I don't like loan-forgiveness for all the reasons brobdingnagians mentioned. Also, it introduces moral hazard into the economy: companies assume further loan-forgiveness is coming, so they think nothing about taking on unsustainable levels of debt. (To a large extent, this is what's happening now: after the 2009 bailouts companies figured they were too big to fail.)
The root cause of this is that our economy has become hyper-optimized around monetary policy that's unsustainable. With markets trending toward efficiency, all major companies that exist today build in the assumption of 0% interest rates into the cost & capital structures of the business. Many activities they engage in would probably become unprofitable at higher interest rates, which means mass layoffs, restructurings, different business processes, possibly adoption of different technologies, products & services going away, etc. Change the monetary environment and you get different companies, different technologies, different supply chains. But the current monetary environment means that whenever there's a demand shock, the Fed has nowhere to drop rates, and whenever there's a supply shock, there's a potential inflationary price spiral.
The Fed, to their credit, recognizes this predicament. That's why they're targeting > 2% inflation, so there's room to raise rates. They've also said that any increase in rates will be well-telegraphed, to give companies time to adjust.
But I have doubts that this'll work. Simply because this isn't a tweak now, this is an existential change to how companies structure their operations. And any company that prepares for it before the Fed actually raises rates will be outcompeted by companies that do nothing, so no company is going to take the mere warning seriously.
It occurs to me that post-Volcker monetary & government policy has basically served to weld the economy & government together so that it's impossible for one part to fail without it all failing. We used to have recessions every 5-10 years; these would clear away uncompetitive businesses so the capital could be recycled into new ones. In trying to "smooth over" these recessions, and then outright bailing them out in 2009, and then failing to raise rates in 2013/2015/2018, we've coupled the whole economy's fortunes together, and then coupled it to the government. As a result, we can't sweep away companies that are doing the wrong thing without widespread civil unrest.
The issue with loan forgiveness is that it is a massive wealth transfer from creditors to debtors. People who made bad bets by getting deeply in debt are rewarded, while people who saved and loaned money get shafted. That unbalances the economy and misallocates resources. Which could do even more damage. There isn't really a clean way out. If businesses started preparing & managed their money better while paying off their debts, that would probably be the safest way out.
Why would you prepare and manage your money better when you can always just get another loan at a great rate? It makes no sense to save when borrowing is more profitable.
I'm starting to think that it's time to let the unproductive businesses that have blossomed over the last 12 years go bankrupt and be removed from the system. Unfortunately a lot of productive businesses that are temporarily unproductive had been using their cash for stock buybacks and using easy corp debt to run operations, and so with the pandemic, those wold get washed out too. Maybe the laws banning stock buybacks prior to Reagan weren't such a bad idea?
On the other hand how can the fed buy bonds from the "good" companies worth saving, and not from the "bad" companies that can freeride until "eventual" profitability?
I suppose you let the market decide - let the bonds float, and anything worth saving should be bought back up by the people enriched by the buybacks, right? Isn't that what efficient markets and capitalism are all about?
Save the people (using unemployment) and ditch the hollow husks of marginal companies that have rotted from within?
Dumb idea: maybe if you had a published interest rate schedule that planned out 10 years, 15 years, whatever. So everyone knew what the bond/loan base interest rates would look like for the next 15 years.
years 0 - 7: base interest rate ramps up from 3% now to 10%
years 8 - 15: base interest rate ramps down from 10% to 3%
years 16-21: repeat
years 22-28: repeat
Downside I'm sure is that people who come of age during high-interest-rate periods can't get car loans or education loans that don't eat them alive...
This seems sort of like what the Fed intends to do now, only with maybe lower rates overall - 0 for a few years, ramping to a target of 2 or 3, but I guess no real guidance after that. Unfortunately the Fed has pretty blunt tools, even after their upgrade back in March 2020. Using some of the surplus wealth from the asset holding class (top half of the K) to implement UBI, healthcare education, for the class that has most of it's wealth tied up in future wages (bottom half of the K). This would take congress though, and I'm not confident that we'll see anything recurring after the next round of stimulus.
