7 ms·

> IMO it'd be sensible to let the markets set the interest rate I'm not sure what you mean by this. The interest rate policy is linked to the money creation/de

by athrun 2y ago

> IMO it'd be sensible to let the markets set the interest rate I'm not sure what you mean by this. The interest rate policy is linked to the money creation/destruction process, which is ultimately a centralised state function. Banks create/destroy the money, but the pace at which they can do so is governed by interest rates. I don't understand how the market would be able to set that rate. You'd need multiple entities acting as "central banks", and somehow competing? What do you have in mind?

roenxi 2y ago
I'd prefer to see a policy where either the schedule for monetary creation was publicised several years in advance, or where a constant amount of money in the economy was targeted rather than a specific interest rate (I'd go with the former, it seems harder to game). We've actually got exactly that in Bitcoin which is making it an interesting experiment for me, although it is too cumbersome to act as money we'll get to see how that sort of system performs in a market. The idea that it is proper to adjust the rate of monetary creation based on the market is suspect. It can't create wealth, it can create confusion and is looks suspiciously like a distortion that results in asset owners becoming wealthy at the expense of someone else. Asset prices appear to inflate more in line with the M2 - somewhat faster than the CPI, suggesting that asset owners are getting more benefits from this policy than anyone else. I don't see why they need an extra boost given that they already own productive assets. Basically; at the moment the system is designed to penalise anyone who tries to preserve wealth in actual cash and as collateral damage prices keep eternally climbing. Neither of those things is helpful and if anything it just makes it harder for people to make rational decisions. It is confusing policy with no theoretical upside that has been drawn to my attention.
- littlestymaar 2y ago
  Well, bitcoin shows you exactly what to expect in such a situation: it makes a terrible currency that nobody ever wants to spend. I know many people are convinced that the value of money comes from its scarcity, but it's actually a very limited view: An even more important characteristic of money is that it must be abundant enough. That's why humanity spent most of history using gold and silver as support for value and not diamond and platinum. That's the neat part with credit-based money: it's generally produced in just the amount you need for the economy. But another problem arise in case of financial crisis: banks can run out of liquidity if other banks refuse to lend them, and it has a catastrophic effect. That's what central banks are made for: they are lenders of last resort. The problems you are referring to aren't really related to monetary policy itself, but about fiscal policy: when you try solving all problems (namely aggregate demand being too low) with monetary policy alone, you end up in weird places.
  - roenxi 2y ago
    It isn't a terrible currency because of the fixed supply pattern though; it is too volatile because there isn't a consensus on how to price it yet. At some point it'll be more like gold where the value of crypto is obvious and understood. And I think the major problem is it is too risky, a fat-finger mistake can deplete an entire wallet with technically no recourse.
    - littlestymaar 2y ago
      Gold is also a terrible currency in today's world, that's why it has been abandoned by everyone during the last century. Of course bitcoin is broken in many additional ways, but the economics doesn't make sense in the first place. (And it was created and promoted by people who were confident that the Fed's intervention in 2008 was going to trigger hyperinflation, what happened in the following decade should give you a pointer how economically literate these people are).
      - roenxi 2y ago
