Sustainable money?
Just some silly little thoughts on rates of growth
The governor suggests that we're best off borrowing large amounts of money now to construct new roads and upgrades and that we're better off than taxing now and investing in projects more gradually as we can pay for them. The logic is that the costs of construction are increasing 10+% per year, so waiting will cost us more than borrowing.
It's a persuasive argument if it was true. HOWEVER I must wonder what these extrapolations mean. Do we expect costs to continue increasing 10% per year for a long time? What's the cause of these increases?
And of course the final question is assuming you believe costs will continue to increase like this, how will we be able to afford the "next generation" of construction?
I could take property values as a parallel. My house was assessed at $79,700 in 1999, and $160,600 in 2006. That's an average increase of 10.5%/year. A pretty good investment when you on the right side of the appreciation! (And on relatively low (claimed) inflation at average 2.7% inflation by CPI.)
On the housing front, it is a strange thing what CPI means. If housing costs are increasing 10% per year, is that included in the CPI? And same thing on road construction. If it's really increasing 10%/year, then the cost of government would appear to be increasing. And health care costs as well!
Back to the road construction, perhaps things will "level out", like housing values are assumed to be doing, we'll hope that an expensive period is ahead and we're saving money by borrowing now at low interest and gaining benefits later by cost savings.
However unless we know the cause of price increases, how can we reall guess if things will "level out" or whatever. It is true in times of high inflation (and price increases ARE inflation whether they are being measured or not), then borrowing at a fixed rate may be better for borrowers, but of course WORSE for lenders. Why would I want to lend my money out if I know that inflation will possibly reverse my returns to negative!
It is hard to see overall what's the real dynamics. I still think the whole system is just being artificially manipulated by the Federal Reserve to HIDE economic weakness and risk, creating artificial incentices for lenders to keep expanding the economy, like flying a kite, letting out more and more string as the wind allows, without making the kite lose altitude. Perhaps a kite is a good analogy of the economy of growth. As long as there's energy (wind - fossil fuels) to fuel new growth, the money system can keep expanding.
I'm sure I'm in the dark over how the economy "really works", so I'm just trying to imagine something, even if too simplistic and perhaps fully wrong.
If my house is worth $80k in 1999, and $160k in 2006, THEN I have equity to borrow a net new $80k from no actual new asset. If I want to borrow this money SOMEONE has to HAVE the money to loan me. If the currency was fixed, people like me couldn't borrow new money on our pretend new wealth. So the government MUST print new money. How does that money get circulated? The government "lends" the money out at some rate of interest. If the rate is low enough, banks will take on that interest and borrow money from the government. Then it'll loan that money to people like me at a bit higher interest rate. THEN I'll pay interest to the bank and the bank pays interest to the government, and eventually the government money is repaid and the bank is a little richer, and I'm a little poorer BUT with a debt-free house worth a lot of money. That's happy land perhaps.
So the Federal Reserve apparently does this by setting rates on borrowing. The rate fell down near 0.5% for a while, and now is up around 4.5%. So previously with such a low rate (below inflation!), banks had a high incentive to borrow money and convince consumers to borrow as well. Many people refinanced their homes, consolidated credit card debt, all that, to create new short term money for spending, thus increasing the demand for products and services and driving the economy. I'm not sure at all what the terms for the Fed Reserve loans would be, but I expect they are fixed term loans, and perhaps on the longer term, like 5 years, who knows?
Anyway, now the federal reserve has raised the rate so banks have a lower incentive to borrow money. The Fed Reserve might think the kite string has been let out enough and now the expanded money supply must grow the economy (raise the kite). If there's high-yield investments, banks can still borrow more.
If this is true, then at any point in time, the federal reserve holds a "gross debt" - amount of borrowed money that must be paid back over time by banks. If the loan rate is below the inflation rate, then even modest investments (like home mortgages) can be good for banks.
