4 ms·

There's a world of difference between high interest rates (which are good and healthy) and rising interest rates (which implode the economy). You gotta look at

There's a world of difference between high interest rates (which are good and healthy) and rising interest rates (which implode the economy). You gotta look at the derivative. Rising interest rates are really, really bad. Anyone who relies on revolving business debt, credit card debt, or other non-fixed-rate debt goes bankrupt. I kinda wish I entered the economy when we still had 12% interest rates. Each time a recession hits, we level it off by lowering them a bit, and we've kinda hit the floor. I don't think we can get back to 12% interest within my lifetime without some kind of economic collapse or cataclysmic event.

listenallyall 5y ago
> Anyone who relies on revolving business debt, credit card debt, or other non-fixed-rate debt goes bankrupt. This is hyperbole. Rising interest rates aren't fun, but they aren't cataclysmic. Rates have gone up and down for decades. Further, if you signal that you're taking the option to raise rates off the table, risk tolerance and asset prices will explode (some would say this has already happened due to Fed signaling).
- blip54321 5y ago
  I hope you're right. The extent to which you might be right or wrong depends to some extent on how much debt there is in the system (or how leveraged/wound up the economy is). A debt-based economy is much more vulnerable. Last time we raised interest rates rapidly, in the eighties, household debt was less than half of what it is today, adjusted for GDP.
  - listenallyall 5y ago
    Yes, whenever rates eventually rise, it's going to hurt some people. People and companies burdened with debt. Some will in fact go bankrupt (most will not, of course). But that's not a reason not to do it, all that is, is more evidence of fiscal irresponsibility. Any company which is unable to withstand higher debt costs is just as poorly managed as one which is unable to withstand a rise in any other input cost. If McDonald's went bankrupt tomorrow claiming rising beef costs, you'd say their business plan was flawed, being overly reliant on subsidized farming and not planning ahead for contingencies. The same is entirely true for a company that is bankrupted by higher interest rates. Making excuses and accommodating heavy debtors by keeping rates artificially low is one of the most damaging things you can do.
    - hndamien 5y ago
      The caveat is that the currency is being debased and interest rates are being manipulated, forcing people out on the risk curve.
- hogFeast 5y ago
  To explain more about the logic used by the guy you replied to... ...the problem is people think: interest rates go up, economy slows down, we can never raise interest rates. This logic takes on a life of its own. The US economy was in this position in the late 60s: the Fed was under pressure to accommodate govt financing, they raised rates in 1959 and were blamed for causing a recession that influenced the outcome of the 1960 election, in 1967 they attempted to raise rates briefly but did so at the wrong time...eventual result (combined with some unfortunate timing with oil price changes) is rates never rise, inflation does, serious problems. When the discussion moves to this point, and we have been moving this way for years, I think it is a sign that something has gone quite wrong. And that expectations around interest rates and Fed behaviour are actually adding volatility and uncertainty, not reducing it. You are quite correct though. Rising interest rates are not bad. It is just the price of money. Falling interest rates can be just as bad too, but the problems are usually subtle (i.e. financial repression, which is what is happening now, no-one will realise what has happened until they try to retire in 20/30 years and realise they can't). Public policy has moved to this risky stage where people blame everything on politicians...the result is, unfortunately, inevitable.
  - refurb 5y ago
