They could lose control of this thing to the upside pretty fast here.
They will raise the risk free rate and more seniors will drop out of the workforce with the higher interest income that will bring; and then we will have labor shortages and increasing prices which will cause them to raise again and so on...
Back To JFK! New Home Sales Increase +16.6% In April, Median Price +9.7% YoY https://t.co/B8OMCP80PQ pic.twitter.com/GI2i2BZb32
— Anthony Sanders (@AnthonyBSanders) May 24, 2016
Home owners bailed out by the Fed and Treasury only a few years ago with almost double digit gains. *fist bump for home owners* Learning how to use government to extract financial rents! They will have Jamie Dimon and Warren Buffet on the back foot worried that people have learned their gig.
ReplyDeleteYou'd think that when prices move faster than wage inflation on a big-ticket item like housing, even when building materials have fallen in price, the central bank would be concerned and do an analysis of supply and demand to see what is happening. But I think they are happy to have inflation where ever they can find it, be damned the consequences.
I dont believe in "inflation!"....
ReplyDelete@ Matt
ReplyDeleteI don't really believe in it either, at least I don't believe the way it is explained by most economists/pundits. Part of that is because there are at least 3 ways inflation seems to be talked about;
1) The "shrinking dollar" view where someone looks at what a dollar could buy in 1913 and compares it to today and blames evil CBers or Treasury officials for stealing our savings. The trouble with this view is myriad but primarily it assumes a dollar under a mattress since 1913 taken to the market today and it doesn't account for what is available today that wasn't in 1913
2) The "no buyer for your bonds" view which accepts that people don't stuff money under a mattress but assumes investing in the risk free govt assets. This view is wrong though because it assumes that people are loaning money to the govt and that if they stop buying bonds the govt will be insolvent. Additionally even if a day came where everyone just wanted to sell their bonds there must still be a buyer on the other side, if there is an "other side" there is no loss of demand and it is the loss of demand which is supposedly driving the inflation by making the govt have to pay more interest to sell their debt.
3) The concern that foreign bond holders will come a callin' - This assumes that the reason that foreigners who hold our govt debt are really just waiting to redeem it for some dollar denominated goods and services and if they flood the market with their dollars they could price many Americans out of markets for what ever good these foreigners are seeking. This seems misplaced because mainly I think dollars are held by many foreign CBs as part of their balance sheet operations. Many CBs are on a dollar standard because they have pegs to the dollar, either explicitly or unofficially and holding dollars is done for domestic monetary policy operations as I understand it.
However I do believe that prices are often not a reflection of sound fundamentals and should probably not be chased because they are likely to correct downward. I have no real problem calling these prices inflated and, even more so, calling a time when a lot of prices are moving that way an inflationary period. But I do not think CBs can really do anything about that and there is not a "monetary" reason for such events
The last time we had demand-pull inflation was during WWII. Resources were restricted for the war effort. Reason why bathtubs changed from monster coffin-sized things made of porcelain-covered lead pre-war to the Leavitt-styled suburban type with adjoined walls that are ubiquitous in cheap motels post-war. Ditto steel and tons of other commodities.
ReplyDeleteThat was the type of inflation that people say is too many dollars chasing too few goods.
Cost-push inflation happened in the 70s during the oil embargo. Cost of everything went up (food, transportation, heating, A/C) when price of oil increased 10X in seven years. This kind comes from pressure on the supply side of resources.
Now wait... if prices are rising because of new money flowing into some product (mortgages into housing is a good example), the Fed can absolutely have an impact by raising rates. Rate hikes make previously affordable homes unaffordable, especially if the change is sudden, as it doesn't provide time for associated increases govt. payments to flow into economy. But this only works for items that are bought on credit, which are mostly big-ticket items.
ReplyDeleteAm I missing something?
Am I missing something?
ReplyDeleteNo. The cost of credit affects the monthly nut and that is income-sensitive. In interest rates increase without a corresponding increase in income, this may have an affect on the consumption and investment.
Real estate, vehicles, and durable goods are typically purchased on credit. Interest rates are also a cost that affects the profitability of firm investment, hence may also negatively impacted employment.
On the other hand, higher interest rates increase income for some economic units, too, which increases their financial ability to consume or invest. But this depends on saving desire and portfolio choices.
Prices don't rise because "new money! is flowing" that is monetarist.....
ReplyDeletePrices rise when those in a position of authority to raise them do so...
MMT: "it's about price not quantity..." and "ALL prices are a function of what govt pays for things and what govt allows its fiscal agents to lend against things"
Government competes with private sector business women and consumers for real production. Who is setting the highest offer is not always going to be government. Government can set floors on prices to an extent, but not ceilings.
Delete
ReplyDeleteGovernment sets prices by setting its own rate (cost of credit) and the prices it pays in markets.
Interest rates are the price of credit. Increase price and decrease effective demand owing to affordability. Spending is interest rate sensitive owing to both income relative to creditworthiness and ability to afford the monthly nut.