So when I wonder "Who's loaning me money at 4.75% for my mortgage when they could be making 10% on the stock market?" the answer is ultimately the federal reserve. Banks take "cheap money" from the government and subsidize cheap loans, while private investors want a better return.
I'm SURE there's something profound here I'm missing or not fully connecting. Just because it seems like too much magic.
I would think, by my Fed.Reserve model, that the amount of money loaned out just keeps increasing year by year, at least in times of economic growth. The system MIGHT make sense in the idea of "real value". If I spend $100k to build a house I can sell for $200k, then I've increased the wealth of the nation by $100k, so it makes sense perhaps for more money to be circulated.
However if I buy a house at $100k, and sell it at $200k, that's just inflation. I mean it is a "local inflation" which proportionally increases the global inflation. (If EVERYTHING doubles in value, then money is worth half what it was before.)
If I hold an asset (like a stash of cash) for 50 years, there'll be no increase in value (from investing), but the buying power of the bills will be worth much less. So holding cash is obviously a BAD investment, except perhaps for a secure balance on operating and emergency funds.
Myself I'm allergic to holding debt, even low interest mortgage debt. I'd rather be frugal now as I can, maximize my repayment, and then have more money available later because I'll have skipped all the extra interest payments. The argument is sound, except for the argument that I ought to take a fixed-rate mortgage and then invest extra income to stocks and such, and "on average" I'll be wealthier in the end. For me it's a poor trade off - to depend on decisions of others to make me money while I have a sure thing on cutting my mortgage interest.
If EVERYONE was like me, even if proportionally to their discretionary funds, then people would be saving HUGE amounts into their homes, and banks would be getting back too much money that they would have no use for. They'd slow borrowing new money from the federal reserve, and the money system would naturally shrink, although who knows what inflation or values would do.
In contrast, if EVERYONE was UNLIKE me, they'd keep refinancing mortgages on increased values and invest in new construction/production (additions, cabins, boats, cars, etc) and economic activity would increase and debt would increase.
In reality not everyone is doing the same thing. Ideally in everyone's life, there's a time for taking on debt, and a time for paying it down, and then there's a generation of older people who have their wealth invested in places that younger people can borrow. The young people pay off their debt as they are able, and then accumulate new wealth they can invest in the next generation.
Well, I'm lost as ever, still not really closer to imagining how things work. I basically accept the belief that the economy can keep growing as long as energy consumption grows, and when we hit physical limits on available energy, that our system as it runs now will have to change. I just can't tell how it might change. I suspect collective debt loads now are overwhelming under any sort of economic downturn.
BUT what can the government do? I mean better than from the great depression? Economists like to say that Roosevelt did it all wrong and slowed down the economic recovery. I don't know. I certainly accept there's a "new theory" of some sort that keeps the economy growing at an optimal rate, like my kite analogy. I just don't know what "controls" this theory has. When the kite goes into freefall (perhaps the wind suddenly reverses direction), the economy MUST collapse in a hurry to prevent inflation, OR perhaps inflation IS the tool for contraction, and the government can only optimize it to a minimum under any conditions.
If inflation is the real danger, then those with fixed-rate loans (and continued income) are best off and those LOANING money at a fixed rate will lose out. Those with revolving debt will be worst off. I would imagine economic down turn means a sudden reduction in funds for purchases. It would seem actually that economic downturn will at least initially cause prices to fall as inventories exceed demand - i.e. deflation. Deflation is BAD because it encourages people to hold on to their money and causes further deflation at least until the economy can adjust, and adjust means cutting jobs, and shrinking the economy further, which is doubly bad for people in debt!
SO at least I see "inflation" is the force that encourages people with money to spend or invest it. The higher the inflation, the greater the incentive.
I would think as a country we need at least a slightly positive savings balance, but if economic downturn was no threat, savings COSTS money. Well given a 0.55% savings return (for 5k-10k) from the 4th quarter of 2005 with a 3.4% CPI increase in 2005, means my "free savings" is a solid net loss, except for flexibility for emergency funds.
