6 ms·

Trying to influence business growth with interest rates is the dumbest idea ever. Interest rate manipulation should serve one and only one purpose. Controlling

Trying to influence business growth with interest rates is the dumbest idea ever. Interest rate manipulation should serve one and only one purpose. Controlling inflation. It's very important goal and any politically motivated moves that are supposed to influence the economy interfere with that goal.

marcosdumay 3y ago
Hum... IMO the government lending interest rate should be set strictly at the highest value that still ensures bank healthy and should have absolutely no concern for the overall economy. Inflation should be managed directly by fiscal policy. Having your central bank do it is a wishful fantasy that only serves to concentrate wealth and create instability with years-long hidden feedback loops. And oh, it also serves to excuse politicians out of their responsibility. But then, I don't see how something that only serves to make rich people richer and make excuses for politicians can ever change. So I'm not holding my breath.
Wytwwww 3y ago
The Fed has a dual mandate of controlling inflation AND minimizing the unemployment rate. You have to try to influence business growth to accomplish the second goal and it makes perfect sense.
- scotty79 3y ago
  Yes. And that's dumb. And the only way US could get away with it for so long was because it printed money for the global economy. So the whole world cushioned their meddling. In recent years their messed up so badly that even global economy sqealed as it could no longer bear the burden. Any other country or even EU, doing the same thing as FED does, would be in deep trouble in less than a decade.
  - Wytwwww 3y ago
    > Any other country or even EU, Wasn't the scale of QE as proportion of GDP significantly larger in the Eurozone in the 2010s? Even now the total value of assets held by the ECB is only a bit lower than the Fed ($7.44 trillion vs 7.9). The situation before the pandemic was similar, the ECB even had more assets than the Fed throughout 2019.
    - scotty79 3y ago
      Doesn't matter. Global economy runs on dollar not euro. If they do exactly the same what US does they'll get hit by inflation even harder. If you want to compare impacts of printing you shouldn't compare it with GDP or central bank assets but with total amount of given currency already in circulation globally.
      - Wytwwww 3y ago
        > If they do exactly the same what US does they'll get hit by inflation even harder. My entire point is that the monetary policy in the Eurozone has been considerably looser between 2014 and 2020 and comparable after that. > If you want to compare impacts of printing you shouldn't compare it with GDP or central bank assets but with total amount of given currency already in circulation globally. So the ECB "printed" considerable more if measured that way, prior to 2020 at least and they were relatively "fine" inflation wise.
        scotty79 3y ago
        If inflation is low and controlled it means the supply of money matches the demand for money which is usually associated with value creation in the economy. The fact that EU was doing well inflationwise despite having looser monetary policy than US means that Eurozone economy was doing better in that period than US and global economy. Of course in relative terms.
- throw0101c 3y ago
  Not wrong, but does the ECB have a dual mandate? (At least legally / officially?) * https://www.ecb.europa.eu/mopo/intro/html/index.en.html https://www.ecb.europa.eu/mopo/intro/html/index.en.html
- cjfd 3y ago
  It would appear to be a bit hard to target two outputs when you have one input....
- Supermancho 3y ago
  > The Fed has a dual mandate of controlling inflation AND minimizing the unemployment rate. Re: https://www.federalreserve.gov/monetarypolicy/monetary-policy-what-are-its-goals-how-does-it-work.htm https://www.federalreserve.gov/monetarypolicy/monetary-polic... I'm very sure The Fed does not have a mandate to minimize the unemployment rate, despite the stated policy. The shifting definition of "employment" being one of the primary tools, alongside the old standbys of "blaming something else" and "give it time". There's almost no historical accountability, so there's no reason to think this will change.
