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Does that imply that US society becomes disfunctional if there's no access to debt? What's making it impossible to function within the existing budgets and caus
by izacus 3y ago
Does that imply that US society becomes disfunctional if there's no access to debt? What's making it impossible to function within the existing budgets and causes this huge dependency on borrowing with cheap rates?
- vidarh 3y agoBorrowing impacts jobs, and housing costs, both of which have outsized effects on people's budgets.
- izacus 3y agoOk, but why is the impact of borrowing costs so big on the US?
- bawolff 3y agoWhy are we assuming this is US specific? Does it not happen in other countries? (Not rhetorical, i have no idea what the answer is)
- offices 3y agoIt's intentional. When the institutions responsible talk about 'raising interest rates', they implicitly add 'to increase unemployment which will reduce spending and reduce inflation'.
- vidarh 3y agoWhy would it not be? As long as there is credit available, supply of it will drive demand for products and services, and property, and either creates jobs and/or affect prices also for people who never borrow. The reality is that there are very few places in the world where people in general can afford to buy property without borrowing for example, and rental prices tend to reflect purchase prices.
- deleted 3y ago[deleted]
- sharperguy 3y agoIf the entire economy is structured around the expectation of low interest rates, then raising interest rates would certainly upset a lot of plans. Many businesses would find they could not afford to employ as many people as expected. Many employees would find not only that they had lost their jobs, but also wasted many years training for a job that no longer exists. Those who invested in affected businesses or capital goods with inflated prices due to easy credit will find those investments collapsing in value. Eventually, the economy could restructure into a more sustainable form, where investments, business sizes and training were aligned with the new state of the economy. But a pain period is not really avoidable, other than by relowering interest rates. The longer interest rates are kept low, the longer and more painful the transition.
- izacus 3y ago> Many businesses would find they could not afford to employ as many people as expected. How does that work? Are they regularly covering their payroll with loans?
- sharperguy 3y agoI believe that many business indeed operate at a loss for extended periods of time, by deliberately spending more money on future developments or obtaining customers than they take in revenue.
- edgyquant 3y agoThis was definitely true for tech in the last cycle, but how true is this both outside of that industry and historically at all?
- toyg 3y agoAny big business lives on loans. Which is why you see, for example, retailers going bust right before Christmas - which "surely" should be the busiest and most profitable time of the year...? But to go through it you need to buy inventory, which requires loans - if you can't raise money, because the market thinks you're already in bad shape, you have to close up shop. Most significantly-sized businesses rely on credit week-in week-out, and tend to implode very quickly if the market turns off the tap.
- bawolff 3y agoThe first hypothesis that comes to mind is that a fixed percent of people experience a financial stress every year. If debt is available they use it. If not they become desperate and turn to crime.
- sokoloff 3y agoDoes the availability of debt for individuals really vary that much in a high vs low interest rate environment? I feel like high interest debt is available whether the Fed funds rate is 0.75% and when it's 5.50%.
- naniwaduni 3y agoPeople at the margins have a lot more trouble accessing even high-interest debt than you probably do. Some of them actually have nontrivial default risk that makes even arbitrarily high interest rates plausibly not worth it.
- sokoloff 3y agoSure. Does that availability change meaningfully with a change in broader interest rates, though? Is there a lender that decides to stop making payday loans and buy T-bills instead?
- naniwaduni 3y agoBecause parity of expected returns is achieved roughly when interest rates remain roughly proportional along the risk curve, and of course subprime loans are particularly sensitive to repayment risk as rates go up, it's absolutely possible to get priced out of payday loans. At the level of individual lenders, this looks more like all institutions shifting slightly toward lower-risk lending across the board than any individual lender choosing to buy t-bills instead of making payday loans. But then again, that's exactly what "maintaining higher capitalized operating reserves" means.
- deleted 3y ago[deleted]
- imtringued 3y agoIs this some kind of joke? Ever heard of Keynes and his liquidity preference theory? Ever heard of Wolfgang Stützel and his book about balance mechanics? It's pretty obvious. The person with the money gets to decide and they are allowed to decide to not decide at all. Since one person's credit is another person's debit, the credit side determines indebtedness. Positive money balances determine how much debt there is in the economy and since people have a preference for holding money balances, those money balances keep ballooning and correspondingly, indebtedness must go up.
- izacus 3y agoNo, not a joke and I'm not a college educated economist and indeed haven't read the work of Keynes or Wolfgangs or whomever. Which is why I'm asking, no idea what's going on with your condescending tone?