Harry Long

Congress and the Fed: An Epic Game of Chicken

I agree. There is no question that the free market should set interest rates, rather than the Fed's artificial price-fixing when it comes to interest rates.

The only thing I would add is that every country which has not had an independent central bank, unfortunately, has inflation worse than our own.

But totally agreed, with the exception of Paul Volcker, a truly exceptional human being, the Fed has created terrible inflation.


On Nov 12 04:42 AM larethdf wrote:

> This is pretty backwards, it seems. The Fed is an inflation creating
> monster that has already destroyed over 95% of the value of the dollar
> since its creation in 1913. There is no Constitutional authority
> for a central bank, and our founders warned strongly against it from
> the very beginning. Certainly it should be audited immediately, but
> it may already be too late to stop serious price increases. Ron Paul
> has been quite outspoken against the ridiculously low interest rates
> already in effect, and this is the driving force behind the public's
> distrust of the Fed, and the concept of fiat currency in general.
> The first thing we should do is legalize competing gold and/or silver
> backed currencies, such as the silver certificates that JFK had issued.
> Interest rates should be based on available savings, not the whims
> of presidential appointees who disingenuously claim that they are
> not influenced by politics. If you really believe that line, perhaps
> there's a bridge you'd like to invest in.

The Dogma of Low Interest Rates Is Wrong

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

The Dogma of Low Interest Rates Is Wrong

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.

The Dogma of Low Interest Rates Is Wrong

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.

The Dogma of Low Interest Rates Is Wrong

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.

The Dogma of Low Interest Rates Is Wrong

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.

The Dogma of Low Interest Rates Is Wrong

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&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!

The Dogma of Low Interest Rates Is Wrong

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...

The Dogma of Low Interest Rates Is Wrong

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:

The Dogma of Low Interest Rates Is Wrong

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.
>

The Dogma of Low Interest Rates Is Wrong

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.

The Dogma of Low Interest Rates Is Wrong

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.
>

The Dogma of Low Interest Rates Is Wrong

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.

The Dogma of Low Interest Rates Is Wrong

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.

The Dogma of Low Interest Rates Is Wrong

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.