Credit, whose cost is controlled by the benchmark rate set by the cb (Fed funds rate), is directly related to effective demand.
Yeah I don't like the "new money" idea either.
ReplyDeleteMost things are purchased by money "already there" and just switching accounts. I take money from my savings or checking and it goes to Toms checking. For big ticket items there is usually a middle man (banker/broker) who coordinated the transaction.... for a fee. No "new" money, just redirecting my already existing income flows.
The banker/broker can be a large influence on the determination of the prices however in addition goats.
Greg its hard to resist making statements like that if you have been at all read into the academe of economics... you end up picking up phrases like Andrew there... I still catch myself doing it from time to time it hard to drop it after years of training...
ReplyDeleteLately Ive just been trying to think more deterministic... as opposed to economics which remains very stochastic ie they dont really understand what is going on to more than a very primitive level...
Neoclassical economics is deterministic. It's axiomatic-deductive rather than inductive.
ReplyDeleteI have no idea what you mean here Tom...
ReplyDeleteHow is it deterministic when they use the DSGE "models" (alleged) where the S stands for stochastic?
they think prices are a result of 'supply and demand!', etc...
Brian can explain this better than I can. But the basic neoclassical framework is ergodic, static, and axiomatic. This is the basis of assuming optimization and general equilibrium. It's basically linear functions, like IS-LM. Change the independent variable interest rate) and the dependent variable (GDP) changes iaw the function. Well, that doesn't work so well for predicting real world behavior.
ReplyDeleteThese models proved to be not good predictors so they were tweaked to take into account expectations that are dynamic (time seres) and involve uncertainty involving the future (stochastic).
Deterministic models are preferred in science where possible but not enough is known about individual psychology or the social sphere to do so — at least not yet. So in the social sciences stochastic models predominate.
When you look at total bank credit, there definitely is "new money" flowing into the economy. Of course, some of that goes to die in non-productive places, but that's beside the point. Does saying "new money" smack of physical printing or something? I never intended it to mean any such thing. When banks write mortgages, they're making "new money." What else would you like to call it?
ReplyDeleteGovernment can set floors on prices to an extent, but not ceilings.
ReplyDeleteRight. As monopolist government is the swing buyer that others must out bid.
Take healthcare. Medicare and Medicaid pay the lowest rate ss the volume buyer. Then private insurance companies. Then small groups of buyers. Finally uninsured individuals pay the highest price.
The highest price is supposedly the price. Everyone else receives a volume discount on that.
Andrew I am saying that what you term "new money" doesnt increase the price...
ReplyDeletePeople who raise and lower prices dont look at the so-called "money supply" before they increase or decrease prices...
these people are looking at their M1's and wtf and they can assert these increase and prices can go down...
this is the same as the MMT people saying we need more "deficit spending" which is an ex post measurement they somehow bring into the present tense...
the 'deficit' is ex post and 'spending' is current time... this is an error in time domain analysis they make... they were never trained correctly...
Here Andrew:
ReplyDelete" if prices are rising because of new money flowing into some product (mortgages into housing is a good example),"
Suggest resist this type of thinking... you could have an increase in bank credit and unit prices for houses could go down psf .... could go the other way too...
"its about PRICE not quantity...."
Price is an independent variable in this...
@Andrew
ReplyDeleteIsn't most bank credit extended against already existing income streams? Lets say tomorrow I buy a car(on credit) and that Im going to do that with no increase in my salary. Well its hard to call the purchase new money, I think, as its just the same income stream I was previously spending on something else or putting into a bank account to save. There is nothing new about it, its just "old" money redirected.
Availability of easy credit is exactly what led to the most recent U.S. housing bubble. I'm not taking a monetarist position in that I'm not saying that the reason prices rose was because of the quantity of new money. But the availability of new money allowed many new buyers into the market and facilitated speculation.
ReplyDeleteStrict/simple monetarism misses much, but there is a certain element of truth in it as well. What is obvious and often ignored is that the total quantity of money is less important than the fraction of that money that people want to spend. Also important is the supply side -- if there is no real limit to supply and the marginal cost of production is low, there is little reason to think that increased spending on such items would be inflationary.
"Availability of easy credit is exactly what led to the most recent U.S. housing bubble"
ReplyDeleteI don't disagree entirely but I think its important to distinguish between a low interest rate environment and an environment that encourages borrowers to up their leverage (ratio of debt to income). They can go together but they don't have to. Its the relaxing of standards regarding what was considered an acceptable debt to income ratio that allowed house prices to rise.
There was a time when they never would have loaned out a 200,000$ mortgage for someone making 40-50K a year but by 2006 many lenders were permitting that.
Thing that really bothers me too is that many times this is presented as helping the home buyer when in fact its intention is to help the home seller. Buyers can lose it all when they are over leveraged but the seller has already walked away with the inflated price. I think low interest rates were les operative in the housing bubble than relaxed standards. IOW even in a low interest rate environment capping what you can borrow to say 300% of income would keep housing prices down.