I'll move on.

III. My discussion of Tide and inflation is relevant, since lower interest rates increase the risks of inflation. That is the link. Interest rates and inflation. You can't disprove the point, so you call it irrelevant. I again invite you to reply to my specific example, on which the whole debate hinges.

IV. Again, Zimbabwe and the Weimar Republic prove that increasing the money supply (which is what decreasing interest rates does) does not increase demand in the real economy.

V. You still don't see it. If the central bank is buying bonds, that drives down yields. That's what quantitative easing is. By definition, the central bank would not have had to buy bonds if private market demand would have kept interest rates low on its own. You still don't see how you're contradicting yourself. Amazing.

You don't have to like my examples and evidence, but you do have to accept them. For more reading:

en.wikipedia.org/wiki/...

www.cia.gov/library/pu.../

Oct 07 02:25 PM

[Harry Long:]

Again, you have a fixed family budget constraint (income). Prices increase. You can afford less goods. Your standard of living goes down and the economy is hurt. It's dirt simple.

You can't get something for nothing. Stop living in a fantasy world. There is a price to be paid for inflation, even if its makes debts less onerous.


On Oct 07 02:18 PM pacalis wrote:

> Virtuous Americans? How absurd!! :)
>
> Seriously, while the argument you make below is certainly true for
> a small faction of Americans, it doesn't represent Americans as a
> whole. If you didn't jump between micro and macro levels of analysis,
> you would realize that Americans as a whole are debtors and that
> inflation helps us as a whole pay for all the crap that we bought,
> either as individually as consumers through collectively through
> expenditures made by our elected and non-elected masters.
>
> I agree with chap08s original post regarding investment opportunities,
> and I would stress that you pay attention to his later comments regarding
> inflation and interests rates. You seem confound the two to suggest
> that there's something about LOW interest rates that punishes savers.
> However people on fixed income are at ANY interest rate, punished
> by inflation.

Oct 07 02:29 PM

[Harry Long:]

Their cars are still cheaper. Good manufacturing beats a devalued currency every time. Just ask Zimbabwe. When was the last time you bought anything with the label "Made in Zimbabwe"?

It's the fact that we coddle our manufacturers that makes them so weak. They're spoiled, fat, an uncompetitive.

There was a time when we competed with American ingenuity, know how, and efficiency. I am arguing for success. You are arguing for failure. Ingenuity, knowledge, and efficiency drive economies. Interest rate manipulation affects the money supply. Accept the distinction.


On Oct 07 02:23 PM William Davison wrote:

> Harry you can't use the performance of the US car industry v Japan's,
> to say devaluing a currency to does not stimulate an economy. The
> US car industry has behaved like lemmings for years, hiding behind
> SUV sales instead of competing in the main world car markets. <br/>
>
> After all Japan's currency was under valued until the 1980's, the
> rapid economic growth slowed once the Yen increased to a more realistic
> value against the Dollar. As China may well discover in 10 years
> time.

Oct 07 02:32 PM

[Harry Long:]

In addition, people on a fixed income are not, in your words,

"at ANY interest rate, punished by inflation".

What a laughable sentiment. If inflation is a 2% and interest rates are at 8%, the real interest rate after inflation is 6%.

It would save us all time and it would save you money if you tried to make your opinions conform to Generally Accepted Principles of Reality.


On Oct 07 02:18 PM pacalis wrote:

> Virtuous Americans? How absurd!! :)
>
> Seriously, while the argument you make below is certainly true for
> a small faction of Americans, it doesn't represent Americans as a
> whole. If you didn't jump between micro and macro levels of analysis,
> you would realize that Americans as a whole are debtors and that
> inflation helps us as a whole pay for all the crap that we bought,
> either as individually as consumers through collectively through
> expenditures made by our elected and non-elected masters.
>
> I agree with chap08s original post regarding investment opportunities,
> and I would stress that you pay attention to his later comments regarding
> inflation and interests rates. You seem confound the two to suggest
> that there's something about LOW interest rates that punishes savers.
> However people on fixed income are at ANY interest rate, punished
> by inflation.

Oct 07 02:39 PM

[a fat panda:]

"Deflation is not the enemy of the economy."

Harry, If I disagree with your point on deflation it is about the question of degree. Both inflation and deflation hurt the economy, because in large doses they distort the market place. Currency should store value - not drive economic decisions.

In the best of all worlds, capitalism likes stability and predictability. It likes a stable currency more than a deflating or inflating one.


On Oct 07 12:49 PM Harry Long wrote:

> You start out with an illogical statement, which is the source of
> your troubles.
>
> Think clearly: deflation is not the enemy of the economy. Deflation
> benefits savers by making their savings more valuable. Deflation
> hurts those who borrow by making their borrowings more difficult
> to repay.
>
> Inflation hurts savers by making their savings less valuable. Inflation
> helps borrowers by making their borrowings cheaper to repay.
>
> As Milton Friedman recollected of du Pont's famous adage "we do not
> have to be gracious at all to inconsistent logic or absurd reasoning.
> Bad logicians have committed more involuntary crimes than bad men
> have done intentionally."

Oct 07 02:43 PM

[William Dav...:]

Deflation is very dangerous it increase peoples and companies debts, that is what happened in the US in 1930's. Where as the UK came off the gold standard and did not experience the a deep depression like the US, for example UK car production only fell in 1 year of the 1930's.

You quote Milton Friedman, you don't appear to have never read his analysis of the depression, pointing out that US money supply shrank by 1/3 up to 1933. His solution was QE, rather that spending stimulus that Keynes argued for. Friedman is almost the father of QE, that is where the Fed got the idea from.

Keynes also argued that lowering interest rates to near zero would have increasingly little effect and he appears, looking at the Japanese experience to be right.


On Oct 07 12:49 PM Harry Long wrote:

> You start out with an illogical statement, which is the source of
> your troubles.
>
> Think clearly: deflation is not the enemy of the economy. Deflation
> benefits savers by making their savings more valuable. Deflation
> hurts those who borrow by making their borrowings more difficult
> to repay.
>
> Inflation hurts savers by making their savings less valuable. Inflation
> helps borrowers by making their borrowings cheaper to repay.
>
> As Milton Friedman recollected of du Pont's famous adage "we do not
> have to be gracious at all to inconsistent logic or absurd reasoning.
> Bad logicians have committed more involuntary crimes than bad men
> have done intentionally."

Oct 07 02:47 PM

[Harry Long:]

Again, to your point, almost half of U.S. banking deposits were wiped out. That was the prime cause of the dramatic decrease in money supply, not an increase in interest rates.

Second, the government attempted to keep wages and prices artificially high, creating a price floor for goods and labor above the clearing price. That lead to the decrease in demand.

The lesson that economists increasingly draw from the depression is the danger of the government engaging in price manipulation.

Oct 07 02:52 PM

[thiazole:]

So are you saying that savers prospered during the Great Depression? NO ONE prospered. Some were better off than others, but everyone suffered.

The haves will always be required to bail out the have nots. Allowing deflation and a megadepression will just delay the inevitable and increase the burden for those who saved money. Besides, you've seemed to have forgotten that currency is just a trading medium - it isn't wealth. The nation isn't given currency to hoard it. That is what is wrong in Japan. There is so much currency being hoarded by the masses that they could buy everything off the shelves several times over. What good is hoarding a trading medium if there aren't enough goods available to spend it on?

As far as your ideals go, allowing deflation in the 1930s caused the government to tax wealthy people at the rate of 90% during the Great Depression in an attempt to bail out the rest of the country. Do you think it would be any different this time?

Lastly, quit giving me thumbs down because you disagree with me. I don't go around giving every comment you make that I disagree with a thumbs down and I don't appreciate you doing it to me either.


On Oct 07 01:56 PM Harry Long wrote:

> It is not the government's job to penalize virtue (savers) and reward
> vice (borrowers).
>
> As Munger has pointed out, economists have been terrible at examining
> the ethical component of human behavior, but nothing is more central.
>
>
> I should know better? As we say in Texas, "that dog don't hunt."
> If you would like to promote inflation in a reckless bid for affirmative
> action for people to borrow beyond their means, be my guest--personally,
> I do know better

Oct 07 03:09 PM

[Barbarous R...:]

In order to lower interest rates below the "free market" rate, the Fed has to offer newly printed money to the banking system at that rate. By printing even a single new dollar, the Fed damages the economy.

The newly printed money grants a benefit to the lucky early recipients, who are able to exchange their new "funny money" for the fruits of others' labors (i.e. exchange nothing for something). This spending artificially bids up certain prices according to the buying preferences of these early recipients -- at the expense of everyone else.

In that sense, the money printing is "stimulative" to certain lucky industries -- the sudden artificial demand leads them to expand by bidding away resources (materials and labor) from other industries, who are thereby disadvantaged.

The disadvantaged also includes savers (such as seniors) who are arbitrarily robbed of the interest income which the free market would give them for their hard-earned savings. As a result, many become increasingly dependent on the government for survival.

