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> We have spent trillions in Iraq and interest rates haven't even gone up. That's because they're set by the Fed and not allowed to fluctuate according to mark

> We have spent trillions in Iraq and interest rates haven't even gone up. That's because they're set by the Fed and not allowed to fluctuate according to market pressure. Surely you knew this? It's the same reason why, some argue, the Fed can't raise rates now (because of leveraged derivatives).

unabridged 12y ago
The Fed can set its discount rate, but the market determines the interest rate it will buy bonds at. And there is still a ton of money buying 30 yr bonds that only pay ~2.5% interest. The Fed keeps rates low because its in their best interest; they are owners, they want inflation to be as low as possible. As long as they can sell enough debt at current rate they would never raise interest rates. The same reason a company who could sell plenty of debt at 5% wouldn't raise their rate to 7%.
- jbarham 12y ago
  > ...the market determines the interest rate it will buy bonds at. No, most newly issued government debt in the US, EU and Japan is now bought by their respective central banks at below fair market interest rates. Consider that some European banks now charge savers and pay borrowers [1]. Do you really think that a fair market would accept negative interest rates?! 1. http://www.nytimes.com/2015/02/28/business/dealbook/in-europe-bond-yields-and-interest-rates-go-through-the-looking-glass.html http://www.nytimes.com/2015/02/28/business/dealbook/in-europ...
adventured 12y ago
Rates, and more importantly inflation, haven't soared because the US controls the global reserve currency, and printing a trillion dollars is barely relevant to that scale. The rest of the world absorbs a sizable portion of US inflation because of that reserve standard. Fair or not, that is how it works and will continue to for at least several decades. Every other country on earth is partially subsidizing US fiscal irresponsibility. The Fed can raise rates, and the US Govt can afford to pay another $500 billion on interest that would be incurred. It wouldn't be pretty, spending would either have to be frozen for five years to allow tax revenues to catch up, or the Fed would have to pay the bill for an extended period of time (again, at part cost to the rest of the world reliant on the dollar).
- innguest 12y ago
  Yes, this is correct. This system is called Petrodollar (if anyone wants to understand why the USD is the global reserve currency).

unabridged 12y ago

The Fed can set its discount rate, but the market determines the interest rate it will buy bonds at. And there is still a ton of money buying 30 yr bonds that only pay ~2.5% interest. The Fed keeps rates low because its in their best interest; they are owners, they want inflation to be as low as possible. As long as they can sell enough debt at current rate they would never raise interest rates. The same reason a company who could sell plenty of debt at 5% wouldn't raise their rate to 7%.

jbarham 12y ago
> ...the market determines the interest rate it will buy bonds at. No, most newly issued government debt in the US, EU and Japan is now bought by their respective central banks at below fair market interest rates. Consider that some European banks now charge savers and pay borrowers [1]. Do you really think that a fair market would accept negative interest rates?! 1. http://www.nytimes.com/2015/02/28/business/dealbook/in-europe-bond-yields-and-interest-rates-go-through-the-looking-glass.html http://www.nytimes.com/2015/02/28/business/dealbook/in-europ...

adventured 12y ago

Rates, and more importantly inflation, haven't soared because the US controls the global reserve currency, and printing a trillion dollars is barely relevant to that scale. The rest of the world absorbs a sizable portion of US inflation because of that reserve standard. Fair or not, that is how it works and will continue to for at least several decades. Every other country on earth is partially subsidizing US fiscal irresponsibility. The Fed can raise rates, and the US Govt can afford to pay another $500 billion on interest that would be incurred. It wouldn't be pretty, spending would either have to be frozen for five years to allow tax revenues to catch up, or the Fed would have to pay the bill for an extended period of time (again, at part cost to the rest of the world reliant on the dollar).

innguest 12y ago
Yes, this is correct. This system is called Petrodollar (if anyone wants to understand why the USD is the global reserve currency).