In my opinion raising interest rates to a more realistic market rate will help a little, but that is not the root of the problem. I think the real problem is government spending. And I think this is a much harder problem to fix than just raising rates. Even if the fed raises rates they still need to fund the huge deficit.
What really worries me is that the fed has almost tripled the monetary base (money printing), WHEN THEY DIDN'T NEED TO! They could've borrowed the money instead of printing it. What's going to happen when the fed HAS to print money because no one is going to lend it??? That's when the real crisis starts.
I keep watching these economists and they all seem to think that raising rates a few points will fix everything. Most of them even think that cutting spending is a bad thing!
If it results in the government cutting spending, the answer would be: it would definitely help.
At most, I think only 5% of the adult population would need to stop cooperating to have real change.
If they raise interest rates now, it will help the dollar. Probably not the so-called "recovery." Or the institutional investors who've been making carry trades with the dollar with cheap borrowed money.
But it will help limit inflation.
It's a complicated question to answer.
The trick of raising rates has already been tried in the early '80s by Paul Volcker and it worked. But Volcker was backed by Ronald Reagan, who was ready to take some short term "political pain" in return for more abundant fruits at a later date. Not only that but the whole situation has changed: US government spending has increased massively together with debt at all levels (even the New York Times acknowledges that) and people's expectations. While I personally believe neither Bernanke nor Obama have the political courage to back a sizable increase in interest rates, I also believe there's no need for it. Yes, US government debt will keep on mounting... so what? The US government can afford not to care about it: even if the Chinese stop buying debt they'll either have the Fed purchase it or will come up with some new fantastic scheme that will allow them not to worry about deficits (disclaimer: don't try it at home or work since the IRS will come around and jail you for life!). Perhaps they'll have Japan test it first in the same way as they tested the present "exit strategy" from the bubble economy. Either way I personally do not believe the US government will be taken down by debt as many seem to think: the advantages of being able to cajole and/or blackmail the whole of the world to your whims. It's a nice thing to know we live in such a world where the laws of common sense do not apply...
Sorry for the rant but as one of my favorite comics characters would say I am "feeling slightly depressed".
cr113: In my opinion raising interest rates to a more realistic market rate will help a little, but that is not the root of the problem.
In my opinion raising interest rates to a more realistic market rate will help a little, but that is not the root of the problem.
The root of the problem is that interest rates are set by a government body, not the amount of savings and the demand for loans.
cr113: I think the real problem is government spending. And I think this is a much harder problem to fix than just raising rates. Even if the fed raises rates they still need to fund the huge deficit.
I think the real problem is government spending. And I think this is a much harder problem to fix than just raising rates. Even if the fed raises rates they still need to fund the huge deficit.
Right, but it will become more and more expensive, not only in total, but also dollar for dollar.
cr113: What really worries me is that the fed has almost tripled the monetary base (money printing), WHEN THEY DIDN'T NEED TO! They could've borrowed the money instead of printing it. What's going to happen when the fed HAS to print money because no one is going to lend it??? That's when the real crisis starts. I keep watching these economists and they all seem to think that raising rates a few points will fix everything. Most of them even think that cutting spending is a bad thing!
The government gets more power by printing more money, giving it more wealth, and making their subjects poorer and easier to control.
Periodically the tree of liberty must be watered with the blood of tyrants and patriots.
Thomas Jefferson
My belief is that the supply of credit and the supply of money are 2 separate things. Keeping interest rates low will increase the supply of credit but not the supply of money. Low interest rates will create a temporary bubble that will drive prices upward but when the bubble bursts prices will actually fall below what they were before the bubble started and then eventually return to normal. Printing money to fund a deficit will increase the true money supply. This will cause a permanent increase in prices. In my opinion printing money is worse than low interest rates because it causes a permanent loss in purchasing power.
cr113: In my opinion printing money is worse than low interest rates because it causes a permanent loss in purchasing power.
In my opinion printing money is worse than low interest rates because it causes a permanent loss in purchasing power.
I think it should be realized that the Federal Reserve rarely increases the monetary base by literally printing money. The dramatic increases in the monetary base are due to increases in the supply of credit, which is necessary to keep interest rates low (interest rates are based entirely on the supply of money in reserve). All increases in credit tend to cause a loss in purchasing power.
cr113: In my opinion raising interest rates to a more realistic market rate will help a little, but that is not the root of the problem. I think the real problem is government spending. And I think this is a much harder problem to fix than just raising rates. Even if the fed raises rates they still need to fund the huge deficit.
There is a relationship between increased interest rates and decreased government spending. In fact, this relationship has been worrying the Spanish government and public. Spain continues to spend large amounts of public money, funding their debt by selling government securities to the private sector. This has been made easy by the low interest rates provoked by the amount of liquidity provided by the European Central Bank. The ECB has already declared that at some point in the second quarter of 2010 they will raise interest rates, whether or not Spain pulls out of recession. This will obviously make it much more difficult for the Spanish government to finance debt, given that the costs and the risks would have increased. The fear is that Spain will not just have to put a stop to extravegant spending, but that Spain will go bankrupt.
Raising interest rates may help, but it is still just a band-aid over a broken aorta. Only the market knows the rate. Let the market determine it and all will be adjusted properly. Individuals acting together determine the rate of interest when the money market is free. The problem we have now is a few individuals determine the rate based upon their wishes, and if their wishes are opposite yours????????????
Raising rates arbitrarily prolongs the agony. Let the rate go and see where it settles. That will correct the distorted signals in the money markets and the price system will direct resources to where they need to go, and it will be done relatively fast.
I am Saan
Kakugo:The trick of raising rates has already been tried in the early '80s by Paul Volcker and it worked. But Volcker was backed by Ronald Reagan, who was ready to take some short term "political pain" in return for more abundant fruits at a later date. Not only that but the whole situation has changed:
Indeed. In 1982 when my parents moved to the suburbs, they bought their house on Land Contract because the rates were fixed by statute at 12%.
Mortgages were going for 15-18%.
I'm not sure what would happen, but I can't imagine the public tolerating 15%+ PRIME interest rates.
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David Z
"The issue is always the same, the government or the market. There is no third solution."
cr113:I keep watching these economists and they all seem to think that raising rates a few points will fix everything.
It's not really the "raising" of interest rates that fixes what's wrong. It's allowing the interest rate to float freely. But this is difficult (impossible?) to accomplish with a fiat/fractional-reserve monetary system.
cr113:Most of them even think that cutting spending is a bad thing!
(AAAAARRRRGGGGH!)
Keynes. Responsible for more human suffering than many of the world's worst despots.