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Its far more concerning to remember that the US Federal Reserve cannot combat this round of inflation using the prime interest rate, as it never fully abandoned

Its far more concerning to remember that the US Federal Reserve cannot combat this round of inflation using the prime interest rate, as it never fully abandoned QE or Quantitative Easing from 2008. since the corporate lending market is now saturated with low or no interest loans, any attempt to raise interest rates at all will likely trigger a massive recession. this is called the corporate debt bubble https://en.wikipedia.org/wiki/Corporate_debt_bubble https://en.wikipedia.org/wiki/Corporate_debt_bubble EDIT: this is due to the QE taper failure of 2012 as a point of evidence as it alone resulted in a 700 point market crash that forced the fed to reverse course immediately. https://en.wikipedia.org/wiki/Quantitative_easing#United_States_(QE1,_QE2,_and_QE3) https://en.wikipedia.org/wiki/Quantitative_easing#United_Sta... the fed is therefore stuck hammering news outlets and the government with hopeful rhetoric about "transient" inflation that will somehow clear up after Covid, despite rising unemployment, underemployment, lingering state debt from the covid crisis, and back-rent payments still due by millions of americans who will likely declare bankruptcy at some point. EDIT: Generally, bankruptcy is a positive influence on the economy. It allows consumers to find a way out of massive debt so they can once again start engaging in the economy through buying goods, services and large-scale assets such as vehicles and real estate. unfortunately personal bankruptcy stokes a permanent US underclass that are denied rental housing in nearly every market. Bankruptcy is also prohibitively expensive for many americans to formally declare, and so the debt remains in an unserviceable limbo on books (eventually becoming an unseen toxic asset.) Bankruptcy can also factor into your employment screening. and this doesnt even begin to touch supply chain constraints like the semiconductor shortage and the ongoing international shipping gridlock, ergo most of what we're seeing now is the Fed treading water until a major recession inevitably hits.

