A short video from Ray Dalio: How the Economic Machine Works

[The-Shoveler]

Actually moderate wage inflation helps workers with debts.

Fixed income not so much.

[FlyerInHi]

[quote=CA renter]
It’s okay to print money, but if the printing occurs in the way it does in the video, it does not reduce the overall debt burden because the Fed is buying new government debt, so for every dollar that the Fed is printing to buy govt debt, the govt increases its debt burden by one dollar (plus interest!). IMHO, this money printing must be offset by higher taxes on those who are most able to afford it; otherwise, the debt will increase at a faster rate. Of course, there are multipliers and fractional reserve lending; but for every dollar additional lent, there is less and less “real” money to back it up.[/quote]

Another thing. Can you please clarify here?

My understanding is that the Federal Reserve cannot buy directly from the Treasury.

The Fed buys bonds in the open market from holders who have invested their savings into bonds. The Fed pays a little bit of a premium so savers are willing to trade their bonds for cash. That results in more cash into the economy.

[CA renter]

[quote=FlyerInHi][quote=CA renter]
By allowing defaults to occur, asset prices tend to go down faster than wages, so workers and others on fixed incomes (the vast majority of those in the bottom half of the economy) gain purchasing power at the expense of the very wealthy. This shrinks the wealth/income gap while also reducing the debt burden of those who tend to have the most debt (relative to income).
[/quote]

Interesting long post. I don’t quite follow all the points you’ve made, but I’ll pick one.

On this one argument you made, is that just theoretical or can you show where it’s happened before.

You’re assuming debt goes away but assets remain with the borrower? The poor to average person has auto loans, a mortgage and some unsecured consumer debt.

How does default help people if they lose their cars and their houses?

Aren’t people at the bottom more likely to get laid off in a recession?[/quote]

Assets used as collateral for large loans will be forfeited, obviously. But, in most cases, this still leaves the borrower in a better position WRT net worth because the assets will usually be worth less than the forgiven loans. The belief that they ever “owned” the car or home was a false assumption. What they owned was an asset with negative value. Of course, this is why debt, even for large purchases, should be kept to the lowest possible amount.

Don’t discount the importance of being able to walk away from consumer loans. In many cases, this can amount to tens of thousands of dollars for these borrowers (sometimes, more). Again, their net worth increases drastically as a result of default/BK.

As far as layoffs hitting the poor more than the rich, I think that depends on other issues like globalization, mechanization, etc. In some cases, well-paid consultants, middle managers, and above can easily be laid off, while the workers are still necessary to run the business effectively.

You can also have asset price deflation without too much of an effect on the prices of other goods **if speculation exists in some asset markets, but not in the markets for the goods/services in question.** Bubbles and bursts are almost always due to speculation. Organic/real demand remains fairly constant for basic goods and services, and if speculation is absent, there will be a floor on prices in that market, so wages for those workers will remain relatively stable.

And the stickiness of wages…

——–

Definition of ‘Sticky Wage Theory’
An economic hypothesis that the pay of employed workers tends to respond slowly to the changes in a company’s or the broader economy’s performance. When unemployment rises, the wages of those workers that remain employed tend to stay the same or grow at a slower rate than before rather than falling with the decrease in demand for labor. Specifically, wages are said to be “sticky-down” since they can move up easily but move down only with difficulty.

http://www.investopedia.com/terms/s/sticky-wage-theory.asp

———–

Some Evidence on the Importance of Sticky Wages
Alessandro Barattieri, Susanto Basu, Peter Gottschalk

NBER Working Paper No. 16130
Issued in June 2010
NBER Program(s): EFG LS ME

Nominal wage stickiness is an important component of recent medium-scale structural macroeconomic models, but to date there has been little microeconomic evidence supporting the assumption of sluggish nominal wage adjustment. We present evidence on the frequency of nominal wage adjustment using data from the Survey of Income and Program Participation (SIPP) for the period 1996-1999. The SIPP provides high-frequency information on wages, employment and demographic characteristics for a large and representative sample of the US population.

The main results of the analysis are as follows. 1) After correcting for measurement error, wages appear to be very sticky. In the average quarter, the probability that an individual will experience a nominal wage change is between 5 and 18 percent, depending on the samples and assumptions used. 2) The frequency of wage adjustment does not display significant seasonal patterns. 3) There is little heterogeneity in the frequency of wage adjustment across industries and occupations. 4) The hazard of a nominal wage change first increases and then decreases, with a peak at 12 months. 5) The probability of a wage change is positively correlated with the unemployment rate and with the consumer price inflation rate.

http://www.nber.org/papers/w16130

[CA renter]

[quote=The-Shoveler]Actually moderate wage inflation helps workers with debts.