There is risk here though - bottom up stimulus comes with it's own moral hazard issues, but then again I don't know what the net drag / benefit is compared to zombie companies getting infinite credit moral hazard we have now. I suspect UBI for individuals leads to fewer systemic risk sorts of issues, but I really don't know, it's very hard to envision what actually ends up happening due to lack of having ever experienced anything like that in my lifetime.
It would be nice if we could try it out - but there's probably a momentum term hidden in there somewhere - give an inch take a mile sort of thinking. Is UBI like corporate debt backstopping? Once you get a taste you can never go back?
I really don't see any good answers here other than "try to be on the top half of the K, and also try not to get eaten".
The 30 year rate has been dropping at 2% every decade for the last 5 decades at a steady rate[0]. If the fed attempts to taper inflation by increasing the interest rate above the 30 year, we will hit a yield curve inversion and trigger another recession, just like every previous recession in the past 50 years. So no, we can't go back to 2 or 3. And by 2030, we can't even stay at 0.
The big problem with bottom up is that you need a lot of it to continue the money supply expansion, and money created that is given to spenders as opposed to savers triggers inflation at drastically higher rates.
Yeah, that's sort of the conclusion I keep coming to. If I understand correctly, I'm assuming that when you say that bottom up triggers inflation, you're referring to price inflation / core CPI / any of the other 20 measures of inflation in physical consumable goods required for survival. Whereas top down (as we have been doing because fed and treasury can't seem to work together) tends to keep price levels for core CPI constant, but does lead to monetary expansion, or the multiplier between higher M's like M3 M4 and total assets over base money to grow, putting most of the price inflation into financial assets instead (My house is up 30% compared to bread this year from pre-pandemic prices, my 401(k) is up 80% investing in "low risk equities" compared to the same).
What are other alternatives? More of the same and hope technological multipliers for productivity continue to outpace CPI inflation so that there aren't bread lines? Charity? I suppose you can keep doing monetary stimulus without fiscal, and then increase taxes, and spend it on infrastructure that improves everyones lives?
You don't just have to watch out for CPI inflation to be outpaced by productivity. The money supply needs to also outpace productivity if you want the same status quo.
I've built up an intuition that the money supply should match changes in productivity, and that if it doesn't it will eventually lead to problems. But it's also notable that the trend is extremely important. If you do match, everything should be fine and this can last forever. If the money supply rises faster than productivity, you see what we've seen these past 50 years since we've been off the gold standard, a huge surge in asset prices. And if productivity rises faster than the money supply, people flee assets and into money. This is called a Deflationary Spiral. But the opposite state is basically an Inflationary Spiral, with people unwilling to spend their assets.
Dalio in his "Explaining the Economic Machine" video talks about a "Beautiful Deleveraging". My thought currently is that such a thing isn't possible. If you wait for the debt to get so bad that you have to do something, you can't match productivity anymore. Therefore the only thing you are left to do is grow the money supply less than productivity. And that changes everything. Suddenly the trend is to money. And once the money managers work that out, they all rush out of assets and into cash. This triggers a crash. So it's the trend that dominates, and there is no way to balance the deleveraging.
So the way I see this going is in any of these scenarios
1. Negative rates. All pretext is lost.
2. Repeat of Japan. Government ends up owning half of the stock market.
3. Mild to extreme bottom-up during a planned crash of assets. In this path you will see the stock market crash at the same time inflation soars.
Number three is the hardest but also the one that will end up with the best productivity. When you see stories like Bill Gates being the largest private farmowner[0], you might see it as an ominous warning that the rich are hedging this possibility and are making sure they end up okay.
Trying to figure out how you unwind it slowly when apparently "slowing raising rates" still destroys many businesses with a lot of debt...