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there is a "natural" interest rate which is roughly what a lender would expect to earn when lending to a reputable borrower. The Federal Reserve/ECB may lend a

by lumost 5y ago

there is a "natural" interest rate which is roughly what a lender would expect to earn when lending to a reputable borrower. The Federal Reserve/ECB may lend at a slightly lower/higher rate than this natural rate - but going far away from it leads to a crisis as the money supply becomes distorted. There is a big difference between lending at 0% when "natural" interest is .25% and lending at 14% when natural interest is 20%. If inflation is 18% you're effectively giving consumers 4% return on borrowed money, which means everyone will borrow as much money as they possibly can and use it to purchase goods.

jbay808 5y ago
> Lending at 14% when [...] inflation is 18% In the US, inflation is nearly at 7%, while savings accounts yield around 0.05%. Doesn't that mean Americans are discouraged from keeping money in savings accounts about the same amount as Turks are?
- JumpCrisscross 5y ago
  > Doesn't that mean Americans are discouraged from keeping money in savings accounts about the same amount as Turks are? If you believe American inflation will remain there, yes. Few do. (Also, the Fed is tightening.)
- lumost 5y ago
  Quite possible that the US is going down the same route Turkey is. The US has an entrenched financial system that might take an extra 6 months to enter a crises. The current belief is that the fed will manage inflation appropriately, and that the 7% headline number will vanish in a few months. Housing increasing 20% last year is a sign that the same incentive is there, getting a mortgage at 2% and then earning a free 5% interest is too good a deal to pass up.
- skybrian 5y ago
  Yes, it is discouraging. This is a reason why fixed income investments are quite unattractive right now. But there is a lag. After many years of low inflation many people haven’t changed habits yet. We still don’t expect that much inflation.

by lumost 5y ago

jbay808 5y ago

> Lending at 14% when [...] inflation is 18% In the US, inflation is nearly at 7%, while savings accounts yield around 0.05%. Doesn't that mean Americans are discouraged from keeping money in savings accounts about the same amount as Turks are?

JumpCrisscross 5y ago
> Doesn't that mean Americans are discouraged from keeping money in savings accounts about the same amount as Turks are? If you believe American inflation will remain there, yes. Few do. (Also, the Fed is tightening.)
lumost 5y ago
Quite possible that the US is going down the same route Turkey is. The US has an entrenched financial system that might take an extra 6 months to enter a crises. The current belief is that the fed will manage inflation appropriately, and that the 7% headline number will vanish in a few months. Housing increasing 20% last year is a sign that the same incentive is there, getting a mortgage at 2% and then earning a free 5% interest is too good a deal to pass up.
skybrian 5y ago
Yes, it is discouraging. This is a reason why fixed income investments are quite unattractive right now. But there is a lag. After many years of low inflation many people haven’t changed habits yet. We still don’t expect that much inflation.