    This is the exact situation many financial commentators highlighted post-2008, so I think your historical points are very relevant. The Federal Reserve is supposed to have independence from the government. It will develop its own monetary policy which doesn't need government approval. In reality, the President appoints all the Governors, so people get selected based on doing what the President wants done. The Fed's monetary policy is typically an inflation target - keep the money supply growing to encourage growth, but keep inflation in check as well. The problem is the political influence starts to impact the pure decisions about what's best for the economy. Election coming up? Well, hold off on increasing rates since we need good employment numbers for the next few months. If the economy gets unstable the Fed ends up riding the razor's edge trying to stick to policy but not piss off the President. Problem is that the economy can go off the rails faster than the Fed can response. The issue highlighted after 2008 was that "yeah, printing new dollars and buying distressed assets worked pretty well! and no massive inflation so far. But there will be incredible pressure to not raise rates later and if the Fed waits too long to apply the brakes, they won't be able to get ahead of it and inflation will skyrocket."
- 01100011 5y ago
  I really don't know if this is correct or not, but one thing I've heard is that low rates disincentivize lending by banks because loans are less profitable. Higher rates will actually encourage lending. Much of the money in circulation comes from the banks because of fractional lending and not from the fed's printing presses. I'm curious if anyone has a take on that. Also, I think rates need to be looked at in comparison to GDP growth. High rates are fine when GDP growth is greater. If rates shoot higher because the fed is trying to stop runaway supply-side driven inflation while GDP growth is low it could easily kick off a depression.
  - listenallyall 5y ago
    Spreads compress when rates are low, so yes, loans are less profitable per dollar when rates are low. But many more people and companies want to borrow so banks make out fine. And there are plenty of other financing sources available for companies, including issuing equity, VCs, junk bonds, which grow in popularity when investors need to chase yields.
  - sokoloff 5y ago
    Higher rates increase willingness to lend. Lower rates increase willingness to borrow. You need both a willing lender and a willing borrower for lending to happen.
JamesBarney 5y ago
The reason we had a 12% interest rate was because we had a 13% inflation rate.
snidane 5y ago
Even worse than rising interest rates is a society addicted to the fentanyl of zero interest rates. There is a reason major religions regulated debt in general, because that is how societal slavery develops. Of course we, the modern people of technology, 'know better' than our primitive ancient ancestors.
- imtringued 5y ago
  I don't get it. Most religions were against usury and they insisted on debt forgiveness if the debtor can't pay. Charging 0% interest is absolutely fantastic. The only problem is that we don't do the debt forgiveness. We bail out banks and then expect tax payers to shoulder some or all of the losses. It was especially bad with Germany vs Greece. German banks were bailed out and public healthcare was basically eliminated in Greece. The only reason why anyone would be against low interest rates is that they noticed that those interest rates eat into economic rents and therefore the owner of money benefited from the economic rents rather than the owner of the monopoly. In that sense, the only difference is that the money goes to the land owner instead of going to the bank. People don't realize that if they buy a $600k house with 0% interest that they would still have to pay $600k at 5% interest except most of the money goes to the bank instead of the seller who only gets $250k (made up number).
  - AniseAbyss 5y ago
    Debt forgiveness does exist. You can declare bankruptcy.