Clearly this is neither beneficial nor sustainable. But it is the favored path of our politicians and economic gurus. Sadly, it also plants the seeds of the next crisis.

Oct 07 03:09 PM

[DonFurio:]

Is this seriously another article on Japan. The US is different from Japan is so many different ways. The had extremely low interest rates for a really long time. I would hardly say you can say the same for the US. A 4.5% federal funds target rate is hardly low if you have inflation in check, which is what we had a couple of years ago.

Oct 07 03:14 PM

[D. McHattie:]

Excellent article and excellent discussion.

Harry, your counterintuitive and counter-conventional wisdom argument is nonetheless extremely compelling.

I look forward to reading more articles with a similar bent as we all 'embrace evidence-based thinking'.

Oct 07 03:18 PM

[Harry Long:]

"The nation isn't given currency to hoard it." What a quote. Save your authoritarian sentiments for Kim Jong il, please.

If you want to spend your money, great. Property is private. Inflation is wealth confiscation. People gain weath through private exchange and can save or spend according to their preferences.

If you don't like living in a free market democracy, that's too bad.

Your next quote is even more priceless:

"allowing deflation in the 1930s caused the government to tax wealthy people at the rate of 90% during the Great Depression in an attempt to bail out the rest of the country."

Did it ever occur to you that a 90% tax rate is deflationary? Lol. I suppose rational investors need people like you in order to make money. The sad part is, you're only hurting yourself with undisciplined "thought" patterns.


On Oct 07 03:09 PM thiazole wrote:

> So are you saying that savers prospered during the Great Depression?
> NO ONE prospered. Some were better off than others, but everyone
> suffered.
>
> The haves will always be required to bail out the have nots. Allowing
> deflation and a megadepression will just delay the inevitable and
> increase the burden for those who saved money. Besides, you've seemed
> to have forgotten that currency is just a trading medium - it isn't
> wealth. The nation isn't given currency to hoard it. That is what
> is wrong in Japan. There is so much currency being hoarded by the
> masses that they could buy everything off the shelves several times
> over. What good is hoarding a trading medium if there aren't enough
> goods available to spend it on?
>
> As far as your ideals go, allowing deflation in the 1930s caused
> the government to tax wealthy people at the rate of 90% during the
> Great Depression in an attempt to bail out the rest of the country.
> Do you think it would be any different this time?
>
> Lastly, quit giving me thumbs down because you disagree with me.
> I don't go around giving every comment you make that I disagree with
> a thumbs down and I don't appreciate you doing it to me either.<br/>

Oct 07 03:23 PM

[Harry Long:]

Thank you for your kind words. I think I need to work on my diplomacy skills :)


On Oct 07 03:18 PM D. McHattie wrote:

> Excellent article and excellent discussion.
>
> Harry, your counterintuitive and counter-conventional wisdom argument
> is nonetheless extremely compelling.
>
> I look forward to reading more articles with a similar bent as we
> all 'embrace evidence-based thinking'.

Oct 07 03:24 PM

[thiazole:]

I'm just saying that currency is a medium for exchange, not an asset. Anyone who treats it as an asset deserves to lose it. Hoarding currency doesn't create wealth for the nation. This is different from using your currency to create wealth though other mediums (whether that be to create the next Microsoft, or to invest in real estate), but hoarding a trading medium is not only stupid from an investment perspective, but harmful to the economy.

You like to attack me and tell much how much my "poor logic and reasoning" hurts me (if only you understood what I did for a living), but I've detailed my investment decisions and logic on these forums and it is clear for anyone to see that the decisions I've made have been very profitable (unlike hoarding currency). I see you haven't done the same. Is it because your superior logic has failed to make money?

Oct 07 03:39 PM

[pacalis:]

Apparently your too busy laughing to realize you make my point. So lets say you have a fixed income of 8%, say an annuity...

6% is lower than the 8% the person would have earned without inflation. So Fixed incomes are ALWAYS hurt but inflation!! AND they are oppositely rewarded by deflation.

Alternatively, holders of fixed debt are rewarded by inflation. We are debtors. We can either get out of debt three ways: (1) by being more productive, which is not likely, (2) inflating out, or (3) defaulting (see inflating out).



On Oct 07 02:39 PM Harry Long wrote:

> In addition, people on a fixed income are not, in your words, <br/>
>
> "at ANY interest rate, punished by inflation".
>
> What a laughable sentiment. If inflation is a 2% and interest rates
> are at 8%, the real interest rate after inflation is 6%.
>
> It would save us all time and it would save you money if you tried
> to make your opinions conform to Generally Accepted Principles of
> Reality.

Oct 07 03:40 PM

[pacalis:]

Given you're trolling your own article, maybe you can answer me this question. Do you recognize that most people posting here share your concerns regarding the underlying structure of the US economy, and the problems of inflation, yet disagree with your comparison to Japan as well as a number of other minor comments along the way?

On Oct 07 02:29 PM Harry Long wrote:

> Again, you have a fixed family budget constraint (income). Prices
> increase. You can afford less goods. Your standard of living goes
> down and the economy is hurt. It's dirt simple.
>
> You can't get something for nothing. Stop living in a fantasy world.
> There is a price to be paid for inflation, even if its makes debts
> less onerous.

Oct 07 03:48 PM

[Harry Long:]

Again, an economics lesson:

You said: "Hoarding currency doesn't create wealth for the nation."

If you save money and put it in the bank, the bank takes the money and lends it to people who are staring businesses, creating companies, etc. For instance, if you are an oil tanker owner, you may be getting bank financing to buy an oil tanker, etc.

You use emotionally laden terms like hoarding currency without having any conception of the logical content, or lack thereof, of what you're saying.

Of course, if you buy gold and bury it, or put money under the mattress, your point would stand, but as Macro 101 teaches, savings = investment as long as the money is deposited in a bank.

Savings does not equal hoarding, unless it is put under the mattress.

Please try to think clearly. Investment creates wealth. Savings = Investment when deposited in a bank. Think.


On Oct 07 03:39 PM thiazole wrote:

> I'm just saying that currency is a medium for exchange, not an asset.
> Anyone who treats it as an asset deserves to lose it. Hoarding currency
> doesn't create wealth for the nation. This is different from using
> your currency to create wealth though other mediums (whether that
> be to create the next Microsoft, or to invest in real estate), but
> hoarding a trading medium is not only stupid from an investment perspective,
> but harmful to the economy.
>
> You like to attack me and tell much how much my "poor logic and reasoning"
> hurts me (if only you understood what I did for a living), but I've
> detailed my investment decisions and logic on these forums and it
> is clear for anyone to see that the decisions I've made have been
> very profitable (unlike hoarding currency). I see you haven't done
> the same. Is it because your superior logic has failed to make money?

Oct 07 03:59 PM

[Alphameister:]

Chap08, again I commend you for your welcome injection of reason into this thread. I don't know whether to compare you to Sisyphus or Hercules in your endeavors.

Deflation is not inherently bad for an economy. It is entirely possible to imagine an economy in which gradual declines in the general price level through productivity gains (as is a way of life in the realm of technology) provides a rising standard of living to workers whose wages are relatively stable. On a practical level, we don't seem to handle that environment very well, partly because consumers would rather see their purchasing power increased through annual wage increases than through annual declines in prices. Extremes in price behavior ARE inherently bad, however, and there's not much to choose between upwardly spiraling inflation versus downwardly spiraling deflation.

Mr. Long seems to believe that a "universally" accepted generality in economics (that a relative decline in a country's currency tends to promote greater exports--thus employment) can be discredited by citing a single non-conforming particular (the success of Toyota while the yen was appreciating relative to the dollar). To think that a currency advantage is the only relevant variable is pathetically naive. Toyota's success comes DESPITE the handicap of having to climb a currency hill at every turn. Given enough time and a persistence of the respective currency trends, perhaps GM would begin exporting massively to Japan. I wouldn't hold my breath, however.

Oct 07 04:02 PM

[Harry Long:]

The real interest rate matters, not the rate of inflation.

30 year bonds purchased in the 80's, as Volcker came in ended up paying a high real rate of interest. Inflation came down, but there was no deflation. Holder of 30 year government bonds reaped a windfall.

In addition. If you have an annuity which pays 8% and there is stable 2% inflation, you expected that level of inflation, so you demanded 6% real interest rates as compensation. No one is hurt, because you had rational expectations going into the contract. What hurts you is when you expect 2% inflation, then get 4%, or 8%.

Similarly, if you went in at an 8% interest rate, expecting 2% inflation and inflation decreases to 1%, you also benefit.

This is how bond trading works. Think about it. The key is credit risk, real interest rats, inflation expectations, then what actually happens compared to expectations.

To give an absurd example, a saver is not hurt if they're getting 100% interest (with low credit risk) and inflation runs 1%. They are tremendously well off. However, if inflation increases to 99%, they are crushed and not earning an economic return. Real interest rates count.