hammock 5y ago
Can you go one level deeper- why would raising interest rates trigger a recession?
- silexia 5y ago
  The US government and corporations borrow money at the prime interest rate plus some margin. Right now, US corporations have borrowed the maximum they possibly can. If the interest rates on that debt go up, many corporations will immediately go bankrupt. The US government also has a debt ceiling it is refusing to raise, which may mean that the US government itself may become insolvent faster with an increase in interest rates.
  - whimsicalism 5y ago
    > If the interest rates on that debt go up, many corporations will immediately go bankrupt Do you know which rates are the ones the Fed sets? These threads always bring out the people who don't understand how the economy works.
    - silexia 5y ago
      Ah fun, a baseless ad hominem attack. The feds sets the prime rate which then works its way down into the corporate markets. Corporations right now are borrowing at 1 or 2% interest rates, but if the fed rate goes to 5% then those corporations will have to roll over their existing debt at 5 or 6%. BTW, I majored in finance in college and worked at Merrill Lynch. 12 years ago I started my own company and have 200 full-time employees. I think I know a little bit about how the economy works.
      - whimsicalism 5y ago
        > BTW, I majored in finance in college and worked at Merrill Lynch As an intern, yes? I know enough people working sell-side to know that it doesn't give you an intimate understanding of the economy, and certainly not after an internship. > Corporations right now are borrowing at 1 or 2% interest rates, but if the fed rate goes to 5% then those corporations will have to roll over their existing debt at 5 or 6%. Fair enough. I don't think we will be seeing 5% anytime soon, nor do I think that will be necessary for a price level increase largely driven by disruption to real output due to the pandemic.
      - opo 5y ago
- cj 5y ago
  I don’t fully understand why, but in general stocks tend to fall when interest rates rise. Investopedia chalks much of it up to psychology and… higher rates means less lending means less spending means less earnings. https://www.investopedia.com/investing/how-interest-rates-affect-stock-market/#impact-of-expectations https://www.investopedia.com/investing/how-interest-rates-af...
  - whimsicalism 5y ago
    > stocks tend to fall when interest rates rise. unexpectedly* stocks tend to fall when interest rates rise unexpectedly. many actual interest rate increases are followed by stocks rallying because a larger rate increase was expected & priced in.
    - dragonwriter 5y ago
      > many actual interest rate increases are followed by stocks rallying because a larger rate increase was expected & priced in. Right, but that just means more than 100% of the fall due to the rate increase occurred earlier when it was anticipated, so the rate increase still caused the fall, in effect.
      - whimsicalism 5y ago
        The expectation caused the fall. It's possible to even have an expectation of a rate increase and then not have any at all.
  - deleted 5y ago
    [deleted]
  - jliptzin 5y ago
    Look at the formula for discounted cash flow. It's a widely used valuation model and applies to lots of companies, especially those in the growth phase where current market cap is largely dependent on expected cash flow far into the future. https://en.wikipedia.org/wiki/Discounted_cash_flow https://en.wikipedia.org/wiki/Discounted_cash_flow Notice the denominator in the series - (1+r)^n where r = interest rates and n = number of years out. The more r rises, the more terms at the end of the series drop out because they're so close to zero. So that effectively means a company that's getting its value from cash flow 10+ years from now loses a lot of its value if interest rates are rising.
- murgindrag 5y ago
  Imagine you're a business with 5 million dollars in revolving debt, at a 2% interest rate. You have $100k in debt service costs. If interest rates go up to 5%, you have $250k in service costs. Most businesses operate close to break-even (in efficient markets), and many will immediately go under. If businesses go under, that triggers a recession cycle: Those businesses lay off employees, who stop buying, driving down revenue for everyone else. People anticipating layoffs/furloughs/etc. stop buying. Hiring goes down too, since businesses start planning for rough times. People buying on credit (anyone with a credit card debt) also find purchasing much more expensive, together with higher bills on existing debt. A whole bunch of business opportunities also disappear in a poof of smoke. If a business has even a 1% expected real return, and interest rates are zero, it makes sense to borrow money to start that business (especially if inflation is also high, giving effective negative interest rates). If a business has an expected 1% return and interest rates are 12%, then I'm bleeding money. For these kinds of opportunities, think less SV startup, and more just normal businesses (e.g. I buy something and sell it a month or two later). All of this piles on to form a recession.
  - hammock 5y ago
    So commercial debt is mostly variable not fixed rate?
    - Ekaros 5y ago
      My understanding bonds are mostly fixed rate. Their price on market can vary though. But unlike let's say mortages they are more often refinanced. And when that happens the rates can change.
  - cannabis_sam 5y ago
    > Most businesses operate close to break-even (in efficient markets), and many will immediately go under. Then they are not managing risk properly and actually need to go under.
    - ac29 5y ago
      I'm not even sure that its true to a meaningful degree - at least in the US, large businesses dominate economically and are quite profitable (much better than "break even"). Microsoft, Berkshire Hathaway, JP Morgan - they are not going to "go under" if interest rates go up 0.25%, even though they all use corporate debt.
whimsicalism 5y ago
