[refurb]

The financial aspects you mention has a cost - there is no free lunch. No doubt the financing is also causing some of the delay in efficient reallocation.

But the piper must be paid in the end. Ideally it’s similar to 2008 where the govt unwound all the extra money, over time, relatively painlessly.

Of course that’s not guaranteed at at all. If inflation gets out of control then you could see a major economic shock as the govt quickly unwinds.

[AlexandrB]

I don't think it's going to be painless. There are asset bubbles in multiple sectors ranging from real estate to collectibles. Either these will pop and many will be left holding the bag or more serious inflation is on the way.

[antihipocrat]

Assets have increased in value because interest rates are close to zero per cent. Other investment classes (like bonds and cash savings) have a similar return on investment to the interest rate i.e. close to zero. In this scenario it makes sense to go for assets like property and shares because the opportunity cost is favorable.

One of the most straightforward ways the asset bubble will pop is if interest rates rise. For interest rates to rise there needs to be inflation at high levels for at least a couple of quarters. If we see another few months of inflation above 4% the fed will need to signal shift toward increasing the interest rate, only then will we start to see a rebalancing of investments away from assets and back into cash.

[bob33212]

Not necessarily. Just look a crypto, these people are not selling. Just being a crypto millionaire on paper is good enough of a reward. They have no desire to sell it all and buy a bunch of retail goods. Housing is unaffordable to average workers in many places, but consumer goods are not going to inflate like crazy until there is a higher demand for them.

[dalbasal]

I think there's a mirror to this in the real economy too.

"Capital" isn't consumed by much of the tech industry in the same way as it was/is by manufacturing. If you're a toaster startup, you'll need a factory, steel, etc. Actual, physical capital that needs to come from somewhere. When your toaster startup goes viral and scales, you'll need more of that physical capital. For every toaster you sell, you'll need to buy more parts and materials.

A tech startup needs riskable money to figure out what they're making, but once it's profitable, they're not sitting across from bankers discussing finance. Also, when covid hits and demand for movies skyrockets, amazon prime or netflix can sell as much as people will by. There's no need for prices to go up. Marginal costs don't exist.

They're pretty much insulated from both real and monetary shock. All they care about is demand. There will not be a shortage of steaming content services' supply chain. A netflix is limited in how much it can invent, but it isn't limited in how much it can produce. Doubling the number of subscriptions or viewing times is trivial. They don't owe on loans.

[bob33212]

Under that scenario inflation could hit A list entertainer salaries. Chapelle could say his next 1 hour special is going to be licensed for 800 million dollars to whoever wants it.

[gruez]

> Ideally it’s similar to 2008 where the govt unwound all the extra money, over time

They did? https://www.federalreserve.gov/monetarypolicy/bst_recenttren...

We only started "unwinding" in 2018 and wasn't even close to undoing everything from 2008. Then the pandemic hit and all of that was undone.

[refurb]

I was referring more to the TARP program, but your point is taken.

[dalbasal]

"There is no free lunch" is like one of those religious quotes that can mean anything and its opposite.

What does "unwound all the extra money" mean? They didn't run surpluses, which means more money circulated out of the economy than in. That's why they were less reserved, this time, creating more of the stuff. They realised that it doesn't have to be paid back.

[refurb]

There is no free lunch. Printing more dollars doesn’t mean you have more money. Lowering interest rates so it’s cheaper to borrow doesn’t mean you have more money. The government buying up bad assets doesn’t mean those assets suddenly have a higher value.

There is no free lunch. Eventually asset prices reflect underlying value - not too many dollars chasing too few assets. Eventually inflations forces higher interest rates and the value inflation disappears. Eventually bad assets are correctly priced and value disappears.

It’s like the financial crisis in 2008. You can go years with increasing prices, but if it based off false premises and not a true increase in productivity, then that value eventually disappears. If it happens suddenly it has massive ripple effects through the economy.

[highfrequency]

> Printing more dollars doesn’t mean you have more money.

Often it does, because “printing money” avoids a cascading effect of negative feedback.

Imagine in the days before FDIC insurance that due to a sudden asset depreciation or error, a large bank does not have cash on hand to meet customer withdrawals today. Because of uncertainty, other banks are not willing to lend to the troubled bank on short notice.

If the Fed does nothing, customers will panic. They will sell their stocks, and withdraw money from other banks. Now the market is crashing and other banks are running low on reserves. Credit tightens up and interest rates rise. Businesses stop investing, consumers stop spending, and unemployment starts rising. This is a vicious negative feedback loop.

Instead, if the Fed had stepped in and simply materialized cash out of nowhere, and assured the public that they would guarantee all deposits no matter the cost, the entire crisis would be averted. When negative feedback cycles are so destructive, merely instilling confidence is about as close to a free lunch as you can get.

[refurb]

I’m not arguing it’s not a useful tool. I’m arguing it has an eventual cost that has to be paid.

If my wages suddenly get reduced by 20% so I start borrowing against the equity in my home that solves the immediate problem but also creates another problem.