5 ms·

If you are a business and need to borrow money to fund production or expansion, it costs a lot more to borrow that money than it did two years ago. That means y

If you are a business and need to borrow money to fund production or expansion, it costs a lot more to borrow that money than it did two years ago. That means your cost of production is higher and you will seek to raise prices. I’m not saying that’s the only reason inflation remains high (greed-flation, shrink-flation, etc. are also factors), but it seems reasonable that this is having an effect.

foolswisdom 2y ago
I understand why it would increase the cost versus when interest rates are low, but I don't see why high interest rates should cause continuing inflation?
- detourdog 2y ago
  If the rate stays steady it should not drive continuing inflation. Increasing interest rates only effecting shaky businesses. If a business has sufficient cash flow interest rates will have a small effect.
  - 15155 2y ago
    What about that business's customers who don't always have sufficient cash flow?
    - detourdog 2y ago
      What about them? Sounds like the customer should think through their issues before making purchasing decisions. Do you have something specific in mind?
disgruntledphd2 2y ago
This is kinda the point, though. Higher rates mean that it's more costly to expand with debt, encouraging people and businesses to take on less debt, and thus at the margin, decreasing prices. Mind you, higher rates don't appear to have done much for housing prices in a bunch of markets (e.g. the US, Ireland and Israel) so clearly the lags are longer than I was expecting, at least.
- tcbawo 2y ago
  High rates don’t impact people without mortgages. There are lots of people who bought in ages ago and move their equity between homes. At least according to the WSJ and others, there seems to be a decent chunk of investor-owned real estate. Someone probably has a study comparing real estate in countries that restrict ownership by investors to see how much this distorts prices.
- alephnerd 2y ago
  Because in the US and Ireland financing for housing collapsed on 2008 and never recovered (so there are no more small and medium sized residential developers in most of the US). In Israel's case there's literally no space (it's the same size and population as the Bay Area)
  - disgruntledphd2 2y ago
    > Because in the US and Ireland financing for housing collapsed on 2008 and never recovered Honestly, I can't speak confidently to the US here, but the Irish building rates were entirely unsustainable before 2008. Like, a fifth of national output was construction, which was definitely way too high. The lag before construction started again (without the small builders getting bank financing) probably does explain some of the issue.
    - alephnerd 2y ago
      Usually major building projects (eg. Toll Brothers type tract housing) are financed 7-10 years before the first sale. After 2008-12 happened, the entire financing industry for residential real estate collapsed, so large builders either switched to commercial or folded. > but the Irish building rates were entirely unsustainable before 2008. Like, a fifth of national output was construction, which was definitely way too high. Lotta corruption too on the Anglo Irish side by not doing due dilligence into connected developers like Bernard McNamara
      - disgruntledphd2 2y ago
tcbawo 2y ago
High rates also incentivizes your customers to save now and buy later, slowing sales activity and growth. This increases pressure to control costs. Trying to engineer a soft landing is hard. It’s like trying to perform a moon landing. There are so many variables: changing demographics, shifting energy production, global macroeconomic events. Time will tell in the end.
- lesam 2y ago
  Except in the moon landing I think they had more useful controls, not just a single lever to be moved up or down.
delfinom 2y ago
And record near 0% rates have led to the richer becoming richer and poorer becoming poorer. The problem is, the people best suited to exploit near 0% are the wealthy who can take out absolutely massive loans, buy up companies, real estate and more, and jack prices. Which all leads to inflation ~~. It's a death spiral.
- detourdog 2y ago
  I have hard time believing current rates are unusually high. They might be slightly above ideal.
- trey-jones 2y ago
  This is how I see it. Current rates aren't high, they just seem high because of the free money that's been available since the 2008 crash. I always thought that we kicked the can down the road for too long and we would pay for it. So far, I think we're still kicking. Who knows, maybe the country's top economists have something going for them and the pullback won't be a crash.
- ta988 2y ago
  Extreme wealth has a net negative impact on economy. Both because of direct impact but also politicians trying to please them with tax incentives and what not. Plus the insanity of a single person can disrupt a whole sector.
detourdog 2y ago
I think the cost of borrowing to purchase goods for production could have a one time hit to prices. The production cycle should price in the new cost of borrowing on the next round.
throw0101b 2y ago
> If you are a business and need to borrow money to fund production or expansion, it costs a lot more to borrow that money than it did two years ago. Yes, and so the hurdle rate to break even is that much higher, a higher needed-ROI discourages economic activity as it is much harder to get that ROI, and slower economic activity will hopefully reduce inflation. > That means your cost of production is higher and you will seek to raise prices. Or discourage you from expanding, which can have knock-on effects of slower economic activity (hiring fewer works so less competition on labour wages, building few plants so not spending on construction, etc). Business do not expand for the sake of expanding regardless of external factors: they expand to increase revenues on which they earn a profit on. If the cost of expansion is high(er), and so a larger margin is needed, then the business may forgo expansion if they can't get that margin. If you know can sell something for 10% over the raw material cost, and your production costs add 5%, then the cost of capital being 2% or 6% is the different between a 3% profit or a 1% loss.
refurb 2y ago
You're ignoring an alternative - you simply reduce borrowing as much as possible, even if that sacrifices expansion. Hence why high interest rates suppress economic growth.

