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Fed Ends Zero-Rate Era

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Re: Fed Ends Zero-Rate Era

#161

Post by millstone »

brc wrote: post #129
roymurdock wrote: post #28

Fed raising interest rates 0.25% and setting a goal of "normal" 2% by 2018 means little to nothing. Market already priced the miniscule rate hike in as the move was widely expected, and move did nothing to assure markets that the Fed is in control, or set credible, measurable goals for future hikes. Fed can continue to push on the supply side of money at the bank/institutional level all it wants. We need the Federal…

>We need the Federal government to stimulate aggregate demand at the consumer level. How? Investing tax dollars in a smarter manner Everyone - and I do mean everyone - would be better off if the fed government (and state and local) invested those tax dollars smarter by leaving the majority of them in the hands of those that earnt them . "There are four ways in which you can spend money. You can spend your own money o…

In terms of stimulating aggregate demand, transfers to people who will spend the money are more effective than transfers to people who spend less (i.e. save more). In practice that means food stamps, unemployment benefits, etc. are more effective than tax cuts directed at high earners.

Re: Fed Ends Zero-Rate Era

#162

Post by jbooth »

jpadkins wrote: post #140
roymurdock wrote: post #28

Fed raising interest rates 0.25% and setting a goal of "normal" 2% by 2018 means little to nothing. Market already priced the miniscule rate hike in as the move was widely expected, and move did nothing to assure markets that the Fed is in control, or set credible, measurable goals for future hikes. Fed can continue to push on the supply side of money at the bank/institutional level all it wants. We need the Federal…

> We need the Federal government to stimulate aggregate demand at the consumer level. How? Investing tax dollars in a smarter manner. How do you get 535 people (congress) to spend $3 trillion smarter? It's an impossible task. A fools errand. Even if we elected the 500 smartest people to congress, the results wouldn't be much better. We need less of the economy flowing thru the federal government, not more.

Well, it starts with a fundamental belief that they can and should do a good job.

Re: Fed Ends Zero-Rate Era

#163

Post by rlucas »

downandout wrote: post #77

This will have an impact on the flow of money to VC's, which will have an impact on the flow of burnable cash to unprofitable startups. No more $1.5 million rounds for apps like Yo [1] (the investor community should be embarrassed and horrified that this kind of thing was getting financed anyway). Winter is indeed coming for those that don't have a business model, and that's a good thing. [1] http://www.businessinsid…

No, the institutions who allocate money to VC typically do so as part of a long (> 30 year) horizon plan based upon portfolio theory. There are no institutional investors for whom a 25 bp change in a short term interest rate will materially alter their allocation to VC (typically a tiny sub-portion of a minor portion allocated to "private equity," the lion's share of which goes to later-stage buyout).

Private equity and, in particular, venture capital, are part of that allocation precisely because their outcomes are relatively uncorrelated to, say, public stocks and bonds -- which are very correlated to interest rates.

Re: Fed Ends Zero-Rate Era

#164

Post by harryh »

jfoutz wrote: post #71
pjungwir wrote: post #56

Earlier quoted context omitted.

Rising interest rates also mean that house prices should drop (or deaccelerate), right? If you figure a buyer has a fixed budget, the more they are paying in interest the less they can pay in principal. Not saying 0.25% will have much effect, but in principle don't they have that relationship?

Eventually. Today, of the many houses sold, there's going to be .25% more people who can't get the loan they want. They're going to move down market, and buy a slightly cheaper house. The more expensive houses might lower their price, or take it off market or whatever. It's like a distributed system. There's a bunch of complicated moving parts that all react to each other. There aren't that many knobs and levers to p…

> there's going to be .25% more people who can't get the loan they want.

No. This is wrong. There isn't a 1-1 correlation between interest rates and the % of people who get the loan they want. That's nuts.

Re: Fed Ends Zero-Rate Era

#165

Post by dragonwriter »

jellicle wrote: post #153
clarkmoody wrote: post #141

Earlier quoted context omitted.

Many smart people argue that the New Deal prolonged the Great Depression due to the government's incessant meddling in the market with price controls and new regulations.

Nobody honest does. But I do agree with you that any economic opinion, no matter how nonsensical and contrary to evidence, can be purchased.