On Oct 07 03:40 PM pacalis wrote:

> Apparently your too busy laughing to realize you make my point. So
> lets say you have a fixed income of 8%, say an annuity...
>
> 6% is lower than the 8% the person would have earned without inflation.
> So Fixed incomes are ALWAYS hurt but inflation!! AND they are oppositely
> rewarded by deflation.
>
> Alternatively, holders of fixed debt are rewarded by inflation. We
> are debtors. We can either get out of debt three ways: (1) by being
> more productive, which is not likely, (2) inflating out, or (3) defaulting
> (see inflating out).
>

Oct 07 04:07 PM

[Harry Long:]

I have cited Zimbabwe and the Weimar Republic as well. Why aren't we importing massive amounts of goods from Zimbabawe? They might as well be free, given their currency depreciation vs. every other major currency.

The answer is that long term, debasing a currency does not stimulate the real economy.


On Oct 07 04:02 PM Alphameister wrote:

> Chap08, again I commend you for your welcome injection of reason
> into this thread. I don't know whether to compare you to Sisyphus
> or Hercules in your endeavors.
>
> Deflation is not inherently bad for an economy. It is entirely possible
> to imagine an economy in which gradual declines in the general price
> level through productivity gains (as is a way of life in the realm
> of technology) provides a rising standard of living to workers whose
> wages are relatively stable. On a practical level, we don't seem
> to handle that environment very well, partly because consumers would
> rather see their purchasing power increased through annual wage increases
> than through annual declines in prices. Extremes in price behavior
> ARE inherently bad, however, and there's not much to choose between
> upwardly spiraling inflation versus downwardly spiraling deflation.
>
>
> Mr. Long seems to believe that a "universally" accepted generality
> in economics (that a relative decline in a country's currency tends
> to promote greater exports--thus employment) can be discredited by
> citing a single non-conforming particular (the success of Toyota
> while the yen was appreciating relative to the dollar). To think
> that a currency advantage is the only relevant variable is pathetically
> naive. Toyota's success comes DESPITE the handicap of having to climb
> a currency hill at every turn. Given enough time and a persistence
> of the respective currency trends, perhaps GM would begin exporting
> massively to Japan. I wouldn't hold my breath, however.

Oct 07 04:10 PM

[Harry Long:]

I apologize for all the typos, I meant rates, etc.


On Oct 07 04:07 PM Harry Long wrote:

> The real interest rate matters, not the rate of inflation.
>
> 30 year bonds purchased in the 80's, as Volcker came in ended up
> paying a high real rate of interest. Inflation came down, but there
> was no deflation. Holder of 30 year government bonds reaped a windfall.
>
>
> In addition. If you have an annuity which pays 8% and there is stable
> 2% inflation, you expected that level of inflation, so you demanded
> 6% real interest rates as compensation. No one is hurt, because you
> had rational expectations going into the contract. What hurts you
> is when you expect 2% inflation, then get 4%, or 8%.
>
> Similarly, if you went in at an 8% interest rate, expecting 2% inflation
> and inflation decreases to 1%, you also benefit.
>
> This is how bond trading works. Think about it. The key is credit
> risk, real interest rats, inflation expectations, then what actually
> happens compared to expectations.
>
> To give an absurd example, a saver is not hurt if they're getting
> 100% interest (with low credit risk) and inflation runs 1%. They
> are tremendously well off. However, if inflation increases to 99%,
> they are crushed and not earning an economic return. Real interest
> rates count.

Oct 07 04:11 PM

[thiazole:]

Who is going to borrow if there is consistent deflation? Hoarding currency triggers deflation and deflation encourages hoarding currency (and discourages borrowing). In the end, people stop buying things that they don't absolutely need and the standard of living crashes. Banks will never PAY interest for borrowing money and charge interest for depositing money, so the more deflation you have, the greater the cost of borrowing.


On Oct 07 03:59 PM Harry Long wrote:

> Again, an economics lesson:
>
> You said: "Hoarding currency doesn't create wealth for the nation."
>
>
> If you save money and put it in the bank, the bank takes the money
> and lends it to people who are staring businesses, creating companies,
> etc. For instance, if you are an oil tanker owner, you may be getting
> bank financing to buy an oil tanker, etc.
>
> You use emotionally laden terms like hoarding currency without having
> any conception of the logical content, or lack thereof, of what you're
> saying.
>
> Of course, if you buy gold and bury it, or put money under the mattress,
> your point would stand, but as Macro 101 teaches, savings = investment
> as long as the money is deposited in a bank.
>
> Savings does not equal hoarding, unless it is put under the mattress.
>
>
> Please try to think clearly. Investment creates wealth. Savings =
> Investment when deposited in a bank. Think.

Oct 07 04:12 PM

[Harry Long:]

I apologize for all the typos, I meant rates, etc.

Oct 07 04:12 PM

[thiazole:]

It does if you produce goods that the rest of the world wants (computers, software, pharmaceuticals) but can't afford.


On Oct 07 04:10 PM Harry Long wrote:

> The answer is that long term, debasing a currency does not stimulate
> the real economy.

Oct 07 04:13 PM

[Harry Long:]

Again, you start with an incorrect logical postulate.

Savings = Investment

Investment does not lead to deflation. Why are you using the term hoarding?


On Oct 07 04:12 PM thiazole wrote:

> Who is going to borrow if there is consistent deflation? Hoarding
> currency triggers deflation and deflation encourages hoarding currency
> (and discourages borrowing). In the end, people stop buying things
> that they don't absolutely need and the standard of living crashes.
> Banks will never PAY interest for borrowing money and charge interest
> for depositing money, so the more deflation you have, the greater
> the cost of borrowing.

Oct 07 04:14 PM

[Harry Long:]

Again, you have a fixed family budget constraint (income). Prices increase. You can afford less goods. Your standard of living goes down and the economy is hurt. It's dirt simple.

You can't get something for nothing. Stop living in a fantasy world. There is a price to be paid for inflation.

You may argue that exports increase. However, imports are more expensive, leading to inflation. See above. It's a circle. You can't get something for nothing. Accept it.


On Oct 07 04:13 PM thiazole wrote:

> It does if you produce goods that the rest of the world wants (computers,
> software, pharmaceuticals) but can't afford.

Oct 07 04:17 PM

[Alphameister:]

As a footnote to my above comment, the major reason that the US historically not been able to deal with mild deflation has been the inflexibility of wage contracts that require specific annual increases, especially union contracts. Today's economy seems considerably more flexible than its counterpart of 50 years ago and thus should be better situated to deal with a mildly deflationary environment.

Oct 07 04:18 PM

[thiazole:]

But as exports increase, the trade deficit reverses, and the surplus of dollars throughout the world decreases which in turn restrengthens the dollar (for the right reasons, not through manipulation). If I have a lot of debt, the solution is to make more money (ie inflation) and use that money to pay off debt. Yes, my standard of living will decrease while I'm paying it off, but that is the solution. The solution is not to get a job at McDonalds and make less money (ie deflation) and accumulate more debt because after my new job doesn't even pay the interest, let alone principle.


On Oct 07 04:17 PM Harry Long wrote:

> Again, you have a fixed family budget constraint (income). Prices
> increase. You can afford less goods. Your standard of living goes
> down and the economy is hurt. It's dirt simple.
>
> You can't get something for nothing. Stop living in a fantasy world.
> There is a price to be paid for inflation.
>
> You may argue that exports increase. However, imports are more expensive,
> leading to inflation. See above. It's a circle. You can't get something
> for nothing. Accept it.

Oct 07 04:24 PM

[thiazole:]

Because if the cost of borrowing goes up too much for too long, no one will borrow and the banks will fail. It will be hoarding (ie, under the mattress) just like in the 30s.

On Oct 07 04:14 PM Harry Long wrote:

> Again, you start with an incorrect logical postulate.
>
> Savings = Investment
>
> Investment does not lead to deflation. Why are you using the term
> hoarding?

Oct 07 04:25 PM

[Alphameister:]

Harry Long wrote: " I have cited Zimbabwe and the Weimar Republic as well. Why aren't we importing massive amounts of goods from Zimbabawe? "

I didn't address those ridiculous citations because they do not deserve a serious reply. What does Zimbabwe produce, btw? Massive amounts of dictatorship? With the hope that I'm guilty of gross exaggeration, I'm afraid the answer to your question might be found in today's White House.

Oct 07 04:30 PM

[Ricard:]

I can see the logic. Hoarding currency here is implying that savings is increasing and consumption is decreasing. Lower consumption leads to lower demand for goods, leading to deflation, which leads to hoarding of currency.

BTW, I've yet to read the article or most of the comments...will do so later. Looks very interesting.


On Oct 07 04:14 PM Harry Long wrote:

> Again, you start with an incorrect logical postulate.
>
> Savings = Investment
>
> Investment does not lead to deflation. Why are you using the term
> hoarding?

