More boom and bust cycles? It seems like most of the busts come when the fed eventually raises rates. What if they simply kept rates at .25 like Japan, where dispite talking head garbage, there has been growth over the last 20 years. Thanks for the help.
I'll never save money in the US ever.....
Hyperinflation. Credit would be too cheap for too long everyone would borrow.
So why isnt everyone borrowing now?
Then why has Japan not had inflation over the last 20 years. They have actually had slight deflation.
And as the poster mentioned above, why isn't everyone borrowing now? Surely the banks could get more than .25% loaning their money out rather than keeping it at the fed.
Unit4- TO answer my own question. I think the main reasons why people arent borrowing is because thier arent many business opportunities (ala keynes) also i work at a bank, and most people who come in for loans arenty credit worthy, (either upside down, or chexsystems, bad credit history).
But Im still puzzled as to why lending isnt on fire. Consumers seem to be de-leveraging anyways.
Seems like with rates at 0% that the credit worthiness standard would drop. Doesn't it usually? When rates are high, only those with great credit can get loans, no?
and isn't that why there is inflation during/after low rate periods. more people can access credit, thus the money is more greatly multiplied throughout the economy.
1. First let's clear up the myth of Japan.
http://mises.org/daily/5170/The-Myth-of-Japans-Lost-Decades
That is a long serious article that lays it all out. Bottom line: The banks have low interest rates because of supply and demand, meaning nobody is borrowing from them. Thus, the low rates doi not cause new money printing. No new moneyt printing means no inflation. No inflation means they get richer and richer, which is exactly what has been happening there.
I know it sounds incredible, the very opposite of what one hears on TV. Read the article, my son, and be enlightened.
In the US, by contrast, the low interest rates come from money printing, a destructive action that brings price inflation.
2. Low interest rates attract more potential borrowers, but the banks still are living in fear of lending to deadbeats, having been so recently burned by doing exactly that. The banks would rather lend to the Fed, who will repay them for sure, than lend to anyone else.
3. As to the original q, don't busts happen when the Fed raises rates? Indeed, that is Bernanke's belief, inherited from Milton Friedman. Sadly, it confuses correlation with causation.
A boom, meaning an increase in profits from selling some commodity [such as stocks or real estate] that does not happen because the comodity is suddenly in greater demand for its intrinsic usefulness, but because money was printed and had to spent somewhere, has to be followed by a bust.
For the boom sucks resources away from productive activities into non productive activities [the objects of the boom]. When that lack of resources an dlack of productive activity is felt, that is the economy suffering.
Now the govt can delay some priviliged class of people feeling this lack of resources by printing money and giving it to them. They thus have money to suck up the few remaining resources. When the supply of resources gets so low there is very little left to suck up, that's hyperinflation. Tremendous amounts are offered to get the few things left.
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Dave- So is this how you explain the stagnant cpi and low gdp? Meanwhile M&A revs up, and banks gobble up little banks, and the elites watch thier tax farms increase in size.
Thanks Dave. I don't think you actually answered the original question. What if Ben kept rates at .25%? It would keep the debt servicable and if the banks aren't lending then there will be no inflation.
And about Japan, we are borrowing from them(close to 1 trillion). I am sure they have a lot of countries that are borrowing from them.
I'm not sure what you mean Bearchu.
Are you talking about Japan or the USA?
That brilliant article explains the whole story of Japan very clearly, not me.
If you mean the USA, I explain the stagnant cpi by the fact that the cpi was specifically modified at Nixon's request to show low inflation numbers, come what may. A little searching will elaborate on their fraudulant sophistry.
As for low GDP in the USA, I don't know if it is low or not, and I don't care. It doesn't measure anything but inflation a few years after the fact, as this other Kel Kelly article explains.
Banks gobbling up little banks and M&A revving up can be a good, bad or neutral thing. It is not an evil in and of itself. So I'm not sure what you mean.
As for the elites watching their tax farms increase in size, yes that is reprehensible if it is indeed the case. I am against all taxes [undecided about maybe taxes for a very very small army]. But from what I understand, it is quantitative easing that is stealing our purchasing power, not new taxes [yet].
Bottom line, I really didn't understand what you are trying to say, Bearchu.
I also want to add the comment...
It seems like lowering the fed funds rate only temporary increases inflation, as the money lent out will be paid back or the bank will eat the losses. It creates the booms and busts. The fed is not printing much money to adjust the fed funds rate. It seems like the only time there would be real drastic permanent inflation would be during quantative easing, when the fed is really printing money. Is this line of thought correct? It just hasn't fully happened yet because so much of the money is sitting at the fed as excess reserves.
Unit4,
Interest rates are low when the banks have so much money they are trying to attract people to borrow so they can profit from having all that money.
But where do banks get the huge wads of gelt that makes them give low interest rates? In a true economy, they get it from people with extra cash, who underconsume [=don't spend it all] and put in the bank.
But that is certainly not the case now. Firstly, most people are broke and have no cash to spare. And if they did, they would not put it into a bank that gave them a quarter of a percent or less in interest. What kind of return is that?
So that these huge wads of cash causing low interest rates come from one source only. The fed prints money [digitally] and gives it to the banks at very low interest. The banks do not sit on this money. They lend it right back to the Fed at a higher rate. Meaning the Fed has money to spend, and trust me, it is spending it. lately they have been buying 70% of new Treasuries [=lending the US govt money]. It's called QE2. The US govt does not sit on the money. It spends it. Spending newly printed money causes price inflation.
Where does the money that is lent out or paid back come from? It is not pre-existing money. It is newly [digitally] printed money. Whether this new money is lent out or paid back, it is used to buy things, increasing prices.
Reading this last post, I sense you have a very different understanding of things than the Austrian one. What can I say? There are excellent beginner's books [=stuff I read] here, all free. Economics in one Lesson, The Inflation Crisis and How to Solve it, both by Hazlitt.
Also, I suggest you search for "CPI fraud" on Google to learn that it has started happening very nicely already. Also, it takes a while from when the money is printed to when it does it's heavy damage. We are feeling the printing of a few years ago. The effects of QE2 are yet to come.
And as I wrote in the previous post, it isn't sitting at the fed. The fed lends it to the govt to spend.