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>> Is lowering interest rates a method to overcome a recession? It is claimed to be. The idea is that with lower interest rate, companies and people will be mo

>> Is lowering interest rates a method to overcome a recession? It is claimed to be. The idea is that with lower interest rate, companies and people will be more likely to borrow money to spend and that will boost the economy. I for one do not really believe this to be true. I suspect it's the act of lowering rates that gives a temporary boost until things rebalance. In other words, economic activity has some dependence on the derivative of interest rates. This is why things were so good from 198x through 2003 or so, rates were dropping the entire time (filtered of course).

jjoonathan 5y ago
> economic activity has some dependence on the derivative of interest rates If interest rates go down, it's easy to roll over old promises and make new ones besides. If interest rates go up, promises must be kept or the business will fold. At the end of every business cycle, interest rates are low and there are lots of unprofitable "zombie companies" that operate by simply rolling over their promises. In order for the economy to grow, interest rates must be hiked to do a controlled burn and remove this underbrush. Zombie companies have to actually die. This is painful at the best of times. Political will formation will be doubly hard this time around because A. there is more national debt (so we probably need to soft-default on it and inflate it down, first) and B. last time around Carter did the burn and Reagan got the growth and the credit, so the question is who wants to be Carter this time around.
- reflexco 5y ago
  It seems that Putin is the scapegoat for inflation and will be the scapegoat for recession as well.
  - jjoonathan 5y ago
    This isn't a rate-hike recession, it's stimulus withdrawal. Rates are at 0.25%. Last time it took 20.00% to stop inflation. We haven't even started. We haven't soft-defaulted on the national debt, so we can't even think about starting. The Ukraine conflict will be dusty history by the time actual rate hikes and an actual rate hike recession come around.
    - voisin 5y ago
      > Rates are at 0.25%. Last time it took 20.00% to stop inflation. This is good context. Is anything different this time that would make one believe we won’t need much, much higher rates to tame inflation?
      - tmn 5y ago
        The system will seize up and collapse with anything close 20% interest rates. Look at what happened in September 2019. The rates shot back to 0 because there was a liquidity problem in the repo market. The system is rife with zombie companies servicing their debt with nearly free debt. This will not go like the 70s. When rates stop increasing and go back to zero within the next two years remember this comment
        jjoonathan 5y ago
        The 1979-1982 interest rate spike was preceded by 15 years of faffing around, playing at raising interest rates, and then chickening out, with a backdrop of rising persistent inflation. I think it's likely to play out exactly as you describe, but that's exactly how it played out in the 70s. I'm much less certain that it will end the same way, but there are big problems with all the alternatives too (yuan, euro, crypto, gold) so who knows.
        voisin 5y ago
        If rates stop increasing and inflation continues with barely a pause, then what happens? We have massive social instability? Retirees are screwed? Lenders will have to increase rates just to earn a real return.
    - cjsplat 5y ago
      The MMT point is that it isn't clear that the interest rate is what killed inflation. A major cause of inflation in the 70s was the 6x increase in the price of oil. From 1980 to 1986 there was nearly a div by 5 drop.
      - 5y ago
- alexb_ 5y ago
  > unprofitable "zombie companies" that operate by simply rolling over their promises Many modern tech companies come to mind....
- phkahler 5y ago
  >> last time around Carter did the burn and Reagan got the growth and the credit, so the question is who wants to be Carter this time around. You are only the second person to tell me this story. I'm not doubting it, the first guy said it to me over 15 years ago right before the bust as he was buying 6 percent treasuries. Probably the right time to do it would have been around 2000, the last time the government ran a surplus (last years of Clinton, first year of Bush jr.) but instead we heard: There's a surplus, we don't know why, but we don't think it will go away, so here have some money, and lets spend like crazy and have a war.
blagie 5y ago
I think what you're describing is exactly what's claimed. /Lowering/ interest rates leads to growth, not low interest rates. I don't think many economists would dispute that. The general model is that interest rates, lowering taxes, and increasing government spending are tools for shoring up the economy during a recession. During a growth period, interest rates should be raised, government spending lowered, and taxes raised, so we have room to adjust them for the next recession. This can, in theory, smooth out the boom-bust cycle which otherwise naturally results. The problem is that we rarely raise interest rates, reduce spending, or raise taxes, since it's politically unpopular. Many of these tools are harmful; for example, outside a few domains like infrastructure and medicine, long-term high government spending tends to /harm/ the economy.
- dragonwriter 5y ago
  > The problem is that we rarely raise interest rates Not really true; there was a long period of near-zero rates not moving during and after the Great Recession, but that was a unique event; from 2015-2018 there was a fairly consistent notching up of rates typical of an expansion with inflationary signals, then an ease back from 2019 until COVID hit at rates were cut sharply. Looking at history there's a long run up in 2003-2006 after the 2001 recession, a run up 1992-2001 through the dotcom boom after the short period of easing from 1989-1992, a runup from 1986-1989, etc.
  - voisin 5y ago
    Throughout these time periods there was a dramatic increase in the money supply (from my view of FRED stats it doesn’t look like there’s ever been a contraction of the monetary supply), so we’re rate increases just offset by enough monetary growth to offset?
    - dragonwriter 5y ago
      > Throughout these time periods there was a dramatic increase in the money supply well, yeah, a hot economy means that borrowing even at high interest is attractive, which is why you are trying to constrain lending (money creation) with higher interest in the first place to prevent inflation. What would you expect to see?

