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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

by 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?
phkahler 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. No, they treat is as if the steady state economy will be larger at a given lower rate. For example GDP = X+Y+Z + K/rate. What I'm saying is that GDP = X+Y+Z + K/rate' which is not sustainable at all and means existing policy is not at all the right way to handle it. Actually there may be some degree of truth and both terms should be present in the equation, but nobody talks or acts like the derivative term exists.

by blagie 5y ago

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?

phkahler 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. No, they treat is as if the steady state economy will be larger at a given lower rate. For example GDP = X+Y+Z + K/rate. What I'm saying is that GDP = X+Y+Z + K/rate' which is not sustainable at all and means existing policy is not at all the right way to handle it. Actually there may be some degree of truth and both terms should be present in the equation, but nobody talks or acts like the derivative term exists.