4 ms·

If anything, I would say that the markets are out of control. Many large companies are gorged with debt and are afraid of what higher interest rates would mean

If anything, I would say that the markets are out of control. Many large companies are gorged with debt and are afraid of what higher interest rates would mean for that debt, and thus the market panicked at the end of Q4 which slowed down the Fed. We've been in a low interest rate environment for all of my adult life, at some point the crows will come to roost and these companies will need to pay the price for their strategy of taking on debt + share buybacks and come back to earth. I'm extremely dissapointed that the Fed was spooked out of performing their duty by Wall St.

mruts 8y ago
Economists call this the “narrowing corridor.” The lower the cut rates, the less room you have to maneuver. The fed needs to increase rates by like 5x in order to get us back on stable footing. My wife always likes to make the analogy of the economy being a bathtub. When the government sells bonds or lowers rates or prints money, the bathtub gets filled up. When the government buys bonds or increases rates, the water line lowers. The size of the bathtub increases along with real growth in the economy. Inflation is when the water rises faster than the size of the bathtub, deflation when the water isn’t rising fast enough.
- jonny_eh 8y ago
  How is the analogy helpful? Am I supposed to be afraid of the bathtub emptying or overflowing?
  - mruts 8y ago
    Yes, you are. The water is the economy.
  - squish78 8y ago
    You want to take a nice comfortable bath with enough water but not overflowing onto your carpeted bathroom floor
- opo 8y ago
  >...When the government sells bonds or lowers rates or prints money, I think you have that backwards. The common consensus is that the Fed selling bonds has the opposite effect: >...f the Fed buys bonds in the open market, it increases the money supply in the economy by swapping out bonds in exchange for cash to the general public. Conversely, if the Fed sells bonds, it decreases the money supply by removing cash from the economy in exchange for bonds. Therefore, OMO has a direct effect on money supply. OMO also affects interest rates because if the Fed buys bonds, prices are pushed higher and interest rates decrease; if the Fed sells bonds, it pushes prices down and rates increase. https://www.investopedia.com/articles/economics/08/monetary-policy-recession.asp https://www.investopedia.com/articles/economics/08/monetary-...
  - mruts 8y ago
    Yes you are right, I’m sorry. By selling the bonds the fed is decreasing the money supply, by buying bonds they are increasing the money supply. Thanks for pointing that out! I deserve downvotes for the original comment if anyone wants to give me one!

mruts 8y ago

Economists call this the “narrowing corridor.” The lower the cut rates, the less room you have to maneuver. The fed needs to increase rates by like 5x in order to get us back on stable footing. My wife always likes to make the analogy of the economy being a bathtub. When the government sells bonds or lowers rates or prints money, the bathtub gets filled up. When the government buys bonds or increases rates, the water line lowers. The size of the bathtub increases along with real growth in the economy. Inflation is when the water rises faster than the size of the bathtub, deflation when the water isn’t rising fast enough.

jonny_eh 8y ago
How is the analogy helpful? Am I supposed to be afraid of the bathtub emptying or overflowing?
- mruts 8y ago
  Yes, you are. The water is the economy.
- squish78 8y ago
  You want to take a nice comfortable bath with enough water but not overflowing onto your carpeted bathroom floor
opo 8y ago
>...When the government sells bonds or lowers rates or prints money, I think you have that backwards. The common consensus is that the Fed selling bonds has the opposite effect: >...f the Fed buys bonds in the open market, it increases the money supply in the economy by swapping out bonds in exchange for cash to the general public. Conversely, if the Fed sells bonds, it decreases the money supply by removing cash from the economy in exchange for bonds. Therefore, OMO has a direct effect on money supply. OMO also affects interest rates because if the Fed buys bonds, prices are pushed higher and interest rates decrease; if the Fed sells bonds, it pushes prices down and rates increase. https://www.investopedia.com/articles/economics/08/monetary-policy-recession.asp https://www.investopedia.com/articles/economics/08/monetary-...
- mruts 8y ago
  Yes you are right, I’m sorry. By selling the bonds the fed is decreasing the money supply, by buying bonds they are increasing the money supply. Thanks for pointing that out! I deserve downvotes for the original comment if anyone wants to give me one!