The system is nudging me to "take a chance" and invest my money to a higher return. WELL, looking at the credit union website, 5.0% is the top return for a 4-year CD, or an IRA.
If I withdraw early, last I remember, it costs 60 days interest. So for $10k, that's $500 return per year, and a $83 early withdrawal fee. In contrast $10k in my 0.55% saving account returns $55/year with no withdrawal fee. So as long as I kept my CD/Roth investment for at least 4 months, I'll be ahead in the penalty cost.
HOWEVER if I knew I'd never need the money, I'm just as well to pay down my mortgage with this imagined $10k, and I'll save $475 in interest costs, even if lose a bit of tax deduction, but I also pay income taxes on interest as well! Admittingly this is the least desirable choice since I lose access to the money completely, except if I get a new loan or sell my house.
Ah, I know my little money games are peanuts in the extreme. Ultimately I don't care about $500 interest except if I was sure I didn't want to spend/invest the money. As-is, I rather like having savings if I lost my job, I can still make minimum payments and live comfortably 6 months while I scope out my choices. That's worth a $500 insurance, even if I've proved I'm still better off with the penalty model IF I expected under conditions I won't need it.
I SHOULD just be grateful for a mortgage loan, which is a darn good deal to expand my freedom of choice. I don't believe capitalism itself would support low interest long term mortgages, so I imagine under a time of economic contraction, housing costs will simply be unattainable for many people, if not almost already. What do I want to do with this freedom? Definitely NOT increase for wealth, just can't do it.
The only questionable investments I have aree for things that can decrease my cost of living in the future - like improved insulation, windows, or even renewable energy like solar or wind. Those seem like worthy investments, PROBABLY NOT, if you imagine smooth sailing, but a good bet if you project ever increasing energy costs. And if I had a debt-free house, properly attired in the best cost saving measures, then local community businesses, and perhaps community supported agriculture farms.
Well, more than enough nonsense, so I'll stop. I'll have to do some real reading on the Federal Reserve to see how my guesses are!
The governor suggests that we're best off borrowing large amounts of money now to construct new roads and upgrades and that we're better off than taxing now and investing in projects more gradually as we can pay for them. The logic is that the costs of construction are increasing 10+% per year, so waiting will cost us more than borrowing.
It's a persuasive argument if it was true. HOWEVER I must wonder what these extrapolations mean. Do we expect costs to continue increasing 10% per year for a long time? What's the cause of these increases?
And of course the final question is assuming you believe costs will continue to increase like this, how will we be able to afford the "next generation" of construction?
I could take property values as a parallel. My house was assessed at $79,700 in 1999, and $160,600 in 2006. That's an average increase of 10.5%/year. A pretty good investment when you on the right side of the appreciation! (And on relatively low (claimed) inflation at average 2.7% inflation by CPI.)
On the housing front, it is a strange thing what CPI means. If housing costs are increasing 10% per year, is that included in the CPI? And same thing on road construction. If it's really increasing 10%/year, then the cost of government would appear to be increasing. And health care costs as well!
Back to the road construction, perhaps things will "level out", like housing values are assumed to be doing, we'll hope that an expensive period is ahead and we're saving money by borrowing now at low interest and gaining benefits later by cost savings.
However unless we know the cause of price increases, how can we reall guess if things will "level out" or whatever. It is true in times of high inflation (and price increases ARE inflation whether they are being measured or not), then borrowing at a fixed rate may be better for borrowers, but of course WORSE for lenders. Why would I want to lend my money out if I know that inflation will possibly reverse my returns to negative!
It is hard to see overall what's the real dynamics. I still think the whole system is just being artificially manipulated by the Federal Reserve to HIDE economic weakness and risk, creating artificial incentices for lenders to keep expanding the economy, like flying a kite, letting out more and more string as the wind allows, without making the kite lose altitude. Perhaps a kite is a good analogy of the economy of growth. As long as there's energy (wind - fossil fuels) to fuel new growth, the money system can keep expanding.
