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> I personally predict that a year from now, a lot of companies (especially ones in the tech sector fueled by immense amounts of cheap debt and the assumption a

> I personally predict that a year from now, a lot of companies (especially ones in the tech sector fueled by immense amounts of cheap debt and the assumption ad revenue always goes up) will collapse. I think this will unfold quicker than that. We’ve had artificially low interest rates (+ QE) for over a decade now. There’s lots and lots of economic activity that will not be profitable when rates go up. If we’ll have ~5% rates in February (as Powell indicates) then I think we’ll see massive deterioration in the labor market before summer.

whimsicalism 4y ago
What makes an interest rate artificial? If it is different from what you think or want it to be?
- datavirtue 4y ago
  Is the market setting the rates when the Fed has them bottomed out? Kind of hard to tell when the banks are essentially able to create free money at the discount window. I imagine interest rates would be much, much higher than we are used to if they relied on raw savings. Things would be very different for sure, and we most likely would not be able to maintain enough growth to match population growth. That would mean widescale creeping poverty. Maybe not, seems like all we know is a strong dollar cheap fiat orgy, and it has been quite nice.
  - whimsicalism 4y ago
    Given that these are both human constructs, I don't know what makes one more artificial than the other. Given that one would likely lead to awful financial contractions and instability... and the other doesn't, seems like there is a preferred option - artificiality aside.
    - bee_rider 4y ago
      At some point this becomes "is human society artificial or is it, like, the natural product of human nature," right?
      - whimsicalism 4y ago
        Good point. Maybe the word "artificial" to describe one human construct vs. another human construct is not a productive conversation.
- bjornsing 4y ago
  Good point. “Extremely low” would have been a better way to phrase it.
datavirtue 4y ago
And massive political pressure on the Fed, again. During the trump years they seemed to buckle under the pressure. With social media and our current political atmosphere I don't see this continuing if people start feeling the pain through job losses. I certainly won't stand for it. Frankly, I'm tired of the interest rate hammer falling on workers. I find it especially unacceptable when the Fed is jacking rates to reign in wild corporate spending and investor speculation. Again, everyone has been begging congress for better tools but they choose inaction until the Fed is forced to use the one tool they have. I see this round as the Fed quickly trying to get things under control when they have safe harbor with Biden. Given a Trump/Republican administration again I expect the gloves to come off when they demand cheap debt for the investor class under the guise of helping workers. Magically, the Republicans know how to fix the economy (until it explodes and it's Binden's fault), or so goes the trope.
- mythhouse 4y ago
  > massive political pressure on the Fed Whats the proof behind this speculation?
  - aschearer 4y ago
    >President Donald Trump said Saturday he had the power to fire or demote Federal Reserve Chairman Jerome Powell, adding new fuel to his long-running animus toward the central bank’s leader at a moment when the economy was at risk of edging into recession. >“I have the right to do that or the right to remove him as chairman,” Trump said Saturday at a news conference called to provide an update on the administration’s response to the coronavirus outbreak. “He has, so far, made a lot of bad decisions, in my opinion.” https://apnews.com/article/business-politics-donald-trump-virus-outbreak-jerome-powell-2a21e92ed9129e91e713495c9ef50050 https://apnews.com/article/business-politics-donald-trump-vi...
    - mythhouse 4y ago
      >During the trump years they seemed to buckle under the pressure. So there is no proof that Powell made fed policy based on saving his own job?
lkrubner 4y ago
"We’ve had artificially low interest rates (+ QE) for over a decade now." No, you misunderstand the situation. We had artificially high interest rates for at least the period from late 2008 to about 2014 -- if we assume the Taylor Rule is "the natural rate", as Taylor originally defined it in 1993, as the rate that allows the maximum possible employment balanced with just 2% inflation. For most of the period 2008-2014, that would have implied a rate of negative 5% interest, but banks cannot go much below 0%, so they were up against the zero lower bound, and so the rate was artificially high -- it was stuck at 0% when the economy needed it to fall to negative 5%, so as the restore what maximum employment could be achieved against the limit of 2% inflation. (Taylor himself later modified the Taylor Rule in response to feedback from Republicans, a story you can grasp from this: https://delong.typepad.com/sdj/2009/12/on-the-definition-of-a-taylor-rule.html https://delong.typepad.com/sdj/2009/12/on-the-definition-of-... )
- mywittyname 4y ago
  TIL. Thanks for this.
- bjornsing 4y ago
  My wording was unfortunate. “Extremely low interest rates” would have been better. But all this is a bit beside the point as I see it. If you run the economy on negative real interest rates for an extended period of time you will see seemingly profitable economic activity that in fact destroys economic value (but does so slower than the negative real interest rate). When rates go up such activities will reveal themselves as unprofitable.