        > Gold is also a terrible currency in today's world, that's why it has been abandoned by everyone during the last century. Open to question how bad though; there isn't really such a thing as a good currency. If the argument is that the US dollar is the best we have it is a bit of a disaster; it can't even be used to compare values over a 12 month span, the inflation is significant. And as I recall the abandoning done in the US was because because Nixon said the US government wasn't winning the game and flipped the table as opposed to any fair process, vote or even market consensus that gold was a bad idea. I'd agree if the argument was to anchor currency value to an energy commodity to preserve some sort of $/Joule energy measure. That'd be really helpful for using money to track value. I'm still not sure why people are so unhappy at the idea of using money to track some constant amount of value.
        zie 2y ago
        Because when the world blows up, people need someone to step in and get the system going again. If they don't it will take forever to get the economy going again. See the GFC as an example. The US economy was about to implode, but the govt stepped in and said, heck no, not on my watch and fixed it. Instead of taking many many decades to right itself, we did it in 1 and the US govt made a nice profit to boot. A counter point is Japan, they chose not to fix their capital markets and it's 30+yrs later and they finally are getting back on track.
- partitioned 2y ago
  The problem is that there IS competition between central banks. If one country did this, the countries that game'd their currencies would have an advantage.
- bluecalm 2y ago
  You need more money when there is potential for more economic activity. Think about money as centralised IOUs. If 10 farmers want to borrow to buy seeds and fertilizer you need 10 units. If 100 farmers want to do it you need 100 units. Same with the rest economy. You just need some institution which assumes the risk the IOUs are not paid back (cause that would destabilize the system). Those institutions are banks. Limiting amount of money in circulation is just limiting economic activity for no reason and allows rent seeking behaviour of sitting on top of money pile selling to the highest desperate bidder. And yes, system is such that it penalise anyone who tries to preserve wealth in actual cash and that is for very good reason! If you want to preserve wealth - it's easy just buy wealth (stocks, real estate, land). If you want preserving wealth without exposure to asset class fluctuations then you want insurance and in any rational market insurance costs you money. Keeping cash is safe and it costs you - exactly as it should be.
  - mitthrowaway2 2y ago
    The problem with that is that it creates an incentive to hoard real estate for the purpose of wealth preservation, which can have major detrimental effects. Even using stocks for this purpose may cause or exacerbate problems, such as asset bubbles. Why is it preferable for people to hoard land than money? Land is a tangible and productive asset; if I had to choose between the two, I'd rather that it be efficiently allocated than that money were. Only those people who desperately need land, in order to make productive use of it, should have any financial incentive to own it.
    - verall 2y ago
      And this can be solved with real estate taxes - a disincentive from just holding land.
      - radlad 2y ago
        For real estates, but not for other assets classes. Unless you tax the ownership of every asset. That begs the question, is even more regulation really the best solution?
- headcanon 2y ago
  > Basically; at the moment the system is designed to penalise anyone who tries to preserve wealth in actual cash and as collateral damage prices keep eternally climbing. That is a feature of the current monetary system. Excessive inflation is bad, but reasonable inflation is a design goal. Cash isn't meant to be hoarded, its meant to be spent and invested. How would you encourage investment in a non-inflationary currency? Thats the problem with bitcoin, people want to hodl but not spend.
  - s1artibartfast 2y ago
    > How would you encourage investment in a non-inflationary currency? Returns on actually profitable investments would be the motivation. Turn the question around for a minute. Do we want an economy that forces people to make unprofitable investments simply to hedge against inflation? Do we want people to have to gamble or lose their assets?
    - partitioned 2y ago
      It seems to work pretty well
      - s1artibartfast 2y ago