Fixed income not so much.[/quote]

There has been no wage inflation. Cost inflation, absent wage inflation, hurts all people on fixed incomes…including workers, who tend to be on relatively fixed incomes. Not all “inflation” is the same — some types of inflation are very dangerous, while other types of inflation are more neutral or beneficial. The type of inflation we’ve seen in the past couple of decades has been very negative for workers.

[The-Shoveler]

patience, its coming.

[CA renter]

[quote=FlyerInHi][quote=CA renter]
It’s okay to print money, but if the printing occurs in the way it does in the video, it does not reduce the overall debt burden because the Fed is buying new government debt, so for every dollar that the Fed is printing to buy govt debt, the govt increases its debt burden by one dollar (plus interest!). IMHO, this money printing must be offset by higher taxes on those who are most able to afford it; otherwise, the debt will increase at a faster rate. Of course, there are multipliers and fractional reserve lending; but for every dollar additional lent, there is less and less “real” money to back it up.[/quote]

Another thing. Can you please clarify here?

My understanding is that the Federal Reserve cannot buy directly from the Treasury.

The Fed buys bonds in the open market from holders who have invested their savings into bonds. The Fed pays a little bit of a premium so savers are willing to trade their bonds for cash. That results in more cash into the economy.[/quote]

Correct, the Federal Reserve uses the primary dealers as middlemen. It is still creating a market for Treasuries so that the government can issue more (new) Treasuries. The process is indirect, but the Fed is buying Treasuries and “printing” money. Ray Dalio was simplifying things in this video, and I was going along with his simplified explanation.

[CA renter]

[quote=The-Shoveler]patience, its coming.[/quote]

From your lips…

Wish I could be as optimistic as you are.

[FlyerInHi]

CAr, how does your deflation part relate to the reflation part in the video?

If you don’t print money, and you keep on contracting credit, how does the economy recover?

[CA renter]

[quote=FlyerInHi]CAr, how does your deflation part relate to the reflation part in the video?

If you don’t print money, and you keep on contracting credit, how does the economy recover?[/quote]

It’s not so much about the pros and cons of printing money as it is about how the printed money is spent. I don’t think that ever-increasing asset prices are an inherently good thing — it depends very much on how assets are allocated in an economy.

I also don’t think that “growth for the sake of growth” is a good thing. IMHO, you can have no growth, but a fully functioning and sustainable economy. You can also have “growth” in an economy where assets and resources are allocated in a very undesirable and unsustainable way…a way that will ending up causing much more damage than whatever good that “growth” caused on the upside.

If you allow a bubble to fully deflate*, I think the economy can get to a point where prices, incomes, debt burdens, and wage/income gaps reach sustainable levels…and this can lead to real, healthy growth.

*When I say that bubbles should fully deflate, that does not necessarily mean that money printing can’t happen at the same time. In an ideal scenario, the printed money goes toward productive investments like infrastructure and R&D that will offer long-term social and economic benefits that will enable truly productive growth to thrive going forward. Asset price (re)-inflation should never be the policy goal when the economy is repairing itself (deflating) from the misallocation of capital.

Also, if the money printing happens the way it does in the video (primarily buying Treasuries), taxes should be increased (preferably on profits from speculation) to offset the additional debt that is being taken on by the government, IMO.

Finally, taxes on speculative trading should NEVER be lower than taxes on productivity/labor. That is one of the most insane tax policies out there.

[patb]

never said that,

[patb]

where i thought the video was deficient is it doesn’t discuss trade deficits.

it’s assuming a closed economy which is true enough for what it says
but it misses what happens when you run big deficits.

say you buy a trillion a year in arab oil, well, if you don’t sell
them finished goods (Jets), then you are sending them cash and either
creating deflation here, or borrowing from them, and paying rents.

[CafeMoto]

found the video’s high level overview interesting, even reassuring. To learn printing money has an intended beneficial effect vs just kicking our problems down the road. Short term and long term cycles with recovery strategies explained. This was worthy of sharing and appreciated for what it is. Thank you davelj.

[Author]

Posts