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Why are interest rates so low?

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Re: Why are interest rates so low?

#81

Post by cylinder »

saosebastiao wrote: post #77

Interest rates are low because inflation is low and central banks are irrationally terrified of even mild deflation, fearing some sort of hypothetical deflationary spiral (despite a complete lack of precedent). And since the rate of technological progress is increasing , and technological progress creates deflationary pressure , they have to work extra hard to keep up. Tell me, when was the last time you stopped buyi…

We also should include asset (house) prices in CPI. Yes, I understand you only need to rent to be able to have shelter, but there's clearly inflation going on, just not in the components of CPI. We can't ignore asset inflation.

Re: Why are interest rates so low?

#82

Post by joelmichael »

saosebastiao wrote: post #77

Interest rates are low because inflation is low and central banks are irrationally terrified of even mild deflation, fearing some sort of hypothetical deflationary spiral (despite a complete lack of precedent). And since the rate of technological progress is increasing , and technological progress creates deflationary pressure , they have to work extra hard to keep up. Tell me, when was the last time you stopped buyi…

The Great Depression is the precedent. The money supply dropped by a third, prices for everything dropped dramatically, and much of the labor force was thrown out of work. The general understanding today held by the Fed is that it was because the Fed failed to create new money and inject it into the banking system to prevent a systemic collapse.

Re: Why are interest rates so low?

#83

Post by cylinder »

jellicle wrote: post #19

It is worth also reading Paul Krugman's take on this blog post: http://krugman.blogs.nytimes.com/2015/03/30/ben-bernanke-blo... In particular Krugman notes that the average retiree has basically nothing in interest earnings. The median retiree has a bit more than $100K in total net worth (most of it in housing), and earns bupkis in interest.

Raising interest rates will actually improve the economy for this reason, but policy makers don't understand this. Read more here http://www.amazon.com/The-Great-Rebalancing-Conflict-Perilou...

Re: Why are interest rates so low?

#84

Post by o_nate »

vitriol83 wrote: post #13

> The Fed does, of course, set the benchmark nominal short-term interest rate....The Fed’s ability to affect real rates of return, especially longer-term real rates, is transitory and limited. this would be a plausible argument if the us treasury weren't the biggest buyer of long-term government debt.

The Fed stopped buying Treasuries in November of last year and since that time long-term rates (both real and nominal) have fallen.

Re: Why are interest rates so low?

#85

Post by rpedroso »

saosebastiao wrote: post #77

Interest rates are low because inflation is low and central banks are irrationally terrified of even mild deflation, fearing some sort of hypothetical deflationary spiral (despite a complete lack of precedent). And since the rate of technological progress is increasing , and technological progress creates deflationary pressure , they have to work extra hard to keep up. Tell me, when was the last time you stopped buyi…

I think the example of falling milk prices downplays the theory that deflation is harmful unfairly.

Surely, if we were facing deflation, I would continue to buy milk. However, I would be seriously hesitant about borrowing money to purchase a house because the value of a dollar at the time I bought the house would be less than the value of a dollar in the future. Under inflation, the opposite is true: I pay back a loan with dollars that are less valuable than the dollars I borrowed.

If you go beyond the individual prospective debtor and consider larger entities like banks and businesses, the potential economic effects of deflation appear more serious.

To add to this: under continued deflation, wages would have to fall to compensate. But, as Krugman and others have pointed out, nominal wages resist downward pressure[1], which means that instead of lower wages, you get layoffs. If you get laid off, whether or not prices are falling, you might actually hesitate about buying that gallon of milk.

[1] http://krugman.blogs.nytimes.com/2010/07/26/mysteries-of-def...

Re: Why are interest rates so low?

#86

Post by Balgair »

jellicle wrote: post #19

It is worth also reading Paul Krugman's take on this blog post: http://krugman.blogs.nytimes.com/2015/03/30/ben-bernanke-blo... In particular Krugman notes that the average retiree has basically nothing in interest earnings. The median retiree has a bit more than $100K in total net worth (most of it in housing), and earns bupkis in interest.

I mean, if that isn't the scariest thing out there in the US, then I really don't know what is (excepting nukes, MRSA, and the like). That aging population is going to wreak havoc on the economy, with the exception of elder care. Oh, and when is that all supposed to be timed to go off? About 2030, just in time for 9 billion other humans to go about their lives too, water wars really starting to heat up, etc.

The 2028 and 2032 elections are going to be a hell of a thing as REAL politics and compromise get going.

Re: Why are interest rates so low?

#87

Post by w0utert »

BenoitEssiambre wrote: post #39
w0utert wrote: post #9

Earlier quoted context omitted.