Oct 07 04:38 PM

[Harry Long:]

Agriculture. Farming. Their food is almost free.


On Oct 07 04:30 PM Alphameister wrote:

> Harry Long wrote: " I have cited Zimbabwe and the Weimar Republic
> as well. Why aren't we importing massive amounts of goods from Zimbabawe?
> "
>
> I didn't address those ridiculous citations because they do not deserve
> a serious reply. What does Zimbabwe produce, btw? Massive amounts
> of dictatorship? With the hope that I'm guilty of gross exaggeration,
> I'm afraid the answer to your question might be found in today's
> White House.

Oct 07 04:48 PM

[EMS News:]

Savers did prosper during the Great Depression. My grandfather was a saver who had a lot of money in the form of hard currency which he hoarded.

He did very well during the Great Depression but my grandmother felt very sorry for the poor who had nothing so she had all sorts of people doing stuff for her and paid them with the hoard of hard money my grandfather had saved.

She must have saved quite a few people from starvation this way.


On Oct 07 03:09 PM thiazole wrote:

> So are you saying that savers prospered during the Great Depression?
> NO ONE prospered. Some were better off than others, but everyone
> suffered.
>
> The haves will always be required to bail out the have nots. Allowing
> deflation and a megadepression will just delay the inevitable and
> increase the burden for those who saved money. Besides, you've seemed
> to have forgotten that currency is just a trading medium - it isn't
> wealth. The nation isn't given currency to hoard it. That is what
> is wrong in Japan. There is so much currency being hoarded by the
> masses that they could buy everything off the shelves several times
> over. What good is hoarding a trading medium if there aren't enough
> goods available to spend it on?
>
> As far as your ideals go, allowing deflation in the 1930s caused
> the government to tax wealthy people at the rate of 90% during the
> Great Depression in an attempt to bail out the rest of the country.
> Do you think it would be any different this time?
>
> Lastly, quit giving me thumbs down because you disagree with me.
> I don't go around giving every comment you make that I disagree with
> a thumbs down and I don't appreciate you doing it to me either.<br/>

Oct 07 05:12 PM

[Joe Duggins:]

The Federal Reserve also has to consider their Treasury buying activities. The current plan to buy treasuries will end this month. Will they extend this plan? Another thing to consider is long term inflation. Ben Bernanke seems to think that he can leave rates low for some time before having to worry about the pending inflation, which will come eventually. In My opinion the Fed is stuck between a rock and a hard place with their interest rate options. They know that the eventual rise of rates will be needed to counter inflation, but, also know that if they begin raising rates now, it will likely send the stock market down, possibly weakening consumer sentiment and slowing the possible economic turnaround as a whole.

“They have to be really careful,” said Christopher Low, the chief economist at FTN Financial in New York City. “They may not be forceful because they are worried about how the market will react,” he said. “The Fed needs to communicate they are aware of the shift in inflation expectations and they take inflation fighting seriously.”

I expect them to at least keep rates at the current level for another few months, possibly starting to raise them sometime in the 4th quarter of this year. Although the initial reaction from the markets of a rate increase may be a sell off of equities, longer term it will show the markets a recovery is in the works, giving them more confidence.
----------------------...
Money without intelligence is like a car without a road.
www.intelligentinvesti...

Oct 07 05:13 PM

[EMS News:]

Also, there seems to be a poor understanding about hoarding hard money here. That is, when prices of anything falls but no one qualifies for credit DUE TO JOB LOSSES or potential job losses, lending freezes up and prices continue to fall even more.

Anyone paying off loans at the pre-depression rate is hammered. It is a lose-lose situation. But if we have inflation AND job losses like in the stagflation years, people have less and less money and that money becomes more and more worthless. This is the Zimbabwe mess and we can have it just as easily.

No one on earth likes stagflation. Bankers, businesses, politicians and the population all hate it. This happens when a country has to either import lots of important goods like oil or....are paying vast debts at a fixed interest rate to creditor nations.

That means, we can be Weimar Germany really easy.

Oct 07 05:15 PM

[chap08:]

Harry, you say you want to humor me. You're not doing a very good job.

Let's go back to basics. Your original argument was that low interest rates were wrong because "Liquidity and investment funds will continue to flow out of the U.S". Remember that? Now you have moved on to argue that low interest rates are wrong because they drive up inflation. Look at your explanations below, they are all about inflation - nothing to do with liquidity and investment funds. So let's talk about the 2 things separately.

You have not provided any evidence at all to back up your claim on liquidity and investments. All the evidence we have says that low interest rates DO NOT drain your country of liquidity. As for the case of Japan - let's be clear, the BOJ only own a minority of JGBs. They own 43 trillion yen in JGBs, while total government debt is somewhere around 750 trillion yen. So that leaves a lot of yen, invested at tiny rates - money that could be available for investment. Japan has not been drained of liquidity and neither has any other country which currently has very low interest rates - of which there are plenty.

OK, so now your argument is that low interest rates cause inflation. Well, I agree that low interest rates are "inflationary", just as high interest rates are "deflationary". But that doesn't mean that they cause inflation. It all depends what's pushing the other way. As I explained before, in Japan they have had very low interest rates since about 1995, but have never generated any substantial inflation and now have CPI at -2.4%. So low rates don't necessarily lead to inflation. That part of your argument is wrong too.

Further, you talk about inflation, but use examples of hyper-inflation. These are different things. Many countries have operated successfully with low and stable inflation, and very, very few of these have turned in to hyper-inflation. No country has operated successfully with hyper-inflation because it is unstable.

So let's look at your Tide example, which you seem strangely keen on. Let's recap, you say:

"For instance, for families with fixed budged constraints (a fancy term for incomes), if the price of Tide goes up by 20%, the family either buys 20% less quantity of Tide, or less of something else in order to still afford it. But their income is unchanged. They can afford less of everything. The economy is hurt, not helped. When citizens can afford less goods, businesses lay off even more workers. Less quantity of goods can be afforded, businesses earn less or go broke, more workers are laid off. It' a simple and vicious cycle."

My responses are:

1. To repeat, this has absolutely nothing to do with draining a country of liquidity.
2. To repeat, we have established that low interest rates don't necessarily lead to inflation.
3. Your example is typical of a hyper-inflationary environment, not an inflationary environment. In an inflationary environment, wages typically keep up with, or exceed CPI. This is a result of productivity gains etc. So, in a normal inflationary environment, your example would not apply.
4. If you want to say "does this example describe the destructive effect of hyper-inflation?", then to humor you, I would say yes.


On Oct 07 02:25 PM Harry Long wrote:

> OK, Chap08, I will humor you. Hopefully, you will learn something
> about economics.
>
> I. Zimbabwe has the weakest currency on earth, with inflation hitting
>
> the thousands % mark. They, consequently, have very cheap labor and
> goods. Unfortunately, this hyperinflation, has drastically increased
> prices, hurting the poor, but has not helped the real economy. Real
> GDP contracted at 14.1% in 2008. The government had your idea of
> debasing the currency, and it didn't work.
>
> An historical example is the Weimar Republic. Money was so worthless
> that people needed wheel barrels full of it to pay for a loaf of
> bread. Economic activity ground to a halt, because no one could effectively
> save. Therefore, they could not rationally plan for the future, or
> invest. Waiters would encourage people to order dessert when first
> ordering appetizers, because prices might change before dinner was
> over. Young people loved it, because they were forced to spend their
> money instantly, but older people who had saved for years and behaved
> responsibly were left with worthless savings and could no feed themselves
> in many cases.
>
> Inflation is serious, it's not a joke. Anemic interest rates create
> the risk of inflation. Wrap your mind around that reality.
>
> II. You seem to conceded the second point. Increasing the money supply
> affects prices, but doesn't spur demand. I'll move on.
>
> III. My discussion of Tide and inflation is relevant, since lower
> interest rates increase the risks of inflation. That is the link.
> Interest rates and inflation. You can't disprove the point, so you
> call it irrelevant. I again invite you to reply to my specific example,
> on which the whole debate hinges.
>
> IV. Again, Zimbabwe and the Weimar Republic prove that increasing
> the money supply (which is what decreasing interest rates does) does
> not increase demand in the real economy.
>
> V. You still don't see it. If the central bank is buying bonds, that
> drives down yields. That's what quantitative easing is. By definition,
> the central bank would not have had to buy bonds if private market
> demand would have kept interest rates low on its own. You still don't
> see how you're contradicting yourself. Amazing.
>
> You don't have to like my examples and evidence, but you do have
> to accept them. For more reading:
>
> en.wikipedia.org/wiki/...
>
>
> www.cia.gov/library/pu.../

Oct 07 05:18 PM

[Harry Long:]

I agree that we should examine issues seperately.

