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View Full Version : Economics Question for Chiefplanet economists. Interest rates.


googlegoogle
11-16-2009, 03:16 PM
Why can't an economy grow with high interest rates?

It seems people are flooding their money into commodities because of the fear of inflation which is like taking money 'out' of the invested economy.(historians FDR gold buyback plan/theft).

Wouldn't higher interest rates cause people to put their money back into banks? This would slow down lending since there would be less money.

Seems to be a catch22.

If low low rates create economic growth then why ever raise them again?

HonestChieffan
11-16-2009, 03:27 PM
It can grow with no respect to interest rates unless they get too high and stfle growth due to the high cost of borrowing.

Interest rates at some point can be linked generally to demand...that is that there is more demand for borrowed money thus rates go up.

'What you are asking is a heck of a topic and hard to deal with in a shorthand answer.

There are compounding ( no pun intended) factors that one can consider as well. The market is not a free market. The government through the treasury, the fed, and foreign investment and flow of capital all contribute to the underlying interest situation.

BucEyedPea
11-16-2009, 03:28 PM
If low low rates created economic growth then why ever raise them again?

They didn't create economic growth. They created speculation and spending. Now few have any money left. That's not my idea of growth.

Jenson71
11-16-2009, 05:43 PM
Don't forget that post, Buc. Thanks.

Saul Good
11-16-2009, 07:33 PM
They didn't create economic growth. They created speculation and spending. Now few have any money left. That's not my idea of growth.

Exactly. Artificially low interest rates create bubbles, not growth.

donkhater
11-16-2009, 10:32 PM
Well, I'm not an economist, but to me the answer is one of common sense.

All an interest rate is is the cost of borrowing some money you don't have. If the rate is set low, then borrowing is encouraged. But below a certain point, a borrower can start to be riskier with the money they have on loan, because it's cheap money. In other words, they can use the low cost money to finance higher risk ventures that have a chance for higher returns.

Sounds dandy. Except high-risk means that sometimes things don't work out and the loan can't be repaid and is defaulted on. Fine. The banks have a safeguard to that as well in the form of collateral. But what happens if the collateral isn't actually worth what the 'market' says it is? Say, for instance, a house that is worth only $200K but has a lien of $300K on it (based on the last assessment). Sound familiar? Now that loan that the bank gave out has been defaulted on AND doesn't have the collateral backing. The bank has to eat it. Too many of these and the bank goes belly-up. Sounding even more familiar?

Therefore, interest rates shouldn't be set to 'encourage' anything.

A higher rate would subdue borrowing, but the borrowing that does occur would be less risky and liklier to be more meaningful growth.

Taco John
11-16-2009, 11:50 PM
If low low rates create economic growth then why ever raise them again?


Low interest rates don't create economic growth. It merely simulates it by making money loose and easy and more easily available to specultors/entreprenuers/home buyers etc. So loose money causes an bubble as the infrastructure goes up and it seems like there's economic growth - it sure looks like it. But if they don't raise the rates, the easy money causes that infrastructure to grow well past what the market will support, and thus a crash follows. What's left is a market flooded with toxicity (for instance, the housing market), and a stagnant economy.

Low rates don't create economic growth unless the low rates are naturally low due to market conditions (ie. in a free market, not a Fed Market, think of banks competing like gas stations, lowering their rates to compete with eachother). Real economic growth is marked by problem/solution scenarios where the market is responding to consumer needs, and catching on. Low interest rates will actually hurt these guys in the long run because of the amount of noise that floods the markets due to the low barrier of entry.

alnorth
11-16-2009, 11:54 PM
Someone check the time and the record books. What we have here is an innocent naive question, followed by 6 perfectly reasonable and thoughtful replies giving an honest attempt at an answer, without anger, snide remarks, insults, etc.

This all just happened here in the Washington D.C. forum. Has that ever happened?

Taco John
11-17-2009, 12:41 AM
Someone check the time and the record books. What we have here is an innocent naive question, followed by 6 perfectly reasonable and thoughtful replies giving an honest attempt at an answer, without anger, snide remarks, insults, etc.

This all just happened here in the Washington D.C. forum. Has that ever happened?

