Comment by underdeserver
1 year ago
Lowering rates is fine. Lowering them to zero is bad.
Economists generally believe the baseline, target rate should be around 2-3%.
Zero interest rate is like steroids. You can take them for a while to pick you up and help fight a bug (like the 2008 crash), but if you don't stop taking them, you'll need a long, painful, 5.5% interest rate rehab.
> and help fight a bug (like the 2008 crash)
That was not a "bug." That was a parasite. If you take steroids with a parasite you might just make the parasite stronger.
The presenter is not a doctor :)
It's an analogy.
2008 was caused by inflated housing prices. ZIRP reinflated the housing bubble. This caused people to not be underwater on their mortgages, but now we have an even bigger housing bubble than we did to begin with.
> Economists generally believe the baseline, target rate should be around 2-3%.
The problem with that is (as we found out) that does not leave you much room to cut without going to near zero rates.
That's a feature, not a bug.
The government reaction to the 2021 economic circumstances was to counter the hot job market, not inflation. It is explicitly and legally the mandate of the federal reserve to target maximum employment first, and 3% inflation if possible.
Inflation has been normal for a while now by most metrics, but rates are still sky-high to crush worker power. This may not be the stated goal, but it is the actual outcome we can see.
The purpose of a system is what it does.
Super-low inflation targets hurt worker negotiating power.
The relevant section of the U.S. Code is 12 U.S.C. § 225a, which states:
The reason rates are staying high is because of the expectations game. The US had unfathomable price stability for decades. The fed realizes that the inflation genie is out of the bottle. The only way to get it back in is to overcompensate by raising rates and leaving them high until people forget about 10% inflation.
Why do people insist on this?
A rate of inflation + 0.5% is double of a rate of inflation + 0.25, that is double of a rate of inflation + 0.125%, that is double of...
You can have as many steps as you want.
> Zero interest rate is like steroids.
The problem with your analogy is that paying interest is an active measure. It takes effort. The higher the rate*(outstanding debt), the more effort. This isn't a choice between injecting nothing vs injecting steroids, it's a choice between injecting sedatives vs injecting nothing. Raising the interest rate is like injecting a sedative. How much sedative should we inject? How much sedative can we inject?
I disagree, as this implies that an interest of zero is the normal default. Why would it be? Why would someone lend someone else money, when they get nothing for it?
> Zero interest rate is like steroids
More like adding fat and never burn it. Zero interest means everything stays around, no pressure to produce since there is no expectation of ROI, and then when you suddenly add that pressure a lot of stuff collapses under their own weight since they don't have anything to keep it up.
I'll be the devil's advocate. Zero interest rates means it's easier for startups to raise money. High interest rates locks in the status quo - because of their massive war chests big companies don't struggle because of high interests, but small companies do.
For individuals in the middle class and lower, high interest rates (and the associated inflation) directly lower the quality of life by eroding their purchasing power.
> high interest rates (and the associated inflation) directly lower the quality of life by eroding their purchasing power.
This confuses me. Rates were raised to reduce inflation. How should inflation have been reduced, if not (at least in part) by raising rates?
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> Economists generally believe the baseline, target rate should be around 2-3%.
If it's lower than inflation, the government is just giving free money to the corporations with access to interbank settlement loans.
And, if you were to balance the Federal budget, you would inflate away 75% of the national debt in 50 years at 3% inflation. But, only a balanced budget amendment to the Constitution could accomplish that.
How are you calculating that? The national debt itself currently has an average interest rate higher than 3%.
"Balanced budget" presumably includes paying the interest on existing debt in the current year rather than recapitalizing it.