First, is the suppply of money. All inflation is monetary. Long term inflation can only occur because of a decrease in the money supply. Long term deflation can only occur because of a decrease in the money supply. With fixed budget constraints, even a spike in oil does not create inflation in average prices, because less money is available to spend on other goods. All inflation is monetary.

You argue that low interest rates, even if they are inflationary, can be stimulative to the real demand for goods and services. I argue that it only increases prices, long term. That is the current state of the debate. My Tide argument wins this part of the debate, by showing that price increases reduce the aggregate quantity demanded for goods. That is why the argument is so important.

Second is the flow of money. You must concede that money is flowing out of the country due to carry trades. I have shown evidence for it happening currently. It is well known that Tiger, etc in the 90's engaged in Yen carry trades, they even discuss it. So, the issue of flow is settled. Money flows in the direction of higher real interest rates.

Third, your rhetorical technique is to say that I have no evidence, when the evidence disagrees with your points. Money is flowing out of the U.S. I have provided data for this in my article, which you ignore. To refresh your memory:

"Yesterday that debate was conclusively laid to rest with the latest numbers from the NSX on net flows into ETFs.

YTD, $25.264 billion has flowed out of U.S. Equity Long ETFs.
YTD, over $13 billion has flowed into U.S. Short and Short Leveraged ETFs.
Conversely,

YTD, over $17 billion has flowed into Global Equity Long ETFs and less than $1billion has flowed into Short and Short Leveraged Global Equity ETFs.
YTD, over $24 billion has flowed into Commodity ETFs and less than $0.5 billion has flowed into Short Commodity ETFs. "

Clearly, money is flowing out of the U.S. You've lost the debate. Accept it. The evidence shows that you are wrong.


On Oct 07 05:18 PM chap08 wrote:

> Harry, you say you want to humor me. You're not doing a very good
> job.
>
> Let's go back to basics. Your original argument was that low interest
> rates were wrong because "Liquidity and investment funds will continue
> to flow out of the U.S". Remember that? Now you have moved on to
> argue that low interest rates are wrong because they drive up inflation.
> Look at your explanations below, they are all about inflation - nothing
> to do with liquidity and investment funds. So let's talk about the
> 2 things separately.
>
> You have not provided any evidence at all to back up your claim on
> liquidity and investments. All the evidence we have says that low
> interest rates DO NOT drain your country of liquidity. As for the
> case of Japan - let's be clear, the BOJ only own a minority of JGBs.
> They own 43 trillion yen in JGBs, while total government debt is
> somewhere around 750 trillion yen. So that leaves a lot of yen, invested
> at tiny rates - money that could be available for investment. Japan
> has not been drained of liquidity and neither has any other country
> which currently has very low interest rates - of which there are
> plenty.
>
> OK, so now your argument is that low interest rates cause inflation.
> Well, I agree that low interest rates are "inflationary", just as
> high interest rates are "deflationary". But that doesn't mean that
> they cause inflation. It all depends what's pushing the other way.
> As I explained before, in Japan they have had very low interest rates
> since about 1995, but have never generated any substantial inflation
> and now have CPI at -2.4%. So low rates don't necessarily lead to
> inflation. That part of your argument is wrong too.
>
> Further, you talk about inflation, but use examples of hyper-inflation.
> These are different things. Many countries have operated successfully
> with low and stable inflation, and very, very few of these have turned
> in to hyper-inflation. No country has operated successfully with
> hyper-inflation because it is unstable.
>
> So let's look at your Tide example, which you seem strangely keen
> on. Let's recap, you say:
>
> "For instance, for families with fixed budged constraints (a fancy
> term for incomes), if the price of Tide goes up by 20%, the family
> either buys 20% less quantity of Tide, or less of something else
> in order to still afford it. But their income is unchanged. They
> can afford less of everything. The economy is hurt, not helped. When
> citizens can afford less goods, businesses lay off even more workers.
> Less quantity of goods can be afforded, businesses earn less or go
> broke, more workers are laid off. It' a simple and vicious cycle."
>
>
> My responses are:
>
> 1. To repeat, this has absolutely nothing to do with draining a country
> of liquidity.
> 2. To repeat, we have established that low interest rates don't necessarily
> lead to inflation.
> 3. Your example is typical of a hyper-inflationary environment, not
> an inflationary environment. In an inflationary environment, wages
> typically keep up with, or exceed CPI. This is a result of productivity
> gains etc. So, in a normal inflationary environment, your example
> would not apply.
> 4. If you want to say "does this example describe the destructive
> effect of hyper-inflation?", then to humor you, I would say yes.
>

Oct 07 05:41 PM

[Harry Long:]

I apologize for the typo. Of course, long term inflation occurs because of an increase in the money supply. I was fielding a phone call while typing. My apologies.


On Oct 07 05:41 PM Harry Long wrote:

> I agree that we should examine issues seperately.
>
> First, is the suppply of money. All inflation is monetary. Long term
> inflation can only occur because of a decrease in the money supply.
> Long term deflation can only occur because of a decrease in the money
> supply. With fixed budget constraints, even a spike in oil does not
> create inflation in average prices, because less money is available
> to spend on other goods. All inflation is monetary.
>
> You argue that low interest rates, even if they are inflationary,
> can be stimulative to the real demand for goods and services. I argue
> that it only increases prices, long term. That is the current state
> of the debate. My Tide argument wins this part of the debate, by
> showing that price increases reduce the aggregate quantity demanded
> for goods. That is why the argument is so important.
>
> Second is the flow of money. You must concede that money is flowing
> out of the country due to carry trades. I have shown evidence for
> it happening currently. It is well known that Tiger, etc in the 90's
> engaged in Yen carry trades, they even discuss it. So, the issue
> of flow is settled. Money flows in the direction of higher real interest
> rates.
>
> Third, your rhetorical technique is to say that I have no evidence,
> when the evidence disagrees with your points. Money is flowing out
> of the U.S. I have provided data for this in my article, which you
> ignore. To refresh your memory:
>
> "Yesterday that debate was conclusively laid to rest with the latest
> numbers from the NSX on net flows into ETFs.
>
> YTD, $25.264 billion has flowed out of U.S. Equity Long ETFs. <br/>YTD,
> over $13 billion has flowed into U.S. Short and Short Leveraged ETFs.
>
> Conversely,
>
> YTD, over $17 billion has flowed into Global Equity Long ETFs and
> less than $1billion has flowed into Short and Short Leveraged Global
> Equity ETFs.
> YTD, over $24 billion has flowed into Commodity ETFs and less than
> $0.5 billion has flowed into Short Commodity ETFs. "
>
> Clearly, money is flowing out of the U.S. You've lost the debate.
> Accept it. The evidence shows that you are wrong.

Oct 07 05:43 PM

[pacalis:]

First, my original comment was that you confounded inflation and interest rates, more specifically LOW interest rates (see the title of your article). Now I certainly know what real interest rates are, and agree that's generally a good ball to follow, but that's not in anything you wrote prior to responding to my posts. Too bad, because that would have been a more interesting thesis.

But there's more than that. Do you think your American fixed-income pensioner's are engaging in large scale carry trades, or that Toyota represents a pure Japanese currency play? Of course not. These micro examples combined with a "pile on" and "move the target " approach to what was originally a discussion of drivers of global capital allocation isn't "alpha."

On Oct 07 04:07 PM Harry Long wrote:
> The real interest rate matters, not the rate of inflation.
> 30 year bonds purchased in the 80's, as Volcker came in ended up paying a high real rate of interest. Inflation came down, but there
> was no deflation. Holder of 30 year government bonds reaped a windfall.

Oct 07 05:44 PM

[Harry Long:]

EMS, thank you for the story. What a great example. Just imagine if a hyperinflation had wiped out your grandparents after they made all the right decisions. Savings are the bedrock of an economy. They allow people to invest. China knows that, even if the "me" generation has forgotten it.


On Oct 07 05:12 PM EMS News wrote:

> Savers did prosper during the Great Depression. My grandfather was
> a saver who had a lot of money in the form of hard currency which
> he hoarded.
>
> He did very well during the Great Depression but my grandmother felt
> very sorry for the poor who had nothing so she had all sorts of people
> doing stuff for her and paid them with the hoard of hard money my
> grandfather had saved.
>
> She must have saved quite a few people from starvation this way.
>

Oct 07 05:47 PM

[Harry Long:]

What a one-sided question. Many retirees with 401Ks place them in foreign stock and bond funds.

Toyota is an example of how an appreciating currency does not affect the real economy long term, namely the price competitiveness of cars from Japan.

Try to argue with my points, rather than mis-representing them.