whimsicalism 4y ago

What makes an interest rate artificial? If it is different from what you think or want it to be?

datavirtue 4y ago
Is the market setting the rates when the Fed has them bottomed out? Kind of hard to tell when the banks are essentially able to create free money at the discount window. I imagine interest rates would be much, much higher than we are used to if they relied on raw savings. Things would be very different for sure, and we most likely would not be able to maintain enough growth to match population growth. That would mean widescale creeping poverty. Maybe not, seems like all we know is a strong dollar cheap fiat orgy, and it has been quite nice.
- whimsicalism 4y ago
  Given that these are both human constructs, I don't know what makes one more artificial than the other. Given that one would likely lead to awful financial contractions and instability... and the other doesn't, seems like there is a preferred option - artificiality aside.
  - bee_rider 4y ago
    At some point this becomes "is human society artificial or is it, like, the natural product of human nature," right?
    - whimsicalism 4y ago
      Good point. Maybe the word "artificial" to describe one human construct vs. another human construct is not a productive conversation.
bjornsing 4y ago
Good point. “Extremely low” would have been a better way to phrase it.

datavirtue 4y ago

And massive political pressure on the Fed, again. During the trump years they seemed to buckle under the pressure. With social media and our current political atmosphere I don't see this continuing if people start feeling the pain through job losses. I certainly won't stand for it. Frankly, I'm tired of the interest rate hammer falling on workers. I find it especially unacceptable when the Fed is jacking rates to reign in wild corporate spending and investor speculation. Again, everyone has been begging congress for better tools but they choose inaction until the Fed is forced to use the one tool they have. I see this round as the Fed quickly trying to get things under control when they have safe harbor with Biden. Given a Trump/Republican administration again I expect the gloves to come off when they demand cheap debt for the investor class under the guise of helping workers. Magically, the Republicans know how to fix the economy (until it explodes and it's Binden's fault), or so goes the trope.

mythhouse 4y ago
> massive political pressure on the Fed Whats the proof behind this speculation?
- aschearer 4y ago
  >President Donald Trump said Saturday he had the power to fire or demote Federal Reserve Chairman Jerome Powell, adding new fuel to his long-running animus toward the central bank’s leader at a moment when the economy was at risk of edging into recession. >“I have the right to do that or the right to remove him as chairman,” Trump said Saturday at a news conference called to provide an update on the administration’s response to the coronavirus outbreak. “He has, so far, made a lot of bad decisions, in my opinion.” https://apnews.com/article/business-politics-donald-trump-virus-outbreak-jerome-powell-2a21e92ed9129e91e713495c9ef50050 https://apnews.com/article/business-politics-donald-trump-vi...
  - mythhouse 4y ago
    >During the trump years they seemed to buckle under the pressure. So there is no proof that Powell made fed policy based on saving his own job?

lkrubner 4y ago

"We’ve had artificially low interest rates (+ QE) for over a decade now." No, you misunderstand the situation. We had artificially high interest rates for at least the period from late 2008 to about 2014 -- if we assume the Taylor Rule is "the natural rate", as Taylor originally defined it in 1993, as the rate that allows the maximum possible employment balanced with just 2% inflation. For most of the period 2008-2014, that would have implied a rate of negative 5% interest, but banks cannot go much below 0%, so they were up against the zero lower bound, and so the rate was artificially high -- it was stuck at 0% when the economy needed it to fall to negative 5%, so as the restore what maximum employment could be achieved against the limit of 2% inflation. (Taylor himself later modified the Taylor Rule in response to feedback from Republicans, a story you can grasp from this: https://delong.typepad.com/sdj/2009/12/on-the-definition-of-a-taylor-rule.html https://delong.typepad.com/sdj/2009/12/on-the-definition-of-... )

mywittyname 4y ago
TIL. Thanks for this.
bjornsing 4y ago
My wording was unfortunate. “Extremely low interest rates” would have been better. But all this is a bit beside the point as I see it. If you run the economy on negative real interest rates for an extended period of time you will see seemingly profitable economic activity that in fact destroys economic value (but does so slower than the negative real interest rate). When rates go up such activities will reveal themselves as unprofitable.