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"We can't sit there and leave interests rates low forever" ...says who? What force dictates that the equilibrium for rates must be higher? Yes that's historic

"We can't sit there and leave interests rates low forever" ...says who? What force dictates that the equilibrium for rates must be higher? Yes that's historically been the case but that doesn't mean that's the right path for us now and in the future. I would argue that low interest rates will be and need to be the new normal. Interest is the ultimate rent seeking activity. The fed funds rate is a form of price fixing for banks whereby they collectively decide how much interest they can extract from the economy without killing it. Why must this be the case, the economy should be allowed to run much hotter for much longer. Inflation is less of a risk now because of technology + globalization, right now we are experiencing significant deflationary pressure as products and labor converge towards global pricing/wages. Our economy and government will be in very serious trouble if we have to pay higher interest on our significant national debt, so the government has a big interest (pun intended) in keeping rates low to protect its own financial solvency. Finally, high interest rates imply money is scarce and that's far from the case now. Having large sums of money is not what it used to be, you're competing against a lot of other people and organizations seeking to deploy that money productively for a return. This generates downward pressure on market interest rates as evidenced by European Central banks going below zero to negative rates.

kadendogthing 8y ago
>What force dictates that the equilibrium for rates must be higher? Because that violates a big part of the dual mandate of the federal reserve. Lowering interest rates indefinitely makes borrowing money super easy, and you essentially cause a credit cascade. At certain levels, borrowing money means the fed is able to print more money. But if no one can really pay that money back, that bubble pops. And if you keep lowering interest rates to correct for that you'll get inflation. Lots of inflation. To the point where the money becomes useless. >Inflation is less of a risk now because of technology + globalization I have quite literally never heard this thought before, and at face value it doesn't make a lick of sense. you can't just vaguely pay lipservice to two very broad terms and act like it's going to make inflation irrelevant? What? >Finally, high interest rates imply money is scarce and that's far from the case now. No it means that the economy shouldn't/isn't/can't really borrow more. The first one tends to be the primary reason for increasing interest rates. You can't just keep borrowing indefinitely. Because again, that makes money useless. We're already in a bit of a pickle at the moment. And we're seeing signs that the economy is starting to slip -- but we can still reverse and put an end to these signs. Consumer and corporate credit is at an all time high. Just last quarter, the number of people that are delinquent on their car loans spiked. Car payments are something people typically let slip during a financial squeeze, because it's hard for the bank to recoup it in a timely manner. But not paying your credit card or electric bill, those kind of services get shut off immediately. Lower interest rates allowed the current credit spike we're seeing. But at some point it has to be paid back. But if people don't have the real wages to pay back those loans AND keep spending money, you're going to see a squeeze on the service sector. And that's not going to be good for the American economy.
- autokad 8y ago
  > "I have quite literally never heard this thought before" I don't mean this to sound harsh, but then you haven't been listening. Its a well known established fact that technology causes 'good' deflation. The number one cited example of this is the printing press, but honestly the internet has probably been a bigger effect. globalization has also been very commonly cited as a source of lower inflation / deflation. you may disagree with it, but you should have heard about it.
  - kadendogthing 8y ago
    >Its a well known established fact that technology causes 'good' deflation. The number one cited example of this is the printing press, I'm just going to be nice and tell you that you are severely conflating multiple issues here. Technological advancements have played literally no part in the monetary policy of the last decade. Monetary policies have largely been focused on making sure cash flow is first and foremost, present, and secondly consistent.
    - autokad 8y ago
      I don't know what you think I could be conflating. the original post was that inflation is not as much of a risk as it use to be due to technology. ("Inflation is less of a risk now because of technology + globalization") if monetary policy is implemented by a magic 8 ball, that remains true.
      - kadendogthing 8y ago
        >I don't know what you think I could be conflating. The motivations and effects of monetary policy? To sit there and say that a fiat system isn't subject to inflationary pressures, or even are less burdened by them, brought about changes in interest rates because of technological advancements is a hilariously misplaced idea and thing to bring up. I feel like I want to call this economic bike shedding? The tiniest detail has no sway on anything when you're talking about policies actively affecting trillions of dollars of cash and credit. We're talking in a time scale of a year, not half a century.
dodobirdlord 8y ago
> "We can't sit there and leave interests rates low forever" ...says who? Certainly it can be done, but if 2008 proved anything it was the theory that lowering interest rates would provide Keynesian stimulus and mitigate the impact of a recession. One of the perks of controlling the interest rate is that you can use it to apply counterpressure to the business cycle, pushing down bubbles and pulling out of recessions. If the interest rate is stuck near 0, you can't really do that, so it's in the interest of economic stability to bring it back up again.
- ams6110 8y ago
  2008 was more a consequence of lowering lending qualification standards (or just ignoring them altogether) than it was low rates. Doesn't matter so much what the interest rate is, if you are lending money to people who can't pay it back.
  - deleted 8y ago
    [deleted]
  - finnh 8y ago
    I believe OP was talking about the stimulus/recovery, not the cause of the crash.
  - moosey 8y ago
    That's a massive oversimplification. My favorite piece about this issue was from This American Life and NPR News: https://www.thisamericanlife.org/355/the-giant-pool-of-money https://www.thisamericanlife.org/355/the-giant-pool-of-money
  - edmundsauto 8y ago
    Aren't those pretty tightly connected?
- kadendogthing 8y ago
  Lowering the interest rates was not the primary band aid on the 2008 financial crisis. The fed and other banks didn't just help the credit market grow (via lowering interest rates), they quite literally bought it to keep money flow up. There was a substantial credit freeze, and many parts of the financial system were on death's door. So governments and banks quite literally just went "take this huge wad of cash, please stay in business." And by huge wad of cash, we're talking about $12 trillion dollars of bailouts, stimulus packages, debt bonds, etc. Twelve. Trillion. In one year. The entire GDP of the U.S in 2017 was about $20 trillion. Wages at the time were too low (oh, imagine that) to mitigate any kind of credit stasis on the monetary system. It would have had a compounding effect. No credit, no consumption, no consumption, no economy. We "fixed" two of those. But we did it in a manner that requires us to pay for it at some point. So here we are. Bring wages up. Allow the credit to be repaid. And not just consumer credit, corporate credit as well. Allow the federal reserve to finally increase interest rates. Make the economy truly robust again, instead of just "letting the good times roll" and creating another crisis. Companies have to start paying workers more for us to get out of this mess.
mruts 8y ago
The lower rates are, the less room the fed has to maneuver. What if a terrible recession happened? The fed would have their hands tied behind their back at the current rates.
- inetknght 8y ago
  Doesn't that rather imply that we haven't recovered from the last time we needed to bring interest rates low?
  - kadendogthing 8y ago
    It's not an implication. It's a reality. We've been propped up by credit. We've borrowed. We have to start paying it back at some point. And with debt now is better than later.
- autokad 8y ago
  I always hated this argument. Its sort of like saying you need to take poison, so that if you ever get sick you can stop taking poison and possibly get better. 2ndly, interest rates were not very effective in these last recessions, the common metaphor is that its like pushing rope. So maybe its better for the fed to fight recessions with QE (or something else) and leave interest rates to 'fight' inflation.