On Oct 07 05:44 PM pacalis wrote:

> First, my original comment was that you confounded inflation and
> interest rates, more specifically LOW interest rates (see the title
> of your article). Now I certainly know what real interest rates are,
> and agree that's generally a good ball to follow, but that's not
> in anything you wrote prior to responding to my posts. Too bad, because
> that would have been a more interesting thesis.
>
> But there's more than that. Do you think your American fixed-income
> pensioner's are engaging in large scale carry trades, or that Toyota
> represents a pure Japanese currency play? Of course not. These micro
> examples combined with a "pile on" and "move the target " approach
> to what was originally a discussion of drivers of global capital
> allocation isn't "alpha."
>
> On Oct 07 04:07 PM Harry Long wrote:

Oct 07 05:50 PM

[EMS News:]

When I was a child and the book, 'Only Yesterday' was published (it is about the Great Depression), my grandfather gave me the book and said, 'Memorize it.'

He went on to explain how I had to avoid debt at all costs. Sure enough, I gained total economic freedom by the age of 50 and although I am not rich, I am not in danger of losing my home, for example.

Saving is important. When some people pay off debts, this allows the next generation who are starting their families to pile on some temporary debt. But when interest rates are ARTIFICIALLY low, then we get no savings and much more debt.

The US government as well as Japan both went very deep into debt with ZIRP (zero interest rate program) debts. That is, the cost of borrowing money from taxpayers or selling debts to dangerous foreign trade rivals like China, is very low. So there is a desire to pile on more and more debt since servicing it is so cheap.

But the PRINCIPAL remains to be paid! This is the killer. This is the kick in the teeth. This is the chain that locks you in a prison! Not interest rates. So, due to cheap lending to governments being such a temptation, they fall into the trap of building up massive credit principal due on loans and eventually go bankrupt when they have to roll over a mountain of cheap debts.

That is, if interest rates rise even a slight amount, this will force a default. This is why ZIRP is a trap, not a way to stimulate an economy.

Oct 07 05:55 PM

[EMS News:]

The US dollar is now a carry trade item. Places with higher interest rates will attract savers who are looking for an honest return. Both the US and Japan fudge inflation statistics to hide real inflation. When wages are dropping faster than prices, this is a form of inflation.

Namely, the number of hours worked to buy basic goods and services rises relentlessly. Japanese wages have fallen much faster than prices over the last 15 years. Car ownership in Japan is below 1987 rates, for example.

This is a hidden inflation! The cheap lending is for only the wealthy who can afford to pay up easily but are looking for free money to invest. Then, they simply send it overseas in some carry trade deal! Thus, the funds depart and the home base is more depressed.

When Japan fell into a depression, this was purely domestic. Toyota grew to the #1 automaker in the world during the Japanese depression, for example. While seeing declines in domestic sales.

But if the US can't buy endless Japanese cars, this hammers Japan greatly! Japan's economy nearly totally collapsed during 2009 due to the Japanese carry trade vanishing in the US sector (but NOT vis a vis Australia, for example!).

Australia buys far fewer cars than the US. Japan wants the US to receive Japanese carry trade deals. My blog emsnews.wordpress.com talks about this topic endlessly. It is life and death for us to understand that ZIRP is a trap.

Oct 07 06:02 PM

[JasonC:]

ETFs are not the United States. They are preferred vehicles for speculators who play fads and momentum.

There is a giant flow of capital to the US. It is called the trade deficit. It is less giant than it was a year ago, but real capital continues to leave Asia and land in the US.

People who simultaneously want to run up currency balances and attract and use real capital do not understand basic accounting, and want to eat cake and have it.

Whether it makes economic sense for Americans to run trade deficits depends entirely on whether the future return from holding dollar bonds at near zero interest rates will be greater or less than the returns from investing real capital in the US. Those simultaneously moaning that the dollar is certain to implode while real everything must soar, and that the trade deficit is ruinous, do not understand basic accounting either. Foreign savers are the ones going long the dollar by accumulating our bonds; we are the ones going long real assets by buying things for issued debt.

As usual, the doom mongering press and pundit set looks at one half of each transaction and predicts horrors from a selected side of it, while pretending the other side does not exist.

The reality is there is no inflation in the US, it is a deflation, and the world has yet to get used to Americans saving for their own capital needs instead of outsourcing it. Interest rates at zero reflect the complete lack of bargaining power of our foreign creditors, who simply do not see how or where to invest their own savings.

If they learn to, fine, we save to fund our own investments and the trade deficit disappears. They've got a giant pile of dollar claims, we've got tons of real stuff already delivered and worth every cent paid for it, to a free consumer.

Everyone is trying to tell other men what to do with their own wealth...

Oct 07 06:07 PM

[Harry Long:]

A vehicle for speculators? Then I guess every retiree in the SPY S&P EFS is a momentum "fad" speculator. Silly me!

There is no inflation in the U.S.? That must be why gold prices are making new highs! Silly me!

Oh, Oracle JasonC, tell us more wisdom for the ages!


On Oct 07 06:07 PM JasonC wrote:

>
> ETFs are not the United States. They are preferred vehicles for speculators
> who play fads and momentum.
>
> There is a giant flow of capital to the US. It is called the trade
> deficit. It is less giant than it was a year ago, but real capital
> continues to leave Asia and land in the US.
>
> People who simultaneously want to run up currency balances and attract
> and use real capital do not understand basic accounting, and want
> to eat cake and have it.
>
> Whether it makes economic sense for Americans to run trade deficits
> depends entirely on whether the future return from holding dollar
> bonds at near zero interest rates will be greater or less than the
> returns from investing real capital in the US. Those simultaneously
> moaning that the dollar is certain to implode while real everything
> must soar, and that the trade deficit is ruinous, do not understand
> basic accounting either. Foreign savers are the ones going long the
> dollar by accumulating our bonds; we are the ones going long real
> assets by buying things for issued debt.
>
> As usual, the doom mongering press and pundit set looks at one half
> of each transaction and predicts horrors from a selected side of
> it, while pretending the other side does not exist.
>
> The reality is there is no inflation in the US, it is a deflation,
> and the world has yet to get used to Americans saving for their own
> capital needs instead of outsourcing it. Interest rates at zero reflect
> the complete lack of bargaining power of our foreign creditors, who
> simply do not see how or where to invest their own savings.
>
> If they learn to, fine, we save to fund our own investments and the
> trade deficit disappears. They've got a giant pile of dollar claims,
> we've got tons of real stuff already delivered and worth every cent
> paid for it, to a free consumer.
>
> Everyone is trying to tell other men what to do with their own wealth...

Oct 07 06:12 PM

[Harry Long:]

ETF, sorry for the typo again. My fingers are getting tired. I will try to respond to everyone when I get back to the computer.


On Oct 07 06:12 PM Harry Long wrote:

> A vehicle for speculators? Then I guess every retiree in the SPY
> S&amp;P EFS is a momentum "fad" speculator. Silly me!
>
> There is no inflation in the U.S.? That must be why gold prices are
> making new highs! Silly me!
>
> Oh, Oracle JasonC, tell us more wisdom for the ages!

Oct 07 06:13 PM

[chap08:]

Harry, at least your purpose has become clearer. But:

1. You say that "Clearly, money is flowing out of the U.S. You've lost the debate. Accept it. The evidence shows that you are wrong." To remind you, the debate is not about whether "money is flowing out of the U.S. ". The debate is about whether, as you originally claimed, this is a) due to interest rates and b) "to our detriment".

I maintain that the lack of good investments in the US, compared to overseas, is a primary cause of this money flow. (In fact, I believe that an increase in interest rates would cause even more money to flow out of US equities - the reverse of what you imply - but we don't need to discuss that). I also maintain that there is no evidence of a lack of liquidity, either in the US, or Japan, or anywhere else that is relevant to this question. If you want to win the argument, you need to show, not just that there is a money flow, but that this, as you claimed, a) is due only to low US interest rates, and b) "will suck liquidity and investment funds out of the U.S. to our long term detriment".

2. My claim regarding low interest rates is not just that they "can be stimulative to the real demand for goods and services" as you say. I claim that they can stimulate the economy in other ways too. In particular, they encourage investment. If you've ever owned a business, as I have, then you would know that this is true. This investment increases productivity and so is deflationary, rather than inflationary.

3. In relation to your inflation point, you say that "My Tide argument wins this part of the debate, by showing that price increases reduce the aggregate quantity demanded for goods". To emphasize what I said in my previous comment, you did not show that at all. You showed that this could happen in hyperinflation - where price rises exceed wage rises. You do not seem to have understood that this is not what happens in 99% of inflationary economies.

In most economies over the last century at least, inflation has been positive, but wages have increased faster than inflation. This is mainly due to productivity. The result of this is that inflation does not lead to reduced demand. It has actually led to increased demand. Taking an example that all of you deflation lovers get excited about - since the Fed was formed, the dollar has lost 95% of its purchasing power. This actually means that inflation has been 3% pa compounded. But, over the same period, GDP per capita has grown at 5.7% pa. This would not have been possible if inflation destroyed aggregate demand.

I need to go now. As someone once said, "time and Tide wait for no man". But if you do post a reply, I will read it later.