I think you missed post #4

donkhater
11-17-2009, 07:01 AM
It would seem then, that low interests rates are great and we shouldn't even consider raising them because it would slow down the economy, right?

Well, go back to what low interest rates actually mean and that is low-cost money. Essentially financing is easy to come by and there is a demand for money. This sets the Treasury printing presses into hyperdrive due to the demand. This is probably a simplistic way to look at it, but everytime the Fed lowers interest rates, the US Treasury prints money.

Why is that bad? Because it devalues the dollar. It promotes inflation. This is the 'hidden tax' that Ron Paul hints at when he talks about the ridiculous economic policies of the last century. The price of things go up. Someone correct me if I'm wrong, but the value of the dollar is .04 of what it was when the Fed was created. Astonishing.

Rapid inflation or the elimination of the dollar is coming. Artificially low interest rates cannot be a sustainable policy. This is why it is a BAD idea to allow anyone or anything other than market forces to set the interest rate.

alnorth
11-17-2009, 08:21 AM
I think you missed post #4

oops. well, damn

KC native
11-17-2009, 09:15 AM
It would seem then, that low interests rates are great and we shouldn't even consider raising them because it would slow down the economy, right?

Well, go back to what low interest rates actually mean and that is low-cost money. Essentially financing is easy to come by and there is a demand for money. This sets the Treasury printing presses into hyperdrive due to the demand. This is probably a simplistic way to look at it, but everytime the Fed lowers interest rates, the US Treasury prints money.

Why is that bad? Because it devalues the dollar. It promotes inflation. This is the 'hidden tax' that Ron Paul hints at when he talks about the ridiculous economic policies of the last century. The price of things go up. Someone correct me if I'm wrong, but the value of the dollar is .04 of what it was when the Fed was created. Astonishing.

Rapid inflation or the elimination of the dollar is coming. Artificially low interest rates cannot be a sustainable policy. This is why it is a BAD idea to allow anyone or anything other than market forces to set the interest rate.

Your first post was good. This one is a little off. Just because the Fed lowers rates doesn't mean the treasury has to print money. The treasury prints money to cover deficits and shortfalls from the government. The government usually takes advantage of low rates so although they are highly correlated they are not causes of each other.

As far as rapid inflation, we are a ways off from that. We are still in a deflationary trend. Now, if in 6 months the economy really gets going (unlikely but still a possibility) then the Fed is going to have to choke off liquidity and fast. Fortunately for the Fed they have put money in circulation in a variety of ways (repos, TALF, etc) so they have many avenues to tamp down inflation when it does show up.

As far as low rates being sustainable, this one isn't so black and white. Low rates are sustainable provided they aren't too low relative to the rest of the world. Right now the entire world is fighting the same issues and has low rates. We're starting to see some of the countries tick up rates but no meaningful increases have come down the pipe. That being said I do think the US needs to increase rates depending on the trajectory of the economy in 6-8 months.

donkhater
11-17-2009, 09:49 AM
Your first post was good. This one is a little off. Just because the Fed lowers rates doesn't mean the treasury has to print money. The treasury prints money to cover deficits and shortfalls from the government. The government usually takes advantage of low rates so although they are highly correlated they are not causes of each other.

As far as rapid inflation, we are a ways off from that. We are still in a deflationary trend. Now, if in 6 months the economy really gets going (unlikely but still a possibility) then the Fed is going to have to choke off liquidity and fast. Fortunately for the Fed they have put money in circulation in a variety of ways (repos, TALF, etc) so they have many avenues to tamp down inflation when it does show up.

As far as low rates being sustainable, this one isn't so black and white. Low rates are sustainable provided they aren't too low relative to the rest of the world. Right now the entire world is fighting the same issues and has low rates. We're starting to see some of the countries tick up rates but no meaningful increases have come down the pipe. That being said I do think the US needs to increase rates depending on the trajectory of the economy in 6-8 months.

I certainly don't claim to be an expert. As I said in my post, lowering interest rates means the treasury prints money is a bit simplistic. The two may not be tied together directly, but result is generally the same.

Artificial low rates certainly aren't sustainable. That is black and white. And I think we are facing rapid inflation very soon. The bubble can only grow so big before it bursts again.