        That's a fair point, things are relatively stable in the US compared to a lot of places. However, it does preclude labor and savings as a path to Financial Security. Your options become Gamble or die poor. If you want to start a family and own a home in midlife, you have to participate in a national pump and dump cycle and come out on top.
        sangnoir 2y ago
        > However, it does preclude labor and savings as a path to Financial Security. Correct. This is an unfortunate fact that most try to sweep under the rug, but when it comes to weighing capital vs labor - the system is exactly what it says on the tin: "Capitalism."
- pjc50 2y ago
  You cannot sensibly target M2 directly. You can target M0, but not M2. The interest rate is an indirect control on M2. (This actually also applies in bitcoin! It's just that because bitcoin credit markets are extremely poorly developed the M2 is both much closer to the M0 and much harder to measure. There are also several completely uncontrolled dollar-flavoured tokens circulating on exchanges such as Tether.) Why can't you control M2? Because issuance of credit is decentralized. The hard money people would like to split out deposit-keeping (which would inevitably have to charge, not pay interest) and lending out (which would have to be limited to the amount of equity available, as it is to e.g. VC funds). This would make business credit, consumer credit, and mortgages much more expensive. > designed to penalise anyone who tries to preserve wealth in actual cash These people are a tiny minority of outliers and trying to force up the cost of credit, on which the real economy runs, to benefit them is pointless. (also, the Japanese system rewarded cash holders! Bank depositors got paid nothing: https://moneykit.net/en/guide/yen/ https://moneykit.net/en/guide/yen/ "As of 20, 3, 2024, the interest on Yen savings account is 0.001%. Interest will be taxed at 20.315%")
- JumpCrisscross 2y ago
  > a policy where either the schedule for monetary creation was publicised several years in advance This is like mandating a city’s thermostat ratings—in degrees on the dial, not temperature—be set months in advance. The source of the variation isn’t the thermostat. It’s the weather. > idea that it is proper to adjust the rate of monetary creation based on the market is suspect It’s possibly the most empirically supported finding in macroeconomics. Fortunately, there is never a shortage of populists or anarchy providing counterexamples. > the system is designed to penalise anyone who tries to preserve wealth in actual cash Yes, we separated the transactional (deposits) and store-of-value (Treasuries) functions of the U.S. dollar decades ago. Storing value in cash is literally using money wrong.
  - roenxi 2y ago
    > It’s possibly the most empirically supported finding in macroeconomics. ... he asserts confidently while providing literally no examples or counterexamples. Or explaining the analogy - I don't adjust my thermostat very often, I know the temperature that I like, so setting it years in advance is feasible although weird. And governments mandating thermostat settings is a value-destructive idea - much like governments mandating that people use a specific currency (the argument there seems to be that it is necessary for the tax system to function, which is fair, but the mandate isn't value-creating). > Yes, we separated the transactional (deposits) and store-of-value (Treasuries) functions of the U.S. dollar decades ago. Storing value in cash is literally using money wrong. "We've implemented this policy on purpose" isn't a valid argument. A year or so ago Sri Lanka implemented a ban on fertiliser. They then had a food crisis because the policy worked as designed. The argument should be "here are the pros, here is the argument/evidence that the pros outweigh the cons". Deliberately doing something stupid just makes it more stupid.
detourdog 2y ago
I think the original comment might be getting at the cultural differences between the US and Japan. It is plausible to me that the group that owns the most Japanese Yen get to set the rate. That group can decide to tread water or start to charging outsiders for use of the capital. Warning the above is wild speculation from a stranger on the internet.
- pjc50 2y ago
  All central banks get to set a "floor" rate by virtue of being a central bank. Commercial banks then charge a "vig" on top of that.