On Oct 07 05:41 PM Harry Long wrote:

> I agree that we should examine issues seperately.
>
> First, is the suppply of money. All inflation is monetary. Long term
> inflation can only occur because of a decrease in the money supply.
> Long term deflation can only occur because of a decrease in the money
> supply. With fixed budget constraints, even a spike in oil does not
> create inflation in average prices, because less money is available
> to spend on other goods. All inflation is monetary.
>
> You argue that low interest rates, even if they are inflationary,
> can be stimulative to the real demand for goods and services. I argue
> that it only increases prices, long term. That is the current state
> of the debate. My Tide argument wins this part of the debate, by
> showing that price increases reduce the aggregate quantity demanded
> for goods. That is why the argument is so important.
>
> Second is the flow of money. You must concede that money is flowing
> out of the country due to carry trades. I have shown evidence for
> it happening currently. It is well known that Tiger, etc in the 90's
> engaged in Yen carry trades, they even discuss it. So, the issue
> of flow is settled. Money flows in the direction of higher real interest
> rates.
>
> Third, your rhetorical technique is to say that I have no evidence,
> when the evidence disagrees with your points. Money is flowing out
> of the U.S. I have provided data for this in my article, which you
> ignore. To refresh your memory:
>
> "Yesterday that debate was conclusively laid to rest with the latest
> numbers from the NSX on net flows into ETFs.
>
> YTD, $25.264 billion has flowed out of U.S. Equity Long ETFs. <br/>YTD,
> over $13 billion has flowed into U.S. Short and Short Leveraged ETFs.
>
> Conversely,
>
> YTD, over $17 billion has flowed into Global Equity Long ETFs and
> less than $1billion has flowed into Short and Short Leveraged Global
> Equity ETFs.
> YTD, over $24 billion has flowed into Commodity ETFs and less than
> $0.5 billion has flowed into Short Commodity ETFs. "
>
> Clearly, money is flowing out of the U.S. You've lost the debate.
> Accept it. The evidence shows that you are wrong.

Oct 07 06:44 PM

[E Nuff Sed:]

Low "real" interest rates are good for asset prices (including stock prices). Low interest rates make it uncomfortable for an investor to stay in safe assets and incent the investor to move money to riskier assets.

I don't think they suck liquidity out of the country. Japan is suffering from major demographic problems (it is not the oldest society in the world) and its population is actually declining. It has bigger problems than low interest rates.

Oct 07 06:57 PM

[EMS News:]

Wrong, E Nuff. Low interest rates drive investors out of country. Savers leave home currencies and invest in CDs overseas (a la Japanese savers using yen to buy into Aussie or New Zealand banks!).

No, if a country chooses to be at zero percent, it sees all savings flee this system because they can grow WITHOUT MUCH RISK in other places. This is why so much flowed to the US but no more.

Oct 07 07:00 PM

[pacalis:]

First it was a rhetorical question. Second your examples are pure distraction.

If I were to argue with your points I would have to first clarify your messes like this where you argue that the rate of inflation doesn't matter but then discuss how it matters.

> The real interest rate matters, not the rate of inflation.
> 30 year bonds purchased in the 80's, as Volcker came in ended up paying a high real rate of interest. Inflation came down, but there
> was no deflation.

Then you would argue with me by introducing another nearly correct, but not quite, definitional point, and provide another goofy example. Lose lose.

But, back on point, here's your main thesis:

>Extremely low interest rates can vacuum liquidity out of nations. >Japan has been referred to as a nation where loose monetary >policy was like "pushing on a string....The tech boom was >supercharged by a massive Japan-funded >carry trade. We may >be funding such a boom in emerging >markets and commodities >right now to our detriment.

You've done nothing to support your argument that people are borrowing US dollars to support a global carry trade, nor that liquidity is being pulled out of the US. Moreover, USD aren't necessarily coming out of the US - US capital allocations be driven by shifts away from dollarization and foreign USD reserves (i.e. China buys aluminum rights in USD, or the Saudi's take some USD out of their vaults, literally, and buy Euros).

On Oct 07 05:50 PM Harry Long wrote:

> What a one-sided question. Many retirees with 401Ks place them in
> foreign stock and bond funds.
>
> Toyota is an example of how an appreciating currency does not affect
> the real economy long term, namely the price competitiveness of cars
> from Japan.
>
> Try to argue with my points, rather than mis-representing them.<br/>

Oct 07 07:32 PM

[Harry Long:]

I guess any evidence which contradicts you is "goofy." Read the article. The fund flows are plain as day. Game over.


On Oct 07 07:32 PM pacalis wrote:

> First it was a rhetorical question. Second your examples are pure
> distraction.
>
> If I were to argue with your points I would have to first clarify
> your messes like this where you argue that the rate of inflation
> doesn't matter but then discuss how it matters.

Oct 07 08:00 PM

[Harry Long:]

Try to get a wage increase in this economy. If you think wages are increasing as fast as prices, you're delusional.


On Oct 07 06:44 PM chap08 wrote:

> Harry, at least your purpose has become clearer. But:
>
> 1. You say that "Clearly, money is flowing out of the U.S. You've
> lost the debate. Accept it. The evidence shows that you are wrong."
> To remind you, the debate is not about whether "money is flowing
> out of the U.S. ". The debate is about whether, as you originally
> claimed, this is a) due to interest rates and b) "to our detriment".
>
>
> I maintain that the lack of good investments in the US, compared
> to overseas, is a primary cause of this money flow. (In fact, I believe
> that an increase in interest rates would cause even more money to
> flow out of US equities - the reverse of what you imply - but we
> don't need to discuss that). I also maintain that there is no evidence
> of a lack of liquidity, either in the US, or Japan, or anywhere else
> that is relevant to this question. If you want to win the argument,
> you need to show, not just that there is a money flow, but that this,
> as you claimed, a) is due only to low US interest rates, and b) "will
> suck liquidity and investment funds out of the U.S. to our long term
> detriment".
>
> 2. My claim regarding low interest rates is not just that they "can
> be stimulative to the real demand for goods and services" as you
> say. I claim that they can stimulate the economy in other ways too.
> In particular, they encourage investment. If you've ever owned a
> business, as I have, then you would know that this is true. This
> investment increases productivity and so is deflationary, rather
> than inflationary.
>
> 3. In relation to your inflation point, you say that "My Tide argument
> wins this part of the debate, by showing that price increases reduce
> the aggregate quantity demanded for goods". To emphasize what I said
> in my previous comment, you did not show that at all. You showed
> that this could happen in hyperinflation - where price rises exceed
> wage rises. You do not seem to have understood that this is not what
> happens in 99% of inflationary economies.
>
> In most economies over the last century at least, inflation has been
> positive, but wages have increased faster than inflation. This is
> mainly due to productivity. The result of this is that inflation
> does not lead to reduced demand. It has actually led to increased
> demand. Taking an example that all of you deflation lovers get excited
> about - since the Fed was formed, the dollar has lost 95% of its
> purchasing power. This actually means that inflation has been 3%
> pa compounded. But, over the same period, GDP per capita has grown
> at 5.7% pa. This would not have been possible if inflation destroyed
> aggregate demand.
>
> I need to go now. As someone once said, "time and Tide wait for no
> man". But if you do post a reply, I will read it later.

Oct 07 08:04 PM

[prudentinve...:]

You make an excellent point. It has been understood, by a few, for centuries that bubbles mis-direct human resources and lead to an inverse "division of labor", where people apply their talents to sectors that provide artificial rewards, which free markets would not allow, thereby failing to apply their talents to the most productive uses.

Adam Anderson, an officer of the South Sea Company, is reported to have written in the aftermath of the South Sea bubble:

" It is hoped that the year 1720 ' .... may serve for a perpetual memento to the legislators and ministers of our own nation, never to leave it to the power of any, hereafter, to hoodwink mankind into so shameful and baneful an imposition on the credulity of the people, thereby diverted from their lawful industry' .."

By "lawful industry", I believe he meant applying their talents in the most productive way as judged by a free market economy, rather than the most profitable way set by a manipulated economy.


On Oct 07 11:04 AM a fat panda wrote:

> "I could go on, but when you start saying things like "low interest
> rates do not stimulate the real economy" then your thinking gets
> so far away from the "facts" and "evidence" that it is, to be frank,
> laughable."
>
> Harry, The problem with low interest rates is more than just the
> carry trade. It lowers the cost of risk, and encourages people who
> have no business owning a business to go into business. If you look
> at the house flippers, as an extreme example, they surely stimulated
> the economy, but did so by pushing demand forward and pulling resources
> away from productive uses. That is to say, that it creates a "real"
> economy that isn't real.
>
> The cost of this is much more than the loss in the house. The cost
> is going to be terrible once you factor in the retraining costs to
> get these 'business people' back in the workforce. People who left
> real jobs to become house flippers now have stale resumes. They are
> going to have to re-invent themselves. This can be a trival cost
> in some industries, but for people who work in say the IT world a
> year off is a killer.