foolswisdom 2y ago

I understand why it would increase the cost versus when interest rates are low, but I don't see why high interest rates should cause continuing inflation?

detourdog 2y ago
If the rate stays steady it should not drive continuing inflation. Increasing interest rates only effecting shaky businesses. If a business has sufficient cash flow interest rates will have a small effect.
- 15155 2y ago
  What about that business's customers who don't always have sufficient cash flow?
  - detourdog 2y ago
    What about them? Sounds like the customer should think through their issues before making purchasing decisions. Do you have something specific in mind?

disgruntledphd2 2y ago

This is kinda the point, though. Higher rates mean that it's more costly to expand with debt, encouraging people and businesses to take on less debt, and thus at the margin, decreasing prices. Mind you, higher rates don't appear to have done much for housing prices in a bunch of markets (e.g. the US, Ireland and Israel) so clearly the lags are longer than I was expecting, at least.

tcbawo 2y ago
High rates don’t impact people without mortgages. There are lots of people who bought in ages ago and move their equity between homes. At least according to the WSJ and others, there seems to be a decent chunk of investor-owned real estate. Someone probably has a study comparing real estate in countries that restrict ownership by investors to see how much this distorts prices.
alephnerd 2y ago
Because in the US and Ireland financing for housing collapsed on 2008 and never recovered (so there are no more small and medium sized residential developers in most of the US). In Israel's case there's literally no space (it's the same size and population as the Bay Area)
- disgruntledphd2 2y ago
  > Because in the US and Ireland financing for housing collapsed on 2008 and never recovered Honestly, I can't speak confidently to the US here, but the Irish building rates were entirely unsustainable before 2008. Like, a fifth of national output was construction, which was definitely way too high. The lag before construction started again (without the small builders getting bank financing) probably does explain some of the issue.
  - alephnerd 2y ago
    Usually major building projects (eg. Toll Brothers type tract housing) are financed 7-10 years before the first sale. After 2008-12 happened, the entire financing industry for residential real estate collapsed, so large builders either switched to commercial or folded. > but the Irish building rates were entirely unsustainable before 2008. Like, a fifth of national output was construction, which was definitely way too high. Lotta corruption too on the Anglo Irish side by not doing due dilligence into connected developers like Bernard McNamara
    - disgruntledphd2 2y ago

tcbawo 2y ago

High rates also incentivizes your customers to save now and buy later, slowing sales activity and growth. This increases pressure to control costs. Trying to engineer a soft landing is hard. It’s like trying to perform a moon landing. There are so many variables: changing demographics, shifting energy production, global macroeconomic events. Time will tell in the end.

lesam 2y ago
Except in the moon landing I think they had more useful controls, not just a single lever to be moved up or down.

delfinom 2y ago

And record near 0% rates have led to the richer becoming richer and poorer becoming poorer. The problem is, the people best suited to exploit near 0% are the wealthy who can take out absolutely massive loans, buy up companies, real estate and more, and jack prices. Which all leads to inflation ~~. It's a death spiral.

detourdog 2y ago
I have hard time believing current rates are unusually high. They might be slightly above ideal.
trey-jones 2y ago
This is how I see it. Current rates aren't high, they just seem high because of the free money that's been available since the 2008 crash. I always thought that we kicked the can down the road for too long and we would pay for it. So far, I think we're still kicking. Who knows, maybe the country's top economists have something going for them and the pullback won't be a crash.
ta988 2y ago
Extreme wealth has a net negative impact on economy. Both because of direct impact but also politicians trying to please them with tax incentives and what not. Plus the insanity of a single person can disrupt a whole sector.

detourdog 2y ago

I think the cost of borrowing to purchase goods for production could have a one time hit to prices. The production cycle should price in the new cost of borrowing on the next round.

throw0101b 2y ago

> If you are a business and need to borrow money to fund production or expansion, it costs a lot more to borrow that money than it did two years ago. Yes, and so the hurdle rate to break even is that much higher, a higher needed-ROI discourages economic activity as it is much harder to get that ROI, and slower economic activity will hopefully reduce inflation. > That means your cost of production is higher and you will seek to raise prices. Or discourage you from expanding, which can have knock-on effects of slower economic activity (hiring fewer works so less competition on labour wages, building few plants so not spending on construction, etc). Business do not expand for the sake of expanding regardless of external factors: they expand to increase revenues on which they earn a profit on. If the cost of expansion is high(er), and so a larger margin is needed, then the business may forgo expansion if they can't get that margin. If you know can sell something for 10% over the raw material cost, and your production costs add 5%, then the cost of capital being 2% or 6% is the different between a 3% profit or a 1% loss.

refurb 2y ago

You're ignoring an alternative - you simply reduce borrowing as much as possible, even if that sacrifices expansion. Hence why high interest rates suppress economic growth.