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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

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
    >The feds sets the prime rate... Just to clarify, the Fed doesn't directly set the prime rate, though it does have influence on it: >...Although the Federal Reserve has no direct role in setting the prime rate, many banks choose to set their prime rates based partly on the target level of the federal funds rate--the rate that banks charge each other for short-term loans--established by the Federal Open Market Committee. https://www.federalreserve.gov/faqs/credit_12846.htm https://www.federalreserve.gov/faqs/credit_12846.htm
  - dragonwriter 5y ago
    > The feds sets the prime rate No. The Fed sets the target for the Federal Funds Rate (currently, as a range target, used to be a single rate target), which is an interbank lending rate, but don't actually set that actual rate (but it is usually very close to or within the target range.) Currently, the actual Fed Funds Rate is 0.25%, the target range is 0-0.25. The prime rate, a measure of available commercial rates, is set by banks lending decisions. It is pretty invariably higher than the Fed Funds Rate; currently, its 3.25%. > if the fed rate goes to 5% ...it would be an enormous jump from the lowest its ever been to the highest since before the 2009 crisis.
    - silexia 5y ago
      You are correct on all points. I know the Fed sets the targets and can't always get what they want, but effectively in recent past they have set the general direction of these rates. I was trying to oversimplify.
ac29 5y ago
> If the interest rates on that debt go up, many corporations will immediately go bankrupt. Interest rates on 10 year debt have gone up about 0.75% in the past year or so already (based on US 10 year treasuries, a common benchmark). They currently are at about 1.5%, a little below the average for the past decade of around 2%. I'm curious which companies, specifically, you think will "immediately" go bankrupt if interest rates come back up to 2% - a rate they were paying as recently as 2 years ago.

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
  >The feds sets the prime rate... Just to clarify, the Fed doesn't directly set the prime rate, though it does have influence on it: >...Although the Federal Reserve has no direct role in setting the prime rate, many banks choose to set their prime rates based partly on the target level of the federal funds rate--the rate that banks charge each other for short-term loans--established by the Federal Open Market Committee. https://www.federalreserve.gov/faqs/credit_12846.htm https://www.federalreserve.gov/faqs/credit_12846.htm
- dragonwriter 5y ago
  > The feds sets the prime rate No. The Fed sets the target for the Federal Funds Rate (currently, as a range target, used to be a single rate target), which is an interbank lending rate, but don't actually set that actual rate (but it is usually very close to or within the target range.) Currently, the actual Fed Funds Rate is 0.25%, the target range is 0-0.25. The prime rate, a measure of available commercial rates, is set by banks lending decisions. It is pretty invariably higher than the Fed Funds Rate; currently, its 3.25%. > if the fed rate goes to 5% ...it would be an enormous jump from the lowest its ever been to the highest since before the 2009 crisis.
  - silexia 5y ago
    You are correct on all points. I know the Fed sets the targets and can't always get what they want, but effectively in recent past they have set the general direction of these rates. I was trying to oversimplify.

ac29 5y ago

> If the interest rates on that debt go up, many corporations will immediately go bankrupt. Interest rates on 10 year debt have gone up about 0.75% in the past year or so already (based on US 10 year treasuries, a common benchmark). They currently are at about 1.5%, a little below the average for the past decade of around 2%. I'm curious which companies, specifically, you think will "immediately" go bankrupt if interest rates come back up to 2% - a rate they were paying as recently as 2 years ago.