jjoonathan 5y ago

> economic activity has some dependence on the derivative of interest rates If interest rates go down, it's easy to roll over old promises and make new ones besides. If interest rates go up, promises must be kept or the business will fold. At the end of every business cycle, interest rates are low and there are lots of unprofitable "zombie companies" that operate by simply rolling over their promises. In order for the economy to grow, interest rates must be hiked to do a controlled burn and remove this underbrush. Zombie companies have to actually die. This is painful at the best of times. Political will formation will be doubly hard this time around because A. there is more national debt (so we probably need to soft-default on it and inflate it down, first) and B. last time around Carter did the burn and Reagan got the growth and the credit, so the question is who wants to be Carter this time around.

reflexco 5y ago
It seems that Putin is the scapegoat for inflation and will be the scapegoat for recession as well.
- jjoonathan 5y ago
  This isn't a rate-hike recession, it's stimulus withdrawal. Rates are at 0.25%. Last time it took 20.00% to stop inflation. We haven't even started. We haven't soft-defaulted on the national debt, so we can't even think about starting. The Ukraine conflict will be dusty history by the time actual rate hikes and an actual rate hike recession come around.
  - voisin 5y ago
    > Rates are at 0.25%. Last time it took 20.00% to stop inflation. This is good context. Is anything different this time that would make one believe we won’t need much, much higher rates to tame inflation?
    - tmn 5y ago
      The system will seize up and collapse with anything close 20% interest rates. Look at what happened in September 2019. The rates shot back to 0 because there was a liquidity problem in the repo market. The system is rife with zombie companies servicing their debt with nearly free debt. This will not go like the 70s. When rates stop increasing and go back to zero within the next two years remember this comment
      - jjoonathan 5y ago
        The 1979-1982 interest rate spike was preceded by 15 years of faffing around, playing at raising interest rates, and then chickening out, with a backdrop of rising persistent inflation. I think it's likely to play out exactly as you describe, but that's exactly how it played out in the 70s. I'm much less certain that it will end the same way, but there are big problems with all the alternatives too (yuan, euro, crypto, gold) so who knows.
      - voisin 5y ago
        If rates stop increasing and inflation continues with barely a pause, then what happens? We have massive social instability? Retirees are screwed? Lenders will have to increase rates just to earn a real return.
  - cjsplat 5y ago
    The MMT point is that it isn't clear that the interest rate is what killed inflation. A major cause of inflation in the 70s was the 6x increase in the price of oil. From 1980 to 1986 there was nearly a div by 5 drop.
    - 5y ago
alexb_ 5y ago
> unprofitable "zombie companies" that operate by simply rolling over their promises Many modern tech companies come to mind....
phkahler 5y ago
>> last time around Carter did the burn and Reagan got the growth and the credit, so the question is who wants to be Carter this time around. You are only the second person to tell me this story. I'm not doubting it, the first guy said it to me over 15 years ago right before the bust as he was buying 6 percent treasuries. Probably the right time to do it would have been around 2000, the last time the government ran a surplus (last years of Clinton, first year of Bush jr.) but instead we heard: There's a surplus, we don't know why, but we don't think it will go away, so here have some money, and lets spend like crazy and have a war.

blagie 5y ago

I think what you're describing is exactly what's claimed. /Lowering/ interest rates leads to growth, not low interest rates. I don't think many economists would dispute that. The general model is that interest rates, lowering taxes, and increasing government spending are tools for shoring up the economy during a recession. During a growth period, interest rates should be raised, government spending lowered, and taxes raised, so we have room to adjust them for the next recession. This can, in theory, smooth out the boom-bust cycle which otherwise naturally results. The problem is that we rarely raise interest rates, reduce spending, or raise taxes, since it's politically unpopular. Many of these tools are harmful; for example, outside a few domains like infrastructure and medicine, long-term high government spending tends to /harm/ the economy.

dragonwriter 5y ago
> The problem is that we rarely raise interest rates Not really true; there was a long period of near-zero rates not moving during and after the Great Recession, but that was a unique event; from 2015-2018 there was a fairly consistent notching up of rates typical of an expansion with inflationary signals, then an ease back from 2019 until COVID hit at rates were cut sharply. Looking at history there's a long run up in 2003-2006 after the 2001 recession, a run up 1992-2001 through the dotcom boom after the short period of easing from 1989-1992, a runup from 1986-1989, etc.
- voisin 5y ago
  Throughout these time periods there was a dramatic increase in the money supply (from my view of FRED stats it doesn’t look like there’s ever been a contraction of the monetary supply), so we’re rate increases just offset by enough monetary growth to offset?
  - dragonwriter 5y ago
    > Throughout these time periods there was a dramatic increase in the money supply well, yeah, a hot economy means that borrowing even at high interest is attractive, which is why you are trying to constrain lending (money creation) with higher interest in the first place to prevent inflation. What would you expect to see?