Oct 07 08:17 PM

[EMS News:]

Speculative bubbles are very much like gold rushes. Only, the modern way of doing this is to have some strange system set up that allows easy credit creation.

The entire derivatives business used by the bankers with the OTC and CDS scripts was to remove 'risk' to a legendary place (someone else, of course) and thus claim they had the capital credit available to offer cheap loans that were even below the real rate of inflation.

This way, we saw over $12 trillion in new credit money created across the planet, money that should never have been lent. To fix the collapse of repaying these many loans (the 'someone else' guys couldn't pay up, of course) governments had to become these 'someone else' people and insure the dying loans!

This is bankrupting the major G7 countries. We are going bankrupt thanks to bailing out the bankers who made loans they couldn't guarantee, themselves. The transfer of the risk of lending was put onto untrustworthy organizations like AIG who had nearly zero capital.

Oct 07 10:05 PM

[woodsey:]

One more comment from the ancient one down here in Takes us.
I hereby declare Mr. Harry Long the winner.
Thank you, sir, for the lessons in economics.
Now take a break; the typos indicate you need one.
I'll spare y'all the personal stories of yore. Lou

Oct 07 10:07 PM

[chap08:]

Harry, is this the best that you can come up with?? To support your argument that inflation destroys demand you say: "Try to get a wage increase in this economy. If you think wages are increasing as fast as prices, you're delusional."??

Harry, it may have escaped your attention, but there is no inflation at the moment. Indeed, to the extent that we have experienced deflation, all wage earners HAVE had a real terms increase. We also happen to be living thru some of the worst economic times in living memory. That is why you can't get a wage increase. This doesn't change the data that I explained to you showing the reality of the last century and more covering all industrialized economies. Does it?? To repeat, the long term record shows wages rising faster than prices due to productivity gains.

If you plan on writing another article, you need to do a better job next time. Think thru your reasoning more carefully. Take a moment in private and look thru my comment 9 above this. That comment explained why you are mistaken. Don't reply again, just think to yourself. Then, when it comes to reader's comments; I think that it's great that you reply, but you should prepare your arguments more carefully and more logically.

Good luck.


On Oct 07 08:04 PM Harry Long wrote:

> Try to get a wage increase in this economy. If you think wages are
> increasing as fast as prices, you're delusional.

Oct 08 06:40 AM

[Harry Long:]

Gold has hit a new high, and wages have not. I already answered the point, and the evidence is clear.

Gold prices are the best free market measure of inflation.

Again, Chap08, your rhetorical technique is to ignore evidence that I cite, and it is a disingenuous technique at that.

Oct 08 10:18 AM

[Harry Long:]

To drive the point home, gold is up well over 100% since the start of the decade, and wages are not.

Chap08, my arguments square with the facts. Yours do not.


On Oct 08 06:40 AM chap08 wrote:

> Harry, is this the best that you can come up with?? To support your
> argument that inflation destroys demand you say: "Try to get a wage
> increase in this economy. If you think wages are increasing as fast
> as prices, you're delusional."??
>
> Harry, it may have escaped your attention, but there is no inflation
> at the moment. Indeed, to the extent that we have experienced deflation,
> all wage earners HAVE had a real terms increase. We also happen to
> be living thru some of the worst economic times in living memory.
> That is why you can't get a wage increase. This doesn't change the
> data that I explained to you showing the reality of the last century
> and more covering all industrialized economies. Does it?? To repeat,
> the long term record shows wages rising faster than prices due to
> productivity gains.
>
> If you plan on writing another article, you need to do a better job
> next time. Think thru your reasoning more carefully. Take a moment
> in private and look thru my comment 9 above this. That comment explained
> why you are mistaken. Don't reply again, just think to yourself.
> Then, when it comes to reader's comments; I think that it's great
> that you reply, but you should prepare your arguments more carefully
> and more logically.
>
> Good luck.

Oct 08 10:25 AM

[William Ram...:]

Carry trade.
First, good article. Low interest rates do not always stimulate the local economy, and even when they do the cost can be high.
It’s true that low interest rates do encourage economic activity in the short run--somewhere. But the money borrowed will be invested where it appears to bring the best gain. Since weak economies are more likely to lower interest rates lower than stronger economies, the borrowed money will often go overseas. This is the carry trade. We saw it in Japan during the last decade or so, and we see it now in the US. It’s true that some money may be invested locally, and so there is some stimulus, but at a high cost.
One side effect of the carry trade is to lower the value of the lender nation’s currency. This happens as follows: investors borrow in the local currency, and then exchange it for foreign currency in order to buy foreign investments. The more the local currency drops the greater the value of the foreign investments and so the carry trade tends to accelerate, driving up asset values and driving down the local currency further. This can create a dramatic feed back loop, similar to what Soros describes in his theory of reflexivity as applied to asset/lending bubbles. Back to the point—the lowered local currency makes the local nation’s exports cheaper and does stimulate the export section of that economy. We saw this in Japan during its carry trade. There are costs of course—imports become more expensive, and foreigners become less interested in lending to the local nation—both factors that might push up interest rates and end the carry trade. The carry trade can also unwind if currency exchange rates change (due for example, to nations entering into the currency market—Japan buying US dollars for example), or if asset values fall. The carry trade can unwind very rapidly driving up the USD in the present case and driving down stock prices internationally.
So where do we go from here? I believe that the Fed can not raise interest rates until the unemployment rate stabilizes (and maybe until it actually declines in a decisive way). Thus, the USD will continue to fall, absent major intervention in the currency markets or a fall in world stock markets. The continued carry trade will be our last great bubble, driving up asset prices all over the world. However, as I or someone else said, “asset bubbles do not an economy make.” The falling dollar will make it difficult for other countries to export to the US. Whether they will develop their own consumer economies is an open question, but unlikely to happen in the next year or two. In the interim, there is massive money to be made as long as the carry trade continues to drive up asset prices. All of the talk about the economy recovering will be silly noise—ignore it. Dance if you dare while the music plays, and try to leave the party before the music stops. Thank you. Bill

Oct 08 10:20 PM

[Harry Long:]

Brilliant, William. I couldn't have said it better myself. Elegantly said.


On Oct 08 10:20 PM William Ramseyer wrote:

> Carry trade.
> First, good article. Low interest rates do not always stimulate the
> local economy, and even when they do the cost can be high.
> It’s true that low interest rates do encourage economic activity
> in the short run--somewhere. But the money borrowed will be invested
> where it appears to bring the best gain. Since weak economies are
> more likely to lower interest rates lower than stronger economies,
> the borrowed money will often go overseas. This is the carry trade.
> We saw it in Japan during the last decade or so, and we see it now
> in the US. It’s true that some money may be invested locally, and
> so there is some stimulus, but at a high cost.
> One side effect of the carry trade is to lower the value of the lender
> nation’s currency. This happens as follows: investors borrow in the
> local currency, and then exchange it for foreign currency in order
> to buy foreign investments. The more the local currency drops the
> greater the value of the foreign investments and so the carry trade
> tends to accelerate, driving up asset values and driving down the
> local currency further. This can create a dramatic feed back loop,
> similar to what Soros describes in his theory of reflexivity as applied
> to asset/lending bubbles. Back to the point—the lowered local currency
> makes the local nation’s exports cheaper and does stimulate the export
> section of that economy. We saw this in Japan during its carry trade.
> There are costs of course—imports become more expensive, and foreigners
> become less interested in lending to the local nation—both factors
> that might push up interest rates and end the carry trade. The carry
> trade can also unwind if currency exchange rates change (due for
> example, to nations entering into the currency market—Japan buying
> US dollars for example), or if asset values fall. The carry trade
> can unwind very rapidly driving up the USD in the present case and
> driving down stock prices internationally.
> So where do we go from here? I believe that the Fed can not raise
> interest rates until the unemployment rate stabilizes (and maybe
> until it actually declines in a decisive way). Thus, the USD will
> continue to fall, absent major intervention in the currency markets
> or a fall in world stock markets. The continued carry trade will
> be our last great bubble, driving up asset prices all over the world.
> However, as I or someone else said, “asset bubbles do not an economy
> make.” The falling dollar will make it difficult for other countries
> to export to the US. Whether they will develop their own consumer
> economies is an open question, but unlikely to happen in the next
> year or two. In the interim, there is massive money to be made as
> long as the carry trade continues to drive up asset prices. All of
> the talk about the economy recovering will be silly noise—ignore
> it. Dance if you dare while the music plays, and try to leave the
> party before the music stops. Thank you. Bill

Oct 09 02:30 PM

[E Nuff Sed:]

Asset prices are being driven up by low interest rates. Interest rates are a force of gravity (g). Less the g the higher the asset floats. The asset which is inflating the most is gold. Compared to gold the S&P 500 has barely started recovering. Here is chart of the S&P 500 relative to Gold since the financial crisis erupted.
stockcharts.com/h-sc/u...

Oct 09 06:42 PM