  - keep_reading 3y ago
    It's not the Fed's responsibility to control what the definition of "employment" is. If you want changes at the Fed vote for a new generation of Congress who will legislate a new mandate.
    - Supermancho 3y ago
      The Fed chair explains the context under which the numbers look best and the whitehouse gets that data out of the omb. Saying congress controls it is more of the same "blame someone else", when the reports are crafted carefully to make the fed look like they are a tool rather than the face of the real power brokers (investment firms). Famously, Clinton complained about this.
throw0101c 3y ago
General economic activity effects the velocity of money which effects inflation. If capital—for businesses or individuals—is more expensive, some of people's plans for spending will be shelved, that reduces activity and velocity. See "Monetary transmission mechanism" * https://en.wikipedia.org/wiki/Monetary_transmission_mechanism https://en.wikipedia.org/wiki/Monetary_transmission_mechanis... * https://www.ecb.europa.eu/mopo/intro/transmission/html/index.en.html https://www.ecb.europa.eu/mopo/intro/transmission/html/index... * https://www.rba.gov.au/education/resources/explainers/the-transmission-of-monetary-policy.html https://www.rba.gov.au/education/resources/explainers/the-tr... * https://www.pragcap.com/monetary-policy-transmission-mechanism/ https://www.pragcap.com/monetary-policy-transmission-mechani... Of course inflation is caused by things other than demand (e.g., supply: energy prices, food prices (thanks Russia!)).
- belter 3y ago
  You want to use "affects"...Sorry...Friday is grammar Nazi day....
darkwater 3y ago
Not an economist at all but, I fail to understand why "Trying to influence business growth with interest rates is the dumbest idea ever." while manipulate the same interests to reduce inflation is good/smart. In a world (especially Europe) where you don't control raw material prices or (an important chunk of) energy prices, how can reducing spending by having forced high cost of money possibly work without tanking the economy as a side effect? And if that's good or acceptable, why is not acceptable have businesses grow because of "free" lent money, especially if this helps improving life conditions for the people that work in those businesses? (which, I have to say, it's not always the case)
- scotty79 3y ago
  You control prices of everything by influencing how much money itself is worth through controling how much money you "print" which you do by controling interest rates. Economy has to be taken into account into how given level of interest rates influences inflation, but only as an input, never an output. The utility of keeping inflation in check is immense because it provides stable environment for the economy so that everyone can pretty much treat price as a proxy for value. If the inflation does weird things you can no longer know how much your investment is worth or will be really worth in the future. If you keep inflation in check it's fine if prices of some resources rise because it means their value increases. If price of pretty much everything goes up it's just a sign that you printed too much money, nothing more, nothing else. When you are using money supply to stimulate economy, sometimes you'll get benefit, sometimes you'll mess up horribly. So the only thing you are really doing is introducing more instability into the system which harms everybody.
- Enginerrrd 3y ago
  I think the issue is just that they kept rates too low for too long and failed to rein them in a bit when things were recovered from 2008. A little extra boom probably is a net positive long-term since it facilitates innovation and growth for a time. But if you selfishly leave the spigot of free money on for too long you get complacency and bubbles. The whole concept is intimately related to the keynesian idea of stimulus spending. But even keynes thought that the government needed to walk things back when things were booming.
cmrdporcupine 3y ago
It's almost like we need actual macroeconomic planning tools other than just interest rates. But that doesn't fit current dogma.