> Nobody honest does.

Maybe nobody who is all of honest, aware of the relevant documented facts, and sufficiently intelligent does. Maybe.

But there are certainly people who are smart, people who are honest, and even people who are smart and honest that believe that the New Deal exacerbated the Depression in the way described.

(Note that I very much do not endorse the idea that these beliefs are correct.)

Re: Fed Ends Zero-Rate Era

#166

Post by SapphireSun »

brc wrote: post #114
dsr_ wrote: post #50

Earlier quoted context omitted.

If you want to stimulate aggregate demand at the consumer level, you need more people to have good jobs, so they can make money, so they can spend money. This would represent a reversal of the trend since 1970 towards greater income inequality. It is not clear to me that anyone is doing anything about that (except, of course, in the negative sense.)

Consumer demand is meaningless. Trying to push it is like trying to push a string. Demand is an artefact of production. Unless your economy is producing, you won't increase quality of life and wealth for all citizens. This point is obvious, but gets completely lost in all the frenzy around 'stimulating demand'. To buy something, first you have to produce something worthy of exchange. Everyone has to start from this p…

Sort of.... you want more stuff if you have more money, but if you have little money, at one point, your propensity to save increases to avoid poverty, whereas below some point I imagine you spend everything you have (not much) as fast as it comes in.

Re: Fed Ends Zero-Rate Era

#167

Post by gotchange »

mywittyname wrote: post #157
jstalin wrote: post #79

Earlier quoted context omitted.

They're "capitalists" as long as they have a thumb on the scale, but they're not really capitalists who would cheer a true free market in currency.

The USD is about as free market as a currency can be reasonably obtain. The Fed allows the market to drive the money supply through lending. Institutional banks can effectively create an unlimited supply of money on demand through lending; they just ask the Fed for money and pay the discount rate. So it's largely the market that drives short and medium term inflation through borrowing. The Fed uses treasury bonds to…

> The USD is about as free market as a currency can be reasonably obtain.

Nothing about the USD is free market.

The USD is shored up by the petro dollar standard and its status as a reserve currency esp. in the commodities market and its supply and management is governed by a quasi-private institution that is in bed with Wall St.

Re: Fed Ends Zero-Rate Era

#168

Post by downandout »

rlucas wrote: post #163
downandout wrote: post #77

This will have an impact on the flow of money to VC's, which will have an impact on the flow of burnable cash to unprofitable startups. No more $1.5 million rounds for apps like Yo [1] (the investor community should be embarrassed and horrified that this kind of thing was getting financed anyway). Winter is indeed coming for those that don't have a business model, and that's a good thing. [1] http://www.businessinsid…

No, the institutions who allocate money to VC typically do so as part of a long (> 30 year) horizon plan based upon portfolio theory. There are no institutional investors for whom a 25 bp change in a short term interest rate will materially alter their allocation to VC (typically a tiny sub-portion of a minor portion allocated to "private equity," the lion's share of which goes to later-stage buyout). Private equity…

The flow of easy money to VC's has dramatically increased because of zero/negative interest rates - not just in the US but around the world. That flow of money will slow in a positive interest rate environment, which means less money for low quality startups.

Re: Fed Ends Zero-Rate Era

#170

Post by shawn-furyan »

jbooth wrote: post #58
chollida1 wrote: post #48

Earlier quoted context omitted.

I agree with your first point. Most people don't follow the markets so I thought it might be interesting to them. As to your second point, we will have to agree to disagree. You might be right, I'm not a macro economist, but your opinion is a minority one and its definitely not the mainstream opinion. Which is fine, it might be right, but I'd rather have the fed have room to cut rates than not have that option on the…

Worth noting that the mainstream macroeconomic wisdom has been completely disconnected from what we've observed in reality the past 10 years or so -- having rates this low for this long is supposed to spur demand and create inflation, according to mainstream macro, right?

I think mainstream macro acknowledges that negative rates can be needed to spur demand even though there isn't a good mechanism for achieving negative rates. The zero bound is pretty much a 'natural' restriction that doesn't have anything to do with just how much people want to hang on to their capital in times of uncertainty.
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