kadendogthing 8y ago

>What force dictates that the equilibrium for rates must be higher? Because that violates a big part of the dual mandate of the federal reserve. Lowering interest rates indefinitely makes borrowing money super easy, and you essentially cause a credit cascade. At certain levels, borrowing money means the fed is able to print more money. But if no one can really pay that money back, that bubble pops. And if you keep lowering interest rates to correct for that you'll get inflation. Lots of inflation. To the point where the money becomes useless. >Inflation is less of a risk now because of technology + globalization I have quite literally never heard this thought before, and at face value it doesn't make a lick of sense. you can't just vaguely pay lipservice to two very broad terms and act like it's going to make inflation irrelevant? What? >Finally, high interest rates imply money is scarce and that's far from the case now. No it means that the economy shouldn't/isn't/can't really borrow more. The first one tends to be the primary reason for increasing interest rates. You can't just keep borrowing indefinitely. Because again, that makes money useless. We're already in a bit of a pickle at the moment. And we're seeing signs that the economy is starting to slip -- but we can still reverse and put an end to these signs. Consumer and corporate credit is at an all time high. Just last quarter, the number of people that are delinquent on their car loans spiked. Car payments are something people typically let slip during a financial squeeze, because it's hard for the bank to recoup it in a timely manner. But not paying your credit card or electric bill, those kind of services get shut off immediately. Lower interest rates allowed the current credit spike we're seeing. But at some point it has to be paid back. But if people don't have the real wages to pay back those loans AND keep spending money, you're going to see a squeeze on the service sector. And that's not going to be good for the American economy.