marcosdumay 3y ago

Hum... IMO the government lending interest rate should be set strictly at the highest value that still ensures bank healthy and should have absolutely no concern for the overall economy. Inflation should be managed directly by fiscal policy. Having your central bank do it is a wishful fantasy that only serves to concentrate wealth and create instability with years-long hidden feedback loops. And oh, it also serves to excuse politicians out of their responsibility. But then, I don't see how something that only serves to make rich people richer and make excuses for politicians can ever change. So I'm not holding my breath.

Wytwwww 3y ago

The Fed has a dual mandate of controlling inflation AND minimizing the unemployment rate. You have to try to influence business growth to accomplish the second goal and it makes perfect sense.

scotty79 3y ago
Yes. And that's dumb. And the only way US could get away with it for so long was because it printed money for the global economy. So the whole world cushioned their meddling. In recent years their messed up so badly that even global economy sqealed as it could no longer bear the burden. Any other country or even EU, doing the same thing as FED does, would be in deep trouble in less than a decade.
- Wytwwww 3y ago
  > Any other country or even EU, Wasn't the scale of QE as proportion of GDP significantly larger in the Eurozone in the 2010s? Even now the total value of assets held by the ECB is only a bit lower than the Fed ($7.44 trillion vs 7.9). The situation before the pandemic was similar, the ECB even had more assets than the Fed throughout 2019.
  - scotty79 3y ago
    Doesn't matter. Global economy runs on dollar not euro. If they do exactly the same what US does they'll get hit by inflation even harder. If you want to compare impacts of printing you shouldn't compare it with GDP or central bank assets but with total amount of given currency already in circulation globally.
    - Wytwwww 3y ago
      > If they do exactly the same what US does they'll get hit by inflation even harder. My entire point is that the monetary policy in the Eurozone has been considerably looser between 2014 and 2020 and comparable after that. > If you want to compare impacts of printing you shouldn't compare it with GDP or central bank assets but with total amount of given currency already in circulation globally. So the ECB "printed" considerable more if measured that way, prior to 2020 at least and they were relatively "fine" inflation wise.
      - scotty79 3y ago
        If inflation is low and controlled it means the supply of money matches the demand for money which is usually associated with value creation in the economy. The fact that EU was doing well inflationwise despite having looser monetary policy than US means that Eurozone economy was doing better in that period than US and global economy. Of course in relative terms.
throw0101c 3y ago
Not wrong, but does the ECB have a dual mandate? (At least legally / officially?) * https://www.ecb.europa.eu/mopo/intro/html/index.en.html https://www.ecb.europa.eu/mopo/intro/html/index.en.html
cjfd 3y ago
It would appear to be a bit hard to target two outputs when you have one input....
Supermancho 3y ago
> The Fed has a dual mandate of controlling inflation AND minimizing the unemployment rate. Re: https://www.federalreserve.gov/monetarypolicy/monetary-policy-what-are-its-goals-how-does-it-work.htm https://www.federalreserve.gov/monetarypolicy/monetary-polic... I'm very sure The Fed does not have a mandate to minimize the unemployment rate, despite the stated policy. The shifting definition of "employment" being one of the primary tools, alongside the old standbys of "blaming something else" and "give it time". There's almost no historical accountability, so there's no reason to think this will change.
- keep_reading 3y ago
  It's not the Fed's responsibility to control what the definition of "employment" is. If you want changes at the Fed vote for a new generation of Congress who will legislate a new mandate.
  - Supermancho 3y ago
    The Fed chair explains the context under which the numbers look best and the whitehouse gets that data out of the omb. Saying congress controls it is more of the same "blame someone else", when the reports are crafted carefully to make the fed look like they are a tool rather than the face of the real power brokers (investment firms). Famously, Clinton complained about this.

throw0101c 3y ago

General economic activity effects the velocity of money which effects inflation. If capital—for businesses or individuals—is more expensive, some of people's plans for spending will be shelved, that reduces activity and velocity. See "Monetary transmission mechanism" * https://en.wikipedia.org/wiki/Monetary_transmission_mechanism https://en.wikipedia.org/wiki/Monetary_transmission_mechanis... * https://www.ecb.europa.eu/mopo/intro/transmission/html/index.en.html https://www.ecb.europa.eu/mopo/intro/transmission/html/index... * https://www.rba.gov.au/education/resources/explainers/the-transmission-of-monetary-policy.html https://www.rba.gov.au/education/resources/explainers/the-tr... * https://www.pragcap.com/monetary-policy-transmission-mechanism/ https://www.pragcap.com/monetary-policy-transmission-mechani... Of course inflation is caused by things other than demand (e.g., supply: energy prices, food prices (thanks Russia!)).

belter 3y ago
You want to use "affects"...Sorry...Friday is grammar Nazi day....

darkwater 3y ago

Not an economist at all but, I fail to understand why "Trying to influence business growth with interest rates is the dumbest idea ever." while manipulate the same interests to reduce inflation is good/smart. In a world (especially Europe) where you don't control raw material prices or (an important chunk of) energy prices, how can reducing spending by having forced high cost of money possibly work without tanking the economy as a side effect? And if that's good or acceptable, why is not acceptable have businesses grow because of "free" lent money, especially if this helps improving life conditions for the people that work in those businesses? (which, I have to say, it's not always the case)

scotty79 3y ago
You control prices of everything by influencing how much money itself is worth through controling how much money you "print" which you do by controling interest rates. Economy has to be taken into account into how given level of interest rates influences inflation, but only as an input, never an output. The utility of keeping inflation in check is immense because it provides stable environment for the economy so that everyone can pretty much treat price as a proxy for value. If the inflation does weird things you can no longer know how much your investment is worth or will be really worth in the future. If you keep inflation in check it's fine if prices of some resources rise because it means their value increases. If price of pretty much everything goes up it's just a sign that you printed too much money, nothing more, nothing else. When you are using money supply to stimulate economy, sometimes you'll get benefit, sometimes you'll mess up horribly. So the only thing you are really doing is introducing more instability into the system which harms everybody.
Enginerrrd 3y ago
I think the issue is just that they kept rates too low for too long and failed to rein them in a bit when things were recovered from 2008. A little extra boom probably is a net positive long-term since it facilitates innovation and growth for a time. But if you selfishly leave the spigot of free money on for too long you get complacency and bubbles. The whole concept is intimately related to the keynesian idea of stimulus spending. But even keynes thought that the government needed to walk things back when things were booming.

cmrdporcupine 3y ago

It's almost like we need actual macroeconomic planning tools other than just interest rates. But that doesn't fit current dogma.