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This article appears to take place in a universe where interest rates at central banks are at counter-inflationary levels. They've been inflationary for a decad

This article appears to take place in a universe where interest rates at central banks are at counter-inflationary levels. They've been inflationary for a decade, and continue to be so. With inflation at 10%, fears about "going too far with interest rates" make sense only *at least* north of 5%, and realistically, 8%.

sfe22 4y ago
Why 8? Doesn’t there need to be a premium for borrowing money? If i can borrow money at zero percent inflation adjusted rate, that is a great deal and still inflationary. I would say 12 percent would be neutral on 10 percent inflation.
- blagie 4y ago
  No, there doesn't need to be a premium on borrowing money. Why would there need to be a premium? If I can invest in businesses with 0% return and make a profit, that's generally good for short-term economic growth, and bad for long-term economic efficiency. I'm not arguing for more or less interest, but I don't think there is a "natural." Interest rates have gone negative several times in several contexts, and the universe didn't explode in a numerical singularity. I am arguing for having reason beyond "we've always done it that way" or "it doesn't make sense."
  - refurb 4y ago
    Of course there needs to be a premium to lend money. Why would I lend someone money to get the same amount back (in real terms)? You'd need at least some premium to account for risk of non-payment, changes in inflation, etc. There doesn't need to be a consistent premium to borrowing money. So if I borrow $1M for 30 years right now the interest rate doesn't have to be 10% because most people assume inflation will come down, so the average inflation over 3 years might be 3-4%, so an interest rate of 5-6% is probably enough of a premium.
    - roflyear 4y ago
      To safely park cash. Think government securities.
      - refurb 4y ago
        Ok, fair point on that one. Eliminate the default risk and you're willing to take 0% or even a negative real interest rate.
        roflyear 4y ago
        Yeah. But without getting value through some mechanism like that (or, imagine if you're convinced that equities will be flat or return negative over the next few years) you're correct - you should make money from lending money.
      - blagie 4y ago
        This is correct. If you have $100B, what are your options? 1) Risky return-yielding instruments, like stocks and bonds 2) Non-liquid assets, like land 3) A Scrooge McDuck giant vault full of cash 4) ... and so on. In many cases, a negative interest account works better than any of the above. Sweden was the first to employ them in 2009, with an interest rate of -0.25%. The world didn't implode, as people predicted. If I deposit $100B overnight at -0.25%, I've lost just north of half a million dollars for that night. That's enough to push me to look for other places to stash my money (stimulating the economy), but not enough to break me (assuming I have $100B, which unfortunately, I don't). Critically, if the economy is collapsing, and you expect stocks to go down, removing other places to stash money can prop them up.
        prottog 4y ago
        > That's enough to push me to look for other places to stash my money Yep, you take your $100B and invest it in the US capital markets. Does nothing for Sweden's economy other than make it comparatively less competitive.
  - FormerBandmate 4y ago
    When interest rates are negative it's inherently inflationary. It won't destroy the universe but it encourages people and businesses to borrow to get additional resources (the deteriorating economic conditions right now make that a very bad idea, but in general this is true)
    - imtringued 4y ago
      >When interest rates are negative it's inherently inflationary. Is this supposed to be some kind of joke? When you have 3% deflation then a -3% negative rate just sets real returns back to 0% like one would expect in a functioning market. Also, a negative interest rate on cash allows the abolishment of inflation as central banks no longer need to target a positive inflation rate and can instead do price level targeting which is the complete destruction of the concept of inflation itself. Lower interest payments mean most of the payments go towards the principal which means the money supply shrinks given a sufficient debt brake on government spending. Negative rates allow 100% reserve requirements to function and mitigate almost all the problems with the loanable funds model which means the central bank doesn't have to control the interest rate anymore. If anything it is the opposite, if interest rates exceed returns in the real economy, the government has to borrow and spend to stimulate the economy until there is enough inflation to pay the interest rates expected of it.
- mjburgess 4y ago
  I was being conservative to give the author some room to make the argument. If rates are 8%, I can see this article at least being justified in its concern.
- fennecfoxen 4y ago
  We've had many years of 0% rates and 2%ish inflation. A return to that status quo ante isn't exactly crushingly tight monetary policy. But perhaps inflation will fall before we hit 8%.
  - roflyear 4y ago
    Inflation is 8% right now, not 10%. So 6% seems to be a good "target" - but many economists in the US are thinking that inflation will not stay at 8% (that is the hope...) so they are aiming for a rate that reflects a 5.5-6.5% inflation rate over 2023 - which is from anywhere from 3.75% (I think at this point this is too low) to 4.75% (higher than expected). This makes a lot of sense to me and I think we'll see around a 4.5%-4.75% target rate by the end of 2023.
