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The Taylor rule gives the math behind it, but the layman's explanation is that as long as rates are lower than inflation, you turn a profit by borrowing money a
by nostrademons 4y ago
The Taylor rule gives the math behind it, but the layman's explanation is that as long as rates are lower than inflation, you turn a profit by borrowing money and buying a basket of assets, since their price will rise alongside inflation. This incentivizes people to borrow more money, which increases the money supply, which further exacerbates inflation.
This is the first term 'p' in the Taylor rule, which corrects the nominal interest rate that the Fed sets into a real interest rate that accounts for inflation.
- ac29 4y ago> you turn a profit by borrowing money and buying a basket of assets, since their price will rise alongside inflation That explanation doesnt make sense when the basket of assets has a expiration date and/or significant storage or maintenance costs.
- nostrademons 4y agoThere are plenty of assets that don't have an expiration date, like real estate or stocks of profitable companies with pricing power. And those are the assets that people are actually buying, and there prices have been going up to match.