by athrun 2y ago

roenxi 2y ago

I'd prefer to see a policy where either the schedule for monetary creation was publicised several years in advance, or where a constant amount of money in the economy was targeted rather than a specific interest rate (I'd go with the former, it seems harder to game). We've actually got exactly that in Bitcoin which is making it an interesting experiment for me, although it is too cumbersome to act as money we'll get to see how that sort of system performs in a market. The idea that it is proper to adjust the rate of monetary creation based on the market is suspect. It can't create wealth, it can create confusion and is looks suspiciously like a distortion that results in asset owners becoming wealthy at the expense of someone else. Asset prices appear to inflate more in line with the M2 - somewhat faster than the CPI, suggesting that asset owners are getting more benefits from this policy than anyone else. I don't see why they need an extra boost given that they already own productive assets. Basically; at the moment the system is designed to penalise anyone who tries to preserve wealth in actual cash and as collateral damage prices keep eternally climbing. Neither of those things is helpful and if anything it just makes it harder for people to make rational decisions. It is confusing policy with no theoretical upside that has been drawn to my attention.

littlestymaar 2y ago
Well, bitcoin shows you exactly what to expect in such a situation: it makes a terrible currency that nobody ever wants to spend. I know many people are convinced that the value of money comes from its scarcity, but it's actually a very limited view: An even more important characteristic of money is that it must be abundant enough. That's why humanity spent most of history using gold and silver as support for value and not diamond and platinum. That's the neat part with credit-based money: it's generally produced in just the amount you need for the economy. But another problem arise in case of financial crisis: banks can run out of liquidity if other banks refuse to lend them, and it has a catastrophic effect. That's what central banks are made for: they are lenders of last resort. The problems you are referring to aren't really related to monetary policy itself, but about fiscal policy: when you try solving all problems (namely aggregate demand being too low) with monetary policy alone, you end up in weird places.
- roenxi 2y ago
  It isn't a terrible currency because of the fixed supply pattern though; it is too volatile because there isn't a consensus on how to price it yet. At some point it'll be more like gold where the value of crypto is obvious and understood. And I think the major problem is it is too risky, a fat-finger mistake can deplete an entire wallet with technically no recourse.
  - littlestymaar 2y ago
    Gold is also a terrible currency in today's world, that's why it has been abandoned by everyone during the last century. Of course bitcoin is broken in many additional ways, but the economics doesn't make sense in the first place. (And it was created and promoted by people who were confident that the Fed's intervention in 2008 was going to trigger hyperinflation, what happened in the following decade should give you a pointer how economically literate these people are).
    - roenxi 2y ago
      > Gold is also a terrible currency in today's world, that's why it has been abandoned by everyone during the last century. Open to question how bad though; there isn't really such a thing as a good currency. If the argument is that the US dollar is the best we have it is a bit of a disaster; it can't even be used to compare values over a 12 month span, the inflation is significant. And as I recall the abandoning done in the US was because because Nixon said the US government wasn't winning the game and flipped the table as opposed to any fair process, vote or even market consensus that gold was a bad idea. I'd agree if the argument was to anchor currency value to an energy commodity to preserve some sort of $/Joule energy measure. That'd be really helpful for using money to track value. I'm still not sure why people are so unhappy at the idea of using money to track some constant amount of value.
      - zie 2y ago
        Because when the world blows up, people need someone to step in and get the system going again. If they don't it will take forever to get the economy going again. See the GFC as an example. The US economy was about to implode, but the govt stepped in and said, heck no, not on my watch and fixed it. Instead of taking many many decades to right itself, we did it in 1 and the US govt made a nice profit to boot. A counter point is Japan, they chose not to fix their capital markets and it's 30+yrs later and they finally are getting back on track.
partitioned 2y ago
The problem is that there IS competition between central banks. If one country did this, the countries that game'd their currencies would have an advantage.
bluecalm 2y ago
You need more money when there is potential for more economic activity. Think about money as centralised IOUs. If 10 farmers want to borrow to buy seeds and fertilizer you need 10 units. If 100 farmers want to do it you need 100 units. Same with the rest economy. You just need some institution which assumes the risk the IOUs are not paid back (cause that would destabilize the system). Those institutions are banks. Limiting amount of money in circulation is just limiting economic activity for no reason and allows rent seeking behaviour of sitting on top of money pile selling to the highest desperate bidder. And yes, system is such that it penalise anyone who tries to preserve wealth in actual cash and that is for very good reason! If you want to preserve wealth - it's easy just buy wealth (stocks, real estate, land). If you want preserving wealth without exposure to asset class fluctuations then you want insurance and in any rational market insurance costs you money. Keeping cash is safe and it costs you - exactly as it should be.
- mitthrowaway2 2y ago