    - UncleMeat 4y ago
      Inflation was 8% averaged over the past year. Right now, the calculation is much more complicated and we observed nearly net zero price change of the basket over the past two months.
      - roflyear 4y ago
        Correct.
- roflyear 4y ago
  The idea is that you are TRYING to drive inflation down. You can borrow at 8%, and that's great when inflation is at like 10-12%, but once inflation goes down (the goal of high rates) it's bad.
- koboll 4y ago
  You are conflating backward-looking inflation (money has gotten 10 percent less valuable over the past year) with forward-looking inflation (we should lend at 12 percent interest because we expect money to get 10 percent less valuable over the next year). The former doesn't guarantee the latter; the latter is unlikely and gets unlikelier the more interest rates ratchet upward. That's why they are incremented - at a certain point inflation will inevitably reverse, and that point is likely below 12%, so going to 12% would unnecessarily knife the economy.
splitstud 4y ago
t_mann 4y ago
The https://en.wikipedia.org/wiki/Real_interest_rate https://en.wikipedia.org/wiki/Real_interest_rate is defined as the nominal interest rate minus inflation. So with your numbers, nominal rates would have to go a lot higher than you suggest to result in positive real rates.
- slaw 4y ago
  > Since 2010, the U.S. Treasury has been obtaining negative real interest rates on government debt Wikipedia says we had negative real interest rate since 2010, but it was only -2%, now we have -7% real interest rate.
tootie 4y ago
It also takes place in a universe where policy making ended in 2022. Fiscal contraction is happening because we just recovered from historic fiscal expansion due to the pandemic. Contraction will continue so long as growth continues. If we slide into recession and inflationary pressure ebbs, we'll just reverse course again. Honestly, I know cynicism and despondency are in vogue right now but the last 20 years have shown global policy makers are doing an absolutely outstanding job. Fiat currency and Keynesian orthodoxy have been vindicated at every turn. Obviously not everything has gone perfect but considering the amount of disasters faced, we've suffered far less than in the past.
nostromo 4y ago
Besides tanking all asset prices initially - that actually could pave the way for more inflation. US federal debt is 30 trillion dollars. If the federal government had to pay 10% interest on its debt, it’d require almost all of federal spending be paid on our debt. Of course that’d never happen. Instead they’d just borrow more to pay the interest, which means more dollars would be minted and we’d print several trillion dollars a year in unwanted stimulus each year just paying our federal debt. (Or enter a debt crisis.)
- imtringued 4y ago
  How about you introduce a negative interest rate on cash and then mandate an actual debt ceiling like a reasonable person instead of continuing this pyramid scheme.
unholiness 4y ago
Macroeconomics novice here. What's the argument that interest rates need to be close to inflation rates to counteract it? It seems like there should be an intrinsic time-value of money (e.g. 1 stuff today is worth 1.05 stuff next year) which is tradable (supply of future-stuff will equal demand for future-stuff at some rate like 1.05). And that single rate of stuff-interest would exist if the central bank does nothing. If that's true, then in a long-run equilibrium, shouldn't there be zero inflation if the interest rate in dollars (i.e. the fed rate) matches that intrinsic rate of stuff-interest? Any explanation or links to the same would be helpful! I'm just past the point of grasping the fact that interest rates going down causes inflation to go up, but finding it hard to find sources on anything that give me intuition on answering e.g. how much things would go up if you held one policy forever, and what factors that answer would depend on.
- edgyquant 4y ago
  Interest rates are risk free premiums. If inflation is less than them they are profitable this people move their capital into “risk free assets” like bonds, loans etc that are based on that rate. If the risk free rate is less than the inflation rate then people move their cash into higher risk assets like stocks otherwise they lose out to inflation in the long run. This is said to kick start the economy etc.
  - mdcds 4y ago
    Which people? Def not mom-and-pop investors who use pension funds and wealth managers/advisors to keep their investments in (usually) diversified portfolios.
    - edgyquant 4y ago
      Those mom an pops own ETFs and index funds which definitely allocate for risk based on interest rates and inflation.
- mdcds 4y ago
  I had the same question! The mechanism of higher rates reducing inflation isn't clear to me. Does it go down because people with cash choose to park it and earn interest instead of buying goods and services? Or does it go down because higher interest rates make the cost of doing business more expensive which leads to reduction in overall business activity? If it's by reducing business activity, then seems like the "breaking point" can be at any arbitrary interest rate for a given country in a given year. Also, if inflation is caused by the lack of supply (like the supply chain issues / chip shortage and such), then I think reducing business activity will only exacerbate the problem by reducing the supply further (and I don't hear anyone explore this angle).