> any attempt to raise interest rates at all will likely trigger a massive recession. this is called the corporate debt bubble It's a continua. If we raised rates 0.00001% it clearly wouldn't "trigger a recession", if we raised rates to 25%, it would. Powell has shown himself to be an effective chairman, I doubt the fed will trigger a recession with rates.
- bumby 5y ago
  You're correct, but I think missing part of the point. The point was not "raising interest rates at any level will trigger a recession" but rather "raising interest levels an amount capable of combating inflation will trigger a recession". A 0.00001% hike may not cause a recession, but it also wouldn't affect inflation.
  - whimsicalism 5y ago
    Interesting, I don't actually think there's much ambiguity in the statement "any attempt to raise interest rates at all."
    - bumby 5y ago
      I'd defer to the OP to state what they really meant, but your response comes across more as a trivial semantic "gotcha" than an actual reasoned response.* If you actually think they meant raising rates by a trivial amount, even though history doesn't indicate that is a tack likely taken, then, yes, you are technically correct. *Since you are a self-described consequentialist, it may be just that you feel what was stated is all that matters and not what was intended
- greenail 5y ago
  Quoting the CBO: "Growth of Net Interest Outlays. In CBO’s most recent projections, the cumulative deficit from 2021 through 2030 totals nearly $13 trillion. Borrowing to finance that deficit—at a time when interest rates are expected to rise—would cause net interest payments as a percentage of GDP to increase over that period, from 1.4 percent to 2.2 percent, which is generally in line with the 50-year average of 2.0 percent. Over the long term, interest rates are projected to rise further, and the amount of debt issued is projected to grow, causing net outlays for interest to increase to about 8 percent of GDP by 2050." I don't believe the current rate of increase is anything close to what was projected. Also, the chart on debt held by the public is very interesting. Raising rates has some big impacts, even small changes. source: https://www.cbo.gov/publication/56910 https://www.cbo.gov/publication/56910
dragonwriter 5y ago
> the fed is therefore stuck hammering news outlets and the government with hopeful rhetoric about "transient" inflation that will somehow clear up after Covid, despite rising unemployment, underemployment These are demand side factors that would work against inflation (but also aren’t happening; unemployment and underemployment are dropping, though still above pre-pandemic levels.) > and back-rent payments still due by millions of americans who will likely declare bankruptcy at some point. What does this have to do with inflation?
- syshum 5y ago
  >What does this have to do with inflation? Part of the inflation rate is housing, in many regions there are still blocks on evictions, foreclosures, etc. This reduces inventory and increases prices. Evictions and Forclosures are critical to the market, if a person can just stay put and not pay rent it is a double whammy for inflation as they will use their rent money on other things increasing demand where supply is restricted (aka inflation) and their housing unit is removed from the supply also increasing inflation
  - sgregnt 5y ago
    But the rent money not paid by the tenant, is not recieved by the landlord so while tenant will spend more the landlord will be spend less, the net change is zero, no?
    - syshum 5y ago
      That would only be the case if the LandLord spent it on the same things. They would not The LandLord would use the money to pay Plumbers, landscapers, and/or invest some of the money, and/or build more housing units The Tenant would use it to Paydown other debt, buy a Graphics card, or other things in the consumer market.
  - dragonwriter 5y ago
    > Part of the inflation rate is housing, in many regions there are still blocks on evictions, foreclosures, etc. That's...not what was cited. I am asking about back rent payments due and bankruptcy potential which is what was cited upthread.
syshum 5y ago
The big risk here is that the fed is going to keep treading water until we fall off the upcoming cliff into another depression. Where if they would just be honest with people today, sure we will have a recession but that is preferred to depression or economic collapse which is where all of this is heading
dragonwriter 5y ago
> Its far more concerning to remember that the US Federal Reserve cannot combat this round of inflation using the prime interest rate, as it never fully abandoned QE or Quantitative Easing from 2008. Not only can it, but more importantly it can fight it without interest rates by gradually unwinding the remaining QE (which it is likely to do, starting either next month or December, from current indications) > since the corporate lending market is now saturated with low or no interest loans, any attempt to raise interest rates at all will likely trigger a massive recession Well, no not “any attempt at all”, but its probably true that the effect of any interest rate hike on slowing the overall economy and demand will be greater than it otherwise would be, for any given size of rate hike. But that's positive for ability to fight inflation with interest rates, as it means each quarter-point increase in the rate target will have more effect on slowing inflation than it otherwise would, and that fewer of them should be necessary, even before considering the effect of QE unwinding which will start before rate increases.
throw0101a 5y ago
> Its far more concerning to remember that the US Federal Reserve cannot combat this round of inflation using the prime interest rate, as it never fully abandoned QE or Quantitative Easing from 2008. The Fed stopped buying in 2014, held the assets for a few years, and they started going away in 2018: * https://fred.stlouisfed.org/series/WALCL https://fred.stlouisfed.org/series/WALCL * https://fred.stlouisfed.org/series/TREAST https://fred.stlouisfed.org/series/TREAST