  The problem with that is that it creates an incentive to hoard real estate for the purpose of wealth preservation, which can have major detrimental effects. Even using stocks for this purpose may cause or exacerbate problems, such as asset bubbles. Why is it preferable for people to hoard land than money? Land is a tangible and productive asset; if I had to choose between the two, I'd rather that it be efficiently allocated than that money were. Only those people who desperately need land, in order to make productive use of it, should have any financial incentive to own it.
  - verall 2y ago
    And this can be solved with real estate taxes - a disincentive from just holding land.
    - radlad 2y ago
      For real estates, but not for other assets classes. Unless you tax the ownership of every asset. That begs the question, is even more regulation really the best solution?
headcanon 2y ago
> Basically; at the moment the system is designed to penalise anyone who tries to preserve wealth in actual cash and as collateral damage prices keep eternally climbing. That is a feature of the current monetary system. Excessive inflation is bad, but reasonable inflation is a design goal. Cash isn't meant to be hoarded, its meant to be spent and invested. How would you encourage investment in a non-inflationary currency? Thats the problem with bitcoin, people want to hodl but not spend.
- s1artibartfast 2y ago
  > How would you encourage investment in a non-inflationary currency? Returns on actually profitable investments would be the motivation. Turn the question around for a minute. Do we want an economy that forces people to make unprofitable investments simply to hedge against inflation? Do we want people to have to gamble or lose their assets?
  - partitioned 2y ago
    It seems to work pretty well
    - s1artibartfast 2y ago
      That's a fair point, things are relatively stable in the US compared to a lot of places. However, it does preclude labor and savings as a path to Financial Security. Your options become Gamble or die poor. If you want to start a family and own a home in midlife, you have to participate in a national pump and dump cycle and come out on top.
      - sangnoir 2y ago
        > However, it does preclude labor and savings as a path to Financial Security. Correct. This is an unfortunate fact that most try to sweep under the rug, but when it comes to weighing capital vs labor - the system is exactly what it says on the tin: "Capitalism."
pjc50 2y ago
You cannot sensibly target M2 directly. You can target M0, but not M2. The interest rate is an indirect control on M2. (This actually also applies in bitcoin! It's just that because bitcoin credit markets are extremely poorly developed the M2 is both much closer to the M0 and much harder to measure. There are also several completely uncontrolled dollar-flavoured tokens circulating on exchanges such as Tether.) Why can't you control M2? Because issuance of credit is decentralized. The hard money people would like to split out deposit-keeping (which would inevitably have to charge, not pay interest) and lending out (which would have to be limited to the amount of equity available, as it is to e.g. VC funds). This would make business credit, consumer credit, and mortgages much more expensive. > designed to penalise anyone who tries to preserve wealth in actual cash These people are a tiny minority of outliers and trying to force up the cost of credit, on which the real economy runs, to benefit them is pointless. (also, the Japanese system rewarded cash holders! Bank depositors got paid nothing: https://moneykit.net/en/guide/yen/ https://moneykit.net/en/guide/yen/ "As of 20, 3, 2024, the interest on Yen savings account is 0.001%. Interest will be taxed at 20.315%")
JumpCrisscross 2y ago
> a policy where either the schedule for monetary creation was publicised several years in advance This is like mandating a city’s thermostat ratings—in degrees on the dial, not temperature—be set months in advance. The source of the variation isn’t the thermostat. It’s the weather. > idea that it is proper to adjust the rate of monetary creation based on the market is suspect It’s possibly the most empirically supported finding in macroeconomics. Fortunately, there is never a shortage of populists or anarchy providing counterexamples. > the system is designed to penalise anyone who tries to preserve wealth in actual cash Yes, we separated the transactional (deposits) and store-of-value (Treasuries) functions of the U.S. dollar decades ago. Storing value in cash is literally using money wrong.
- roenxi 2y ago
  > It’s possibly the most empirically supported finding in macroeconomics. ... he asserts confidently while providing literally no examples or counterexamples. Or explaining the analogy - I don't adjust my thermostat very often, I know the temperature that I like, so setting it years in advance is feasible although weird. And governments mandating thermostat settings is a value-destructive idea - much like governments mandating that people use a specific currency (the argument there seems to be that it is necessary for the tax system to function, which is fair, but the mandate isn't value-creating). > Yes, we separated the transactional (deposits) and store-of-value (Treasuries) functions of the U.S. dollar decades ago. Storing value in cash is literally using money wrong. "We've implemented this policy on purpose" isn't a valid argument. A year or so ago Sri Lanka implemented a ban on fertiliser. They then had a food crisis because the policy worked as designed. The argument should be "here are the pros, here is the argument/evidence that the pros outweigh the cons". Deliberately doing something stupid just makes it more stupid.

detourdog 2y ago

I think the original comment might be getting at the cultural differences between the US and Japan. It is plausible to me that the group that owns the most Japanese Yen get to set the rate. That group can decide to tread water or start to charging outsiders for use of the capital. Warning the above is wild speculation from a stranger on the internet.

pjc50 2y ago
All central banks get to set a "floor" rate by virtue of being a central bank. Commercial banks then charge a "vig" on top of that.