listenallyall 5y ago

> Anyone who relies on revolving business debt, credit card debt, or other non-fixed-rate debt goes bankrupt. This is hyperbole. Rising interest rates aren't fun, but they aren't cataclysmic. Rates have gone up and down for decades. Further, if you signal that you're taking the option to raise rates off the table, risk tolerance and asset prices will explode (some would say this has already happened due to Fed signaling).

blip54321 5y ago
I hope you're right. The extent to which you might be right or wrong depends to some extent on how much debt there is in the system (or how leveraged/wound up the economy is). A debt-based economy is much more vulnerable. Last time we raised interest rates rapidly, in the eighties, household debt was less than half of what it is today, adjusted for GDP.
- listenallyall 5y ago
  Yes, whenever rates eventually rise, it's going to hurt some people. People and companies burdened with debt. Some will in fact go bankrupt (most will not, of course). But that's not a reason not to do it, all that is, is more evidence of fiscal irresponsibility. Any company which is unable to withstand higher debt costs is just as poorly managed as one which is unable to withstand a rise in any other input cost. If McDonald's went bankrupt tomorrow claiming rising beef costs, you'd say their business plan was flawed, being overly reliant on subsidized farming and not planning ahead for contingencies. The same is entirely true for a company that is bankrupted by higher interest rates. Making excuses and accommodating heavy debtors by keeping rates artificially low is one of the most damaging things you can do.
  - hndamien 5y ago
    The caveat is that the currency is being debased and interest rates are being manipulated, forcing people out on the risk curve.
hogFeast 5y ago
To explain more about the logic used by the guy you replied to... ...the problem is people think: interest rates go up, economy slows down, we can never raise interest rates. This logic takes on a life of its own. The US economy was in this position in the late 60s: the Fed was under pressure to accommodate govt financing, they raised rates in 1959 and were blamed for causing a recession that influenced the outcome of the 1960 election, in 1967 they attempted to raise rates briefly but did so at the wrong time...eventual result (combined with some unfortunate timing with oil price changes) is rates never rise, inflation does, serious problems. When the discussion moves to this point, and we have been moving this way for years, I think it is a sign that something has gone quite wrong. And that expectations around interest rates and Fed behaviour are actually adding volatility and uncertainty, not reducing it. You are quite correct though. Rising interest rates are not bad. It is just the price of money. Falling interest rates can be just as bad too, but the problems are usually subtle (i.e. financial repression, which is what is happening now, no-one will realise what has happened until they try to retire in 20/30 years and realise they can't). Public policy has moved to this risky stage where people blame everything on politicians...the result is, unfortunately, inevitable.
- refurb 5y ago
  This is the exact situation many financial commentators highlighted post-2008, so I think your historical points are very relevant. The Federal Reserve is supposed to have independence from the government. It will develop its own monetary policy which doesn't need government approval. In reality, the President appoints all the Governors, so people get selected based on doing what the President wants done. The Fed's monetary policy is typically an inflation target - keep the money supply growing to encourage growth, but keep inflation in check as well. The problem is the political influence starts to impact the pure decisions about what's best for the economy. Election coming up? Well, hold off on increasing rates since we need good employment numbers for the next few months. If the economy gets unstable the Fed ends up riding the razor's edge trying to stick to policy but not piss off the President. Problem is that the economy can go off the rails faster than the Fed can response. The issue highlighted after 2008 was that "yeah, printing new dollars and buying distressed assets worked pretty well! and no massive inflation so far. But there will be incredible pressure to not raise rates later and if the Fed waits too long to apply the brakes, they won't be able to get ahead of it and inflation will skyrocket."
01100011 5y ago
I really don't know if this is correct or not, but one thing I've heard is that low rates disincentivize lending by banks because loans are less profitable. Higher rates will actually encourage lending. Much of the money in circulation comes from the banks because of fractional lending and not from the fed's printing presses. I'm curious if anyone has a take on that. Also, I think rates need to be looked at in comparison to GDP growth. High rates are fine when GDP growth is greater. If rates shoot higher because the fed is trying to stop runaway supply-side driven inflation while GDP growth is low it could easily kick off a depression.
- listenallyall 5y ago
  Spreads compress when rates are low, so yes, loans are less profitable per dollar when rates are low. But many more people and companies want to borrow so banks make out fine. And there are plenty of other financing sources available for companies, including issuing equity, VCs, junk bonds, which grow in popularity when investors need to chase yields.
- sokoloff 5y ago
  Higher rates increase willingness to lend. Lower rates increase willingness to borrow. You need both a willing lender and a willing borrower for lending to happen.

JamesBarney 5y ago

The reason we had a 12% interest rate was because we had a 13% inflation rate.

snidane 5y ago

Even worse than rising interest rates is a society addicted to the fentanyl of zero interest rates. There is a reason major religions regulated debt in general, because that is how societal slavery develops. Of course we, the modern people of technology, 'know better' than our primitive ancient ancestors.

imtringued 5y ago
I don't get it. Most religions were against usury and they insisted on debt forgiveness if the debtor can't pay. Charging 0% interest is absolutely fantastic. The only problem is that we don't do the debt forgiveness. We bail out banks and then expect tax payers to shoulder some or all of the losses. It was especially bad with Germany vs Greece. German banks were bailed out and public healthcare was basically eliminated in Greece. The only reason why anyone would be against low interest rates is that they noticed that those interest rates eat into economic rents and therefore the owner of money benefited from the economic rents rather than the owner of the monopoly. In that sense, the only difference is that the money goes to the land owner instead of going to the bank. People don't realize that if they buy a $600k house with 0% interest that they would still have to pay $600k at 5% interest except most of the money goes to the bank instead of the seller who only gets $250k (made up number).
- AniseAbyss 5y ago
  Debt forgiveness does exist. You can declare bankruptcy.