hammock 5y ago

Can you go one level deeper- why would raising interest rates trigger a recession?

silexia 5y ago
The US government and corporations borrow money at the prime interest rate plus some margin. Right now, US corporations have borrowed the maximum they possibly can. If the interest rates on that debt go up, many corporations will immediately go bankrupt. The US government also has a debt ceiling it is refusing to raise, which may mean that the US government itself may become insolvent faster with an increase in interest rates.
- whimsicalism 5y ago
  > If the interest rates on that debt go up, many corporations will immediately go bankrupt Do you know which rates are the ones the Fed sets? These threads always bring out the people who don't understand how the economy works.
  - silexia 5y ago
    Ah fun, a baseless ad hominem attack. The feds sets the prime rate which then works its way down into the corporate markets. Corporations right now are borrowing at 1 or 2% interest rates, but if the fed rate goes to 5% then those corporations will have to roll over their existing debt at 5 or 6%. BTW, I majored in finance in college and worked at Merrill Lynch. 12 years ago I started my own company and have 200 full-time employees. I think I know a little bit about how the economy works.
    - whimsicalism 5y ago
      > BTW, I majored in finance in college and worked at Merrill Lynch As an intern, yes? I know enough people working sell-side to know that it doesn't give you an intimate understanding of the economy, and certainly not after an internship. > Corporations right now are borrowing at 1 or 2% interest rates, but if the fed rate goes to 5% then those corporations will have to roll over their existing debt at 5 or 6%. Fair enough. I don't think we will be seeing 5% anytime soon, nor do I think that will be necessary for a price level increase largely driven by disruption to real output due to the pandemic.
    - opo 5y ago
cj 5y ago
I don’t fully understand why, but in general stocks tend to fall when interest rates rise. Investopedia chalks much of it up to psychology and… higher rates means less lending means less spending means less earnings. https://www.investopedia.com/investing/how-interest-rates-affect-stock-market/#impact-of-expectations https://www.investopedia.com/investing/how-interest-rates-af...
- whimsicalism 5y ago
  > stocks tend to fall when interest rates rise. unexpectedly* stocks tend to fall when interest rates rise unexpectedly. many actual interest rate increases are followed by stocks rallying because a larger rate increase was expected & priced in.
  - dragonwriter 5y ago
    > many actual interest rate increases are followed by stocks rallying because a larger rate increase was expected & priced in. Right, but that just means more than 100% of the fall due to the rate increase occurred earlier when it was anticipated, so the rate increase still caused the fall, in effect.
    - whimsicalism 5y ago
      The expectation caused the fall. It's possible to even have an expectation of a rate increase and then not have any at all.
- deleted 5y ago
  [deleted]
- jliptzin 5y ago
  Look at the formula for discounted cash flow. It's a widely used valuation model and applies to lots of companies, especially those in the growth phase where current market cap is largely dependent on expected cash flow far into the future. https://en.wikipedia.org/wiki/Discounted_cash_flow https://en.wikipedia.org/wiki/Discounted_cash_flow Notice the denominator in the series - (1+r)^n where r = interest rates and n = number of years out. The more r rises, the more terms at the end of the series drop out because they're so close to zero. So that effectively means a company that's getting its value from cash flow 10+ years from now loses a lot of its value if interest rates are rising.
murgindrag 5y ago
Imagine you're a business with 5 million dollars in revolving debt, at a 2% interest rate. You have $100k in debt service costs. If interest rates go up to 5%, you have $250k in service costs. Most businesses operate close to break-even (in efficient markets), and many will immediately go under. If businesses go under, that triggers a recession cycle: Those businesses lay off employees, who stop buying, driving down revenue for everyone else. People anticipating layoffs/furloughs/etc. stop buying. Hiring goes down too, since businesses start planning for rough times. People buying on credit (anyone with a credit card debt) also find purchasing much more expensive, together with higher bills on existing debt. A whole bunch of business opportunities also disappear in a poof of smoke. If a business has even a 1% expected real return, and interest rates are zero, it makes sense to borrow money to start that business (especially if inflation is also high, giving effective negative interest rates). If a business has an expected 1% return and interest rates are 12%, then I'm bleeding money. For these kinds of opportunities, think less SV startup, and more just normal businesses (e.g. I buy something and sell it a month or two later). All of this piles on to form a recession.
- hammock 5y ago
  So commercial debt is mostly variable not fixed rate?
  - Ekaros 5y ago
    My understanding bonds are mostly fixed rate. Their price on market can vary though. But unlike let's say mortages they are more often refinanced. And when that happens the rates can change.
- cannabis_sam 5y ago
  > Most businesses operate close to break-even (in efficient markets), and many will immediately go under. Then they are not managing risk properly and actually need to go under.
  - ac29 5y ago
    I'm not even sure that its true to a meaningful degree - at least in the US, large businesses dominate economically and are quite profitable (much better than "break even"). Microsoft, Berkshire Hathaway, JP Morgan - they are not going to "go under" if interest rates go up 0.25%, even though they all use corporate debt.

whimsicalism 5y ago

> any attempt to raise interest rates at all will likely trigger a massive recession. this is called the corporate debt bubble It's a continua. If we raised rates 0.00001% it clearly wouldn't "trigger a recession", if we raised rates to 25%, it would. Powell has shown himself to be an effective chairman, I doubt the fed will trigger a recession with rates.

