58 sats \ 22 replies \ @kepford 21 Aug \ parent \ on: Donald Trump Does Not Know the "Correct" Interest Rate econ
Don't ask me.
The Fed claims they have a dual mandate. Full employment and stable prices.
Interest rates are simply the lever they use. Not the point.
Sounds like communism to me ;)
The dual mandate is fabricated. The primary and only goal is price stability.
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So one thing to consider here is that price stability and employment levels are tied. Put another way, employment compensation is very tied to prices. They don't overtly say they are trying to keep wages down but they are. Just as they don't say they are trying to incite a recession but they are. Or at least a mild one.
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Good call about employee compensation which is not the same as 'full employment'.
Full employment is about getting the unemployment rate under 3 percent. The benchmark in 1997 was 5 percent.
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They say full employment for marketing reasons but its more about the cost of employment. If the econ gets to hot certain skilled workers start getting paid a lot more and that drives up prices. I've enjoyed being on the receiving end of that a few times.
Honestly, I am impressed with the Fed in many ways. But even with the smartest people in the world you can't really replicate the free market hive mind that sets market prices.
Its like having an AI that has access to all the data in the world and has sensors everywhere. There are so many feedback loops we can't even account for them all. The invisible hand is really underselling the pricing system.
And this applies to money or the cost of money as well as other goods.
But I better stop or I will get something wrong and Dr @Undisciplined will have to correct me.
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One addition, and I know you know it, but it's the reason none of this central planning stuff can ever even hypothetically work: the market has access to data that is fundamentally unknowable outside of the individual.
Our subjective preferences are not even comparable interpersonally, much less quantifiable by some group of Fed nerds, and yet, through the near magic of market forces, the result is an efficient allocation of resources.
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Yep, exactly.
Here's another wrinkle. Often we may not even be aware of what we want ourselves... until we are presented with a choice. Our human action often conflicts with what we SAY we want, believe, or value.
So even if you could ask people... you would get it wrong. We have many examples of this in the business and marketing world.
The more I got into Austrian economics the more it just seemed logical and even humble to me. I never really found traditional economics that I learned in college logical. I mean the math was but the concepts seemed odd. At the time I just assumed I wasn't smart enough or interested enough to get it.
Reading Rothbard and listening to Ron Paul, Tom Woods, and Bob Murphy really opened my mind to how things work in free markets. It all kinda fell into place for me in my mind at least.
I'm sure there are many discoveries to be made in economics and I suspect there are mistakes in these theories but the bones seem very solid to me.
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The cheap-talk point is really important. Most of the difficulty in designing economic experiments revolves around eliciting true preferences. Well designed experiments often have entirely different results to surveys that just ask what people believe about themselves.
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1999 was a good year for 'skilled workers' in a 'tight labor market'.
Cost of employment makes more sense as it pertains to wage and price
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I think those goals are real actually. If your think about it, it makes sense. They don't want unemployment to hi or the plebs get restless. If prices rise to high to fast you have the same problem.
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From 1979 to 1983, unemployment, interest rate and inflation were in double digits. Ergo, high unemployment is caused by high interest rates.
Then in the 1990s, the Fed response to a 'smaller deficit' or a 'surplus' was lower interest rates (and a crazy stock market, irrational exuberance).
Another sign of fragility
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Setting interest rates is part of monetary policy but it shouldn't be the bedrock of economic activity
Something changed after 1995 and then another big change in response to the 2008 financial crisis
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The price of money should be determined on the market. Monetary policy is commie BS.
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Is Libor determined by market or political forces?
Treasury yields are set by daily or weekly treasury auctions. What interest rate will you lend to US govt?
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I forgot Libor disappeared and was replaced by:
SOFR is based on transactions in the Treasury repurchase market and is preferable to LIBOR since it is based on data from observable transactions rather than estimated future borrowing rates.
I think Libor is political, but I'd have to double check.
I would not lend to the US government, so I'm the wrong person to ask. My preference would be that nobody lend to them.