5 ms·
Fed interest rate policy is stimulating rather than slowing down the economy. They don't seem to realize this. We are at risk of getting into an recursive loop
by bubbleRefuge 4y ago
Fed interest rate policy is stimulating rather than slowing down the economy. They don't seem to realize this. We are at risk of getting into an recursive loop here.
1) Fed increases rates in an effort to reduce demand and slow economy.
2) Holders of federal debt instruments -the public- receive a raise every month
a) They spend more into the economy.
3) Economic indicators remain positive or increase ( see GDP, employment, prices, etc)
4) Fed thinks economy is still to strong
5) Goto 1
Argentina , has like 90% interest rates.
- kyaghmour 4y agoSorry, you lost me at #2. How does the public receive a raise here?
- qbasic_forever 4y agoSustained labor shortages putting upwards pressure on wages. It's more of an external factor, but it really can't be ignored that the pandemic, despite people burying their heads in sand and pretending it's over, is continuing to sideline millions of workers.
- cma 4y agoAnd this makes their existing low fixed rate 10y treasuries more valuable how?
- sp332 4y agoAnd on the spending side, people who can't afford to buy a thing just don't count in the inflation metrics. For example, when nvidia saw that fewer people were going to buy GPUs this generation, they raised unit prices. That makes the inflation number go up even though economic activity is down.
- bubbleRefuge 4y agoThe Federal government is a net payer of interest to the private sector on a monthly basis. When interest rates are increased by the fed, this amount increases. Since the amount of outstanding treasuries is at all time highs vs GDP, its significant. Unlike before.
- jlmorton 4y agoErdogan, is that you?
- bubbleRefuge 4y agoPlease elaborate instead of being snarky .
- jlmorton 4y agoTurkey's president, Recep Tayyip Erdogan, famously agrees with your unorthodox assessment, that high interest rates cause inflation, and the cure is lower rates. [1] [1] https://www.cnbc.com/2022/09/29/erdogan-says-turkey-will-keep-cutting-interest-rates-mocks-british-pound-.html https://www.cnbc.com/2022/09/29/erdogan-says-turkey-will-kee...
- bubbleRefuge 4y agoOk. Thank you . He is right about that technically if there is allot of government debt in the economy and the government is net payer of interest, then raising interest rates can cause inflation via more money in pockets leading to more demand. Just because Erdogan may be a disliked or reprehensible politician does not mean he is not logical when it comes to government finance or he probably was told that by someone who recognizes this.
- mtoner23 4y agoThis is a crazy take lol. The public is not receiving a rase from holding federal debt. Raising interest rates will not lead to more spending. Erdogan would be proud of this post
- bubbleRefuge 4y agohaving more money available every month doesn't create more spending opportunities ? huh ?
- josho 4y agoHow are people getting more money in their pockets every month? Most Americans are not sitting on cash earning interest.
- bubbleRefuge 4y agoyeah. this policy is regressive . no doubt. but people who do have cash are getting more "free money" every month and allot of it. they seem to be spending it into the economy right now. luxury items are created by everyday people.
- kevstev 4y agoI think a huge point you are missing here is the whole supply and demand aspect. The whole point of raising interest rates is to reduce the demand of borrowed money. What made sense to borrow for at 1% interest may not make sense at 4.75%. I myself was taking out margin loans in the 2010s at 1% and investing in dividend yielding stocks in the 4-5% range for a long time. I was never excessively leveraged, but it absolutely made sense to do so at that time. Nowadays, that's a really dumb bet. In fact, I have a lot of stuff in cash right now as I kind of wait and see where I feel the market is going, and as of this week its getting over 4% interest at IB, which is great. Also, I think you are misunderstanding magnitudes here. Do you have stats on what percentage of federal debt is actually being held by US citizens? Joe Schmo is not sitting on piles of bonds.
- 4y ago
- rubiquity 4y ago> 2) Holders of federal debt instruments -the public- receive a raise every month That is not how raising the Federal Funds Rate works. Existing treasuries actually decrease in face value and only newly issued treasuries have the higher interest rate. If you own 10, 20, or 30 treasuries right now you're deeply in the red.
- ladyattis 4y agoNot really, since the Treasury still honors the interest of the bond. Just because someone values the purchase value lower doesn't invalid the interest rate. You just lose money if you sell it.
- prottog 4y agoExactly. You're mark-to-market red on your bonds, since if you tried to sell your 2%-yielding bonds in a market where new bonds yield 4% obviously your bond will be worth less than what you bought it for; but you'll still continue to receive those coupons at 2% for the lifetime of the bond.
- rubiquity 4y agoYes you still receive your coupon. My point was that existing bonds coupons don't change.
- bubbleRefuge 4y agoshort term treasuries roll over every 3 months.
- rubiquity 4y agoYou think bonds yielding 2-4.5% APR over the past 12 months are causing 6%+ inflation?
- bubbleRefuge 4y ago
- gymbeaux 4y agoIt’s been my experience that economics is a very hard subject to grasp, so what I typically see on forums where someone posts something like this is a lot of disagreeing and back and forth (as is the case here). The issue I think is that… economics is a very hard subject to grasp. Lots of moving parts. I think your comment oversimplifies the point it’s trying to make, but it kind of has to in order to be understood by laymen. Bit of a damned if you do, damned if you don’t situation. I think what you’re saying though is that higher interest rates = more money in companies’ pockets = higher wages paid to workers = the price increase of goods and services being absorbed, and the interest rate increase having a net-zero effect. I don’t know enough to agree or disagree, I’m just trying to reword what you’re saying.
- bubbleRefuge 4y agosimply stating that increasing federal interest rates will put more money into the private sector from the public sector (deficit spending). This is an income channel which increases aggregate demand which can in of itself increase growth and inflation all things being equal. It is the opposite of the intended policy.