The monetary system hasn't been about 'me and my savings', for at least 3 decades. Reasoning about banks, capital, supply/demand, return on investment, in terms of whether consumers spend their savings or leave it sitting on a bank account, will not make you any wiser about the state of the economy or our monetary system. Current rates are low because central banks everywhere are basically flooding the world with fre…

This could not be more wrong. Current central bank rates are high compared to market rates for stores of value, otherwise people, banks and businesses would not be keeping so much of their savings in idle excess fiat. I keep some musings about this here if you are curious: http://bessiambre.tumblr.com/

Eh? The Federal funds rate has been at 0.25% since 2008, if it were to go any lower we'd be in negative interest rate territory. The fed has only just started scaling back their asset repurchase program (aka 'QE' for 'quantitative easing'), but just like the previous 3 times (in ~5 years) it supposedly wanted to stop 'printing money', another round of QE is just one big stock market correction or housing market crash away. All the FED did to 'improve the economy' through its actions is drive up the stock market, create opportunities for malinvestments (e.g. the shale oil industry that is now about to collapse because of lower oil prices), and drive other central banks around the world to do the same to avoid their currencies decoupling too much from the value of the dollar. Things don't look too bad right now because most of the rest of the world (except Japan) is basically about a year behind the curve compared to the US, and we the next powder keg hasn't exploded yet, but the fuse has been lit, and it's just a matter of time until Bernanke will have to eat his words and all the asset bubbles the Fed created under his supervision explode in the faces of all these retirees he was supposedly so concerned about...

Just to be clear, I'm not saying Bernanke had easy and/or painless other policy options, or that central banks would even have the ability to fix the global economy and monetary system by the way. Just that a piece like this is a more or less meaningless bedtime story.

Re: Why are interest rates so low?

#88

Post by collyw »

rpedroso wrote: post #85
saosebastiao wrote: post #77

Interest rates are low because inflation is low and central banks are irrationally terrified of even mild deflation, fearing some sort of hypothetical deflationary spiral (despite a complete lack of precedent). And since the rate of technological progress is increasing , and technological progress creates deflationary pressure , they have to work extra hard to keep up. Tell me, when was the last time you stopped buyi…

I think the example of falling milk prices downplays the theory that deflation is harmful unfairly. Surely, if we were facing deflation, I would continue to buy milk. However, I would be seriously hesitant about borrowing money to purchase a house because the value of a dollar at the time I bought the house would be less than the value of a dollar in the future. Under inflation, the opposite is true: I pay back a loa…

I am in Europe where the low interest rates are keeping housing and other assets as close to bubble prices as possible. I am waiting for them to go up, as the prices ought to come down then.

Re: Why are interest rates so low?

#89

Post by aetherson »

Mikeb85 wrote: post #74
cloakandswagger wrote: post #58

Earlier quoted context omitted.

How is it not an answer? He's saying that the "greed" described by the original commenter is the same source of innovation that's given us all of the modern amenities we enjoy today. Conversely, I would say outright dismissing the pursuit of growth is not an answer.

> He's saying that the "greed" described by the original commenter is the same source of innovation that's given us all of the modern amenities we enjoy today. And is life any better today than in 1990? Are we happier? I think he's arguing that material possessions don't necessarily correlate to 'quality of life' and happiness. I would personally be pretty happy without a car or computer. But I live in a ridiculous c…

Things that you can do today that you couldn't do in 1990:

* Survive much longer with many types of cancer.

* Live a pretty normal life, more or less indefinitely, despite being HIV+

* See your grandkids that live in a different state via a high-quality video connection.

* Enjoy television shows that offer multi-month and multi-year arcs and are designed to be consumed by dedicated fans in order, rather than principally for syndication in random order.

* Vacuum your floors with a robot.

* Survive more car crashes dues to a variety of safety features.

Is life "better" today than in 1990? Sure, of course it is. Does that make us happier? I genuinely don't know. Most hedonic research strikes me as obvious bullshit. Maybe people's happiness levels reset to the norms around them regardless of what those norms are. Maybe you'd literally be just as happy if you lived in a medieval village with open-trench sewers and a pretty decent chance of your wife dying in childbirth and you doing hard labor for your adult life to a brief, decrepit old age. I mean, seriously, maybe you would! It's not outside the realm of possibility.

It's hard for me to argue that that kind of happiness means that there's no point to increased material prosperity.

Re: Why are interest rates so low?

#90

Post by collyw »

enraged_camel wrote: post #73
jseliger wrote: post #25

Earlier quoted context omitted.

Why the obsession of economic growth? One alternate question might be, "At what point in time do you consider the economy to have become 'big enough' that you don't care about growth?" Today? 2000? 1990? 1970? The people who might think today is "big enough" might also have thought that say 1990 was big enough, and yet very few people would want to be limited to 1990's tech / culture. It seems reasonable to imagine t…

You can have technological, scientific and cultural advancement without economic growth. Building more shopping malls out in the suburbs leads to growth, but it doesn't advance society.

I have discussed this with friends recently. Why do we need growth?

I don't need a faster iPhone, or more tech. I honestly don't see my life being any better for the last ten years worth of "growth" (much of which seems to have been pumping up asset prices).

I would quite like to relax and coast a bit in life, but with the constant chasing of growth by everyone else, standing still means you will get left behind (i.e you will become poor).

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