I'm sure I'm in the dark over how the economy "really works", so I'm just trying to imagine something, even if too simplistic and perhaps fully wrong.
If my house is worth $80k in 1999, and $160k in 2006, THEN I have equity to borrow a net new $80k from no actual new asset. If I want to borrow this money SOMEONE has to HAVE the money to loan me. If the currency was fixed, people like me couldn't borrow new money on our pretend new wealth. So the government MUST print new money. How does that money get circulated? The government "lends" the money out at some rate of interest. If the rate is low enough, banks will take on that interest and borrow money from the government. Then it'll loan that money to people like me at a bit higher interest rate. THEN I'll pay interest to the bank and the bank pays interest to the government, and eventually the government money is repaid and the bank is a little richer, and I'm a little poorer BUT with a debt-free house worth a lot of money. That's happy land perhaps.
So the Federal Reserve apparently does this by setting rates on borrowing. The rate fell down near 0.5% for a while, and now is up around 4.5%. So previously with such a low rate (below inflation!), banks had a high incentive to borrow money and convince consumers to borrow as well. Many people refinanced their homes, consolidated credit card debt, all that, to create new short term money for spending, thus increasing the demand for products and services and driving the economy. I'm not sure at all what the terms for the Fed Reserve loans would be, but I expect they are fixed term loans, and perhaps on the longer term, like 5 years, who knows?
Anyway, now the federal reserve has raised the rate so banks have a lower incentive to borrow money. The Fed Reserve might think the kite string has been let out enough and now the expanded money supply must grow the economy (raise the kite). If there's high-yield investments, banks can still borrow more.
If this is true, then at any point in time, the federal reserve holds a "gross debt" - amount of borrowed money that must be paid back over time by banks. If the loan rate is below the inflation rate, then even modest investments (like home mortgages) can be good for banks.
So when I wonder "Who's loaning me money at 4.75% for my mortgage when they could be making 10% on the stock market?" the answer is ultimately the federal reserve. Banks take "cheap money" from the government and subsidize cheap loans, while private investors want a better return.
I'm SURE there's something profound here I'm missing or not fully connecting. Just because it seems like too much magic.
I would think, by my Fed.Reserve model, that the amount of money loaned out just keeps increasing year by year, at least in times of economic growth. The system MIGHT make sense in the idea of "real value". If I spend $100k to build a house I can sell for $200k, then I've increased the wealth of the nation by $100k, so it makes sense perhaps for more money to be circulated.
However if I buy a house at $100k, and sell it at $200k, that's just inflation. I mean it is a "local inflation" which proportionally increases the global inflation. (If EVERYTHING doubles in value, then money is worth half what it was before.)
If I hold an asset (like a stash of cash) for 50 years, there'll be no increase in value (from investing), but the buying power of the bills will be worth much less. So holding cash is obviously a BAD investment, except perhaps for a secure balance on operating and emergency funds.
Myself I'm allergic to holding debt, even low interest mortgage debt. I'd rather be frugal now as I can, maximize my repayment, and then have more money available later because I'll have skipped all the extra interest payments. The argument is sound, except for the argument that I ought to take a fixed-rate mortgage and then invest extra income to stocks and such, and "on average" I'll be wealthier in the end. For me it's a poor trade off - to depend on decisions of others to make me money while I have a sure thing on cutting my mortgage interest.
If EVERYONE was like me, even if proportionally to their discretionary funds, then people would be saving HUGE amounts into their homes, and banks would be getting back too much money that they would have no use for. They'd slow borrowing new money from the federal reserve, and the money system would naturally shrink, although who knows what inflation or values would do.
In contrast, if EVERYONE was UNLIKE me, they'd keep refinancing mortgages on increased values and invest in new construction/production (additions, cabins, boats, cars, etc) and economic activity would increase and debt would increase.