sfe22 4y ago

Why 8? Doesn’t there need to be a premium for borrowing money? If i can borrow money at zero percent inflation adjusted rate, that is a great deal and still inflationary. I would say 12 percent would be neutral on 10 percent inflation.

blagie 4y ago
No, there doesn't need to be a premium on borrowing money. Why would there need to be a premium? If I can invest in businesses with 0% return and make a profit, that's generally good for short-term economic growth, and bad for long-term economic efficiency. I'm not arguing for more or less interest, but I don't think there is a "natural." Interest rates have gone negative several times in several contexts, and the universe didn't explode in a numerical singularity. I am arguing for having reason beyond "we've always done it that way" or "it doesn't make sense."
- refurb 4y ago
  Of course there needs to be a premium to lend money. Why would I lend someone money to get the same amount back (in real terms)? You'd need at least some premium to account for risk of non-payment, changes in inflation, etc. There doesn't need to be a consistent premium to borrowing money. So if I borrow $1M for 30 years right now the interest rate doesn't have to be 10% because most people assume inflation will come down, so the average inflation over 3 years might be 3-4%, so an interest rate of 5-6% is probably enough of a premium.
  - roflyear 4y ago
    To safely park cash. Think government securities.
    - refurb 4y ago
      Ok, fair point on that one. Eliminate the default risk and you're willing to take 0% or even a negative real interest rate.
      - roflyear 4y ago
        Yeah. But without getting value through some mechanism like that (or, imagine if you're convinced that equities will be flat or return negative over the next few years) you're correct - you should make money from lending money.
    - blagie 4y ago
      This is correct. If you have $100B, what are your options? 1) Risky return-yielding instruments, like stocks and bonds 2) Non-liquid assets, like land 3) A Scrooge McDuck giant vault full of cash 4) ... and so on. In many cases, a negative interest account works better than any of the above. Sweden was the first to employ them in 2009, with an interest rate of -0.25%. The world didn't implode, as people predicted. If I deposit $100B overnight at -0.25%, I've lost just north of half a million dollars for that night. That's enough to push me to look for other places to stash my money (stimulating the economy), but not enough to break me (assuming I have $100B, which unfortunately, I don't). Critically, if the economy is collapsing, and you expect stocks to go down, removing other places to stash money can prop them up.
      - prottog 4y ago
        > That's enough to push me to look for other places to stash my money Yep, you take your $100B and invest it in the US capital markets. Does nothing for Sweden's economy other than make it comparatively less competitive.
- FormerBandmate 4y ago
  When interest rates are negative it's inherently inflationary. It won't destroy the universe but it encourages people and businesses to borrow to get additional resources (the deteriorating economic conditions right now make that a very bad idea, but in general this is true)
  - imtringued 4y ago
    >When interest rates are negative it's inherently inflationary. Is this supposed to be some kind of joke? When you have 3% deflation then a -3% negative rate just sets real returns back to 0% like one would expect in a functioning market. Also, a negative interest rate on cash allows the abolishment of inflation as central banks no longer need to target a positive inflation rate and can instead do price level targeting which is the complete destruction of the concept of inflation itself. Lower interest payments mean most of the payments go towards the principal which means the money supply shrinks given a sufficient debt brake on government spending. Negative rates allow 100% reserve requirements to function and mitigate almost all the problems with the loanable funds model which means the central bank doesn't have to control the interest rate anymore. If anything it is the opposite, if interest rates exceed returns in the real economy, the government has to borrow and spend to stimulate the economy until there is enough inflation to pay the interest rates expected of it.
mjburgess 4y ago
I was being conservative to give the author some room to make the argument. If rates are 8%, I can see this article at least being justified in its concern.
fennecfoxen 4y ago
We've had many years of 0% rates and 2%ish inflation. A return to that status quo ante isn't exactly crushingly tight monetary policy. But perhaps inflation will fall before we hit 8%.
- roflyear 4y ago
  Inflation is 8% right now, not 10%. So 6% seems to be a good "target" - but many economists in the US are thinking that inflation will not stay at 8% (that is the hope...) so they are aiming for a rate that reflects a 5.5-6.5% inflation rate over 2023 - which is from anywhere from 3.75% (I think at this point this is too low) to 4.75% (higher than expected). This makes a lot of sense to me and I think we'll see around a 4.5%-4.75% target rate by the end of 2023.
  - UncleMeat 4y ago
    Inflation was 8% averaged over the past year. Right now, the calculation is much more complicated and we observed nearly net zero price change of the basket over the past two months.
    - roflyear 4y ago
      Correct.
roflyear 4y ago
The idea is that you are TRYING to drive inflation down. You can borrow at 8%, and that's great when inflation is at like 10-12%, but once inflation goes down (the goal of high rates) it's bad.
koboll 4y ago
You are conflating backward-looking inflation (money has gotten 10 percent less valuable over the past year) with forward-looking inflation (we should lend at 12 percent interest because we expect money to get 10 percent less valuable over the next year). The former doesn't guarantee the latter; the latter is unlikely and gets unlikelier the more interest rates ratchet upward. That's why they are incremented - at a certain point inflation will inevitably reverse, and that point is likely below 12%, so going to 12% would unnecessarily knife the economy.