autokad 8y ago
> "I have quite literally never heard this thought before" I don't mean this to sound harsh, but then you haven't been listening. Its a well known established fact that technology causes 'good' deflation. The number one cited example of this is the printing press, but honestly the internet has probably been a bigger effect. globalization has also been very commonly cited as a source of lower inflation / deflation. you may disagree with it, but you should have heard about it.
- kadendogthing 8y ago
  >Its a well known established fact that technology causes 'good' deflation. The number one cited example of this is the printing press, I'm just going to be nice and tell you that you are severely conflating multiple issues here. Technological advancements have played literally no part in the monetary policy of the last decade. Monetary policies have largely been focused on making sure cash flow is first and foremost, present, and secondly consistent.
  - autokad 8y ago
    I don't know what you think I could be conflating. the original post was that inflation is not as much of a risk as it use to be due to technology. ("Inflation is less of a risk now because of technology + globalization") if monetary policy is implemented by a magic 8 ball, that remains true.
    - kadendogthing 8y ago
      >I don't know what you think I could be conflating. The motivations and effects of monetary policy? To sit there and say that a fiat system isn't subject to inflationary pressures, or even are less burdened by them, brought about changes in interest rates because of technological advancements is a hilariously misplaced idea and thing to bring up. I feel like I want to call this economic bike shedding? The tiniest detail has no sway on anything when you're talking about policies actively affecting trillions of dollars of cash and credit. We're talking in a time scale of a year, not half a century.

dodobirdlord 8y ago

> "We can't sit there and leave interests rates low forever" ...says who? Certainly it can be done, but if 2008 proved anything it was the theory that lowering interest rates would provide Keynesian stimulus and mitigate the impact of a recession. One of the perks of controlling the interest rate is that you can use it to apply counterpressure to the business cycle, pushing down bubbles and pulling out of recessions. If the interest rate is stuck near 0, you can't really do that, so it's in the interest of economic stability to bring it back up again.

ams6110 8y ago
2008 was more a consequence of lowering lending qualification standards (or just ignoring them altogether) than it was low rates. Doesn't matter so much what the interest rate is, if you are lending money to people who can't pay it back.
- deleted 8y ago
  [deleted]
- finnh 8y ago
  I believe OP was talking about the stimulus/recovery, not the cause of the crash.
- moosey 8y ago
  That's a massive oversimplification. My favorite piece about this issue was from This American Life and NPR News: https://www.thisamericanlife.org/355/the-giant-pool-of-money https://www.thisamericanlife.org/355/the-giant-pool-of-money
- edmundsauto 8y ago
  Aren't those pretty tightly connected?
kadendogthing 8y ago
Lowering the interest rates was not the primary band aid on the 2008 financial crisis. The fed and other banks didn't just help the credit market grow (via lowering interest rates), they quite literally bought it to keep money flow up. There was a substantial credit freeze, and many parts of the financial system were on death's door. So governments and banks quite literally just went "take this huge wad of cash, please stay in business." And by huge wad of cash, we're talking about $12 trillion dollars of bailouts, stimulus packages, debt bonds, etc. Twelve. Trillion. In one year. The entire GDP of the U.S in 2017 was about $20 trillion. Wages at the time were too low (oh, imagine that) to mitigate any kind of credit stasis on the monetary system. It would have had a compounding effect. No credit, no consumption, no consumption, no economy. We "fixed" two of those. But we did it in a manner that requires us to pay for it at some point. So here we are. Bring wages up. Allow the credit to be repaid. And not just consumer credit, corporate credit as well. Allow the federal reserve to finally increase interest rates. Make the economy truly robust again, instead of just "letting the good times roll" and creating another crisis. Companies have to start paying workers more for us to get out of this mess.

mruts 8y ago

The lower rates are, the less room the fed has to maneuver. What if a terrible recession happened? The fed would have their hands tied behind their back at the current rates.

inetknght 8y ago
Doesn't that rather imply that we haven't recovered from the last time we needed to bring interest rates low?
- kadendogthing 8y ago
  It's not an implication. It's a reality. We've been propped up by credit. We've borrowed. We have to start paying it back at some point. And with debt now is better than later.
autokad 8y ago
I always hated this argument. Its sort of like saying you need to take poison, so that if you ever get sick you can stop taking poison and possibly get better. 2ndly, interest rates were not very effective in these last recessions, the common metaphor is that its like pushing rope. So maybe its better for the fed to fight recessions with QE (or something else) and leave interest rates to 'fight' inflation.