In reality not everyone is doing the same thing. Ideally in everyone's life, there's a time for taking on debt, and a time for paying it down, and then there's a generation of older people who have their wealth invested in places that younger people can borrow. The young people pay off their debt as they are able, and then accumulate new wealth they can invest in the next generation.
Well, I'm lost as ever, still not really closer to imagining how things work. I basically accept the belief that the economy can keep growing as long as energy consumption grows, and when we hit physical limits on available energy, that our system as it runs now will have to change. I just can't tell how it might change. I suspect collective debt loads now are overwhelming under any sort of economic downturn.
BUT what can the government do? I mean better than from the great depression? Economists like to say that Roosevelt did it all wrong and slowed down the economic recovery. I don't know. I certainly accept there's a "new theory" of some sort that keeps the economy growing at an optimal rate, like my kite analogy. I just don't know what "controls" this theory has. When the kite goes into freefall (perhaps the wind suddenly reverses direction), the economy MUST collapse in a hurry to prevent inflation, OR perhaps inflation IS the tool for contraction, and the government can only optimize it to a minimum under any conditions.
If inflation is the real danger, then those with fixed-rate loans (and continued income) are best off and those LOANING money at a fixed rate will lose out. Those with revolving debt will be worst off. I would imagine economic down turn means a sudden reduction in funds for purchases. It would seem actually that economic downturn will at least initially cause prices to fall as inventories exceed demand - i.e. deflation. Deflation is BAD because it encourages people to hold on to their money and causes further deflation at least until the economy can adjust, and adjust means cutting jobs, and shrinking the economy further, which is doubly bad for people in debt!
SO at least I see "inflation" is the force that encourages people with money to spend or invest it. The higher the inflation, the greater the incentive.
I would think as a country we need at least a slightly positive savings balance, but if economic downturn was no threat, savings COSTS money. Well given a 0.55% savings return (for 5k-10k) from the 4th quarter of 2005 with a 3.4% CPI increase in 2005, means my "free savings" is a solid net loss, except for flexibility for emergency funds.
The system is nudging me to "take a chance" and invest my money to a higher return. WELL, looking at the credit union website, 5.0% is the top return for a 4-year CD, or an IRA.
If I withdraw early, last I remember, it costs 60 days interest. So for $10k, that's $500 return per year, and a $83 early withdrawal fee. In contrast $10k in my 0.55% saving account returns $55/year with no withdrawal fee. So as long as I kept my CD/Roth investment for at least 4 months, I'll be ahead in the penalty cost.
HOWEVER if I knew I'd never need the money, I'm just as well to pay down my mortgage with this imagined $10k, and I'll save $475 in interest costs, even if lose a bit of tax deduction, but I also pay income taxes on interest as well! Admittingly this is the least desirable choice since I lose access to the money completely, except if I get a new loan or sell my house.
Ah, I know my little money games are peanuts in the extreme. Ultimately I don't care about $500 interest except if I was sure I didn't want to spend/invest the money. As-is, I rather like having savings if I lost my job, I can still make minimum payments and live comfortably 6 months while I scope out my choices. That's worth a $500 insurance, even if I've proved I'm still better off with the penalty model IF I expected under conditions I won't need it.
I SHOULD just be grateful for a mortgage loan, which is a darn good deal to expand my freedom of choice. I don't believe capitalism itself would support low interest long term mortgages, so I imagine under a time of economic contraction, housing costs will simply be unattainable for many people, if not almost already. What do I want to do with this freedom? Definitely NOT increase for wealth, just can't do it.
The only questionable investments I have aree for things that can decrease my cost of living in the future - like improved insulation, windows, or even renewable energy like solar or wind. Those seem like worthy investments, PROBABLY NOT, if you imagine smooth sailing, but a good bet if you project ever increasing energy costs. And if I had a debt-free house, properly attired in the best cost saving measures, then local community businesses, and perhaps community supported agriculture farms.
Well, more than enough nonsense, so I'll stop. I'll have to do some real reading on the Federal Reserve to see how my guesses are!
posted by Ares Olympus at 4:37 PM
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