splitstud 4y ago

t_mann 4y ago

The https://en.wikipedia.org/wiki/Real_interest_rate https://en.wikipedia.org/wiki/Real_interest_rate is defined as the nominal interest rate minus inflation. So with your numbers, nominal rates would have to go a lot higher than you suggest to result in positive real rates.

slaw 4y ago
> Since 2010, the U.S. Treasury has been obtaining negative real interest rates on government debt Wikipedia says we had negative real interest rate since 2010, but it was only -2%, now we have -7% real interest rate.

tootie 4y ago

It also takes place in a universe where policy making ended in 2022. Fiscal contraction is happening because we just recovered from historic fiscal expansion due to the pandemic. Contraction will continue so long as growth continues. If we slide into recession and inflationary pressure ebbs, we'll just reverse course again. Honestly, I know cynicism and despondency are in vogue right now but the last 20 years have shown global policy makers are doing an absolutely outstanding job. Fiat currency and Keynesian orthodoxy have been vindicated at every turn. Obviously not everything has gone perfect but considering the amount of disasters faced, we've suffered far less than in the past.

nostromo 4y ago

Besides tanking all asset prices initially - that actually could pave the way for more inflation. US federal debt is 30 trillion dollars. If the federal government had to pay 10% interest on its debt, it’d require almost all of federal spending be paid on our debt. Of course that’d never happen. Instead they’d just borrow more to pay the interest, which means more dollars would be minted and we’d print several trillion dollars a year in unwanted stimulus each year just paying our federal debt. (Or enter a debt crisis.)

imtringued 4y ago
How about you introduce a negative interest rate on cash and then mandate an actual debt ceiling like a reasonable person instead of continuing this pyramid scheme.

unholiness 4y ago

Macroeconomics novice here. What's the argument that interest rates need to be close to inflation rates to counteract it? It seems like there should be an intrinsic time-value of money (e.g. 1 stuff today is worth 1.05 stuff next year) which is tradable (supply of future-stuff will equal demand for future-stuff at some rate like 1.05). And that single rate of stuff-interest would exist if the central bank does nothing. If that's true, then in a long-run equilibrium, shouldn't there be zero inflation if the interest rate in dollars (i.e. the fed rate) matches that intrinsic rate of stuff-interest? Any explanation or links to the same would be helpful! I'm just past the point of grasping the fact that interest rates going down causes inflation to go up, but finding it hard to find sources on anything that give me intuition on answering e.g. how much things would go up if you held one policy forever, and what factors that answer would depend on.

edgyquant 4y ago
Interest rates are risk free premiums. If inflation is less than them they are profitable this people move their capital into “risk free assets” like bonds, loans etc that are based on that rate. If the risk free rate is less than the inflation rate then people move their cash into higher risk assets like stocks otherwise they lose out to inflation in the long run. This is said to kick start the economy etc.
- mdcds 4y ago
  Which people? Def not mom-and-pop investors who use pension funds and wealth managers/advisors to keep their investments in (usually) diversified portfolios.
  - edgyquant 4y ago
    Those mom an pops own ETFs and index funds which definitely allocate for risk based on interest rates and inflation.
mdcds 4y ago
I had the same question! The mechanism of higher rates reducing inflation isn't clear to me. Does it go down because people with cash choose to park it and earn interest instead of buying goods and services? Or does it go down because higher interest rates make the cost of doing business more expensive which leads to reduction in overall business activity? If it's by reducing business activity, then seems like the "breaking point" can be at any arbitrary interest rate for a given country in a given year. Also, if inflation is caused by the lack of supply (like the supply chain issues / chip shortage and such), then I think reducing business activity will only exacerbate the problem by reducing the supply further (and I don't hear anyone explore this angle).