bumby 5y ago
You're correct, but I think missing part of the point. The point was not "raising interest rates at any level will trigger a recession" but rather "raising interest levels an amount capable of combating inflation will trigger a recession". A 0.00001% hike may not cause a recession, but it also wouldn't affect inflation.
- whimsicalism 5y ago
  Interesting, I don't actually think there's much ambiguity in the statement "any attempt to raise interest rates at all."
  - bumby 5y ago
    I'd defer to the OP to state what they really meant, but your response comes across more as a trivial semantic "gotcha" than an actual reasoned response.* If you actually think they meant raising rates by a trivial amount, even though history doesn't indicate that is a tack likely taken, then, yes, you are technically correct. *Since you are a self-described consequentialist, it may be just that you feel what was stated is all that matters and not what was intended
greenail 5y ago
Quoting the CBO: "Growth of Net Interest Outlays. In CBO’s most recent projections, the cumulative deficit from 2021 through 2030 totals nearly $13 trillion. Borrowing to finance that deficit—at a time when interest rates are expected to rise—would cause net interest payments as a percentage of GDP to increase over that period, from 1.4 percent to 2.2 percent, which is generally in line with the 50-year average of 2.0 percent. Over the long term, interest rates are projected to rise further, and the amount of debt issued is projected to grow, causing net outlays for interest to increase to about 8 percent of GDP by 2050." I don't believe the current rate of increase is anything close to what was projected. Also, the chart on debt held by the public is very interesting. Raising rates has some big impacts, even small changes. source: https://www.cbo.gov/publication/56910 https://www.cbo.gov/publication/56910

dragonwriter 5y ago

> the fed is therefore stuck hammering news outlets and the government with hopeful rhetoric about "transient" inflation that will somehow clear up after Covid, despite rising unemployment, underemployment These are demand side factors that would work against inflation (but also aren’t happening; unemployment and underemployment are dropping, though still above pre-pandemic levels.) > and back-rent payments still due by millions of americans who will likely declare bankruptcy at some point. What does this have to do with inflation?

syshum 5y ago
>What does this have to do with inflation? Part of the inflation rate is housing, in many regions there are still blocks on evictions, foreclosures, etc. This reduces inventory and increases prices. Evictions and Forclosures are critical to the market, if a person can just stay put and not pay rent it is a double whammy for inflation as they will use their rent money on other things increasing demand where supply is restricted (aka inflation) and their housing unit is removed from the supply also increasing inflation
- sgregnt 5y ago
  But the rent money not paid by the tenant, is not recieved by the landlord so while tenant will spend more the landlord will be spend less, the net change is zero, no?
  - syshum 5y ago
    That would only be the case if the LandLord spent it on the same things. They would not The LandLord would use the money to pay Plumbers, landscapers, and/or invest some of the money, and/or build more housing units The Tenant would use it to Paydown other debt, buy a Graphics card, or other things in the consumer market.
- dragonwriter 5y ago
  > Part of the inflation rate is housing, in many regions there are still blocks on evictions, foreclosures, etc. That's...not what was cited. I am asking about back rent payments due and bankruptcy potential which is what was cited upthread.

syshum 5y ago

The big risk here is that the fed is going to keep treading water until we fall off the upcoming cliff into another depression. Where if they would just be honest with people today, sure we will have a recession but that is preferred to depression or economic collapse which is where all of this is heading

dragonwriter 5y ago

> Its far more concerning to remember that the US Federal Reserve cannot combat this round of inflation using the prime interest rate, as it never fully abandoned QE or Quantitative Easing from 2008. Not only can it, but more importantly it can fight it without interest rates by gradually unwinding the remaining QE (which it is likely to do, starting either next month or December, from current indications) > since the corporate lending market is now saturated with low or no interest loans, any attempt to raise interest rates at all will likely trigger a massive recession Well, no not “any attempt at all”, but its probably true that the effect of any interest rate hike on slowing the overall economy and demand will be greater than it otherwise would be, for any given size of rate hike. But that's positive for ability to fight inflation with interest rates, as it means each quarter-point increase in the rate target will have more effect on slowing inflation than it otherwise would, and that fewer of them should be necessary, even before considering the effect of QE unwinding which will start before rate increases.

throw0101a 5y ago

> Its far more concerning to remember that the US Federal Reserve cannot combat this round of inflation using the prime interest rate, as it never fully abandoned QE or Quantitative Easing from 2008. The Fed stopped buying in 2014, held the assets for a few years, and they started going away in 2018: * https://fred.stlouisfed.org/series/WALCL https://fred.stlouisfed.org/series/WALCL * https://fred.stlouisfed.org/series/TREAST https://fred.stlouisfed.org/series/TREAST