I wonder if such perseverance is possible today in what seems like a time of more intense politics, and with the presence of social media potentially making everyone see the bad side of things only.
It was a moment from the Fed (and government in general) where they favored long term prosperity at the expense of near term possible recession. I think we need a little more of that, not necessarily in what central banks do, but governments in general.
01100011 28 minutes ago [-]
Strange to see this on the front page. I guess everyone is mad at Powell's doveish language yesterday.
I don't know why we're surprised. The fed has been consistently wrong since Covid. Now they're trying to help the gov fund itself by keeping rates low in coordination with the treasury(or it sure seems like that). Also, it's an election year, and probably no one at the fed wants the orange man elected.
Powell keeps talking out of both sides of his mouth. Endless statements about how much inflation hurts poor people(i.e. most Americans, who own very little inflation linked assets), yet they're followed by inaction or outright dovishness, like yesterday's statement ruling out further hikes(what happened to data dependency?).
lenerdenator 19 minutes ago [-]
> Endless statements about how much inflation hurts poor people(i.e. most Americans, who own very little inflation linked assets)
It's not about owning assets, it's about being able to afford food, fuel, housing, medicine, and basic savings.
Most Americans live paycheck-to-paycheck because our financial industry decided 45 years ago that it'd be awesome to have Americans pay interest on everyday purchases instead of just major purchases like their home, car, or business startup capital. Since this has also coincided with stagnant wages, that interest can't go much higher without the masses getting pissed off, and over the last 15 years, "pissed off" has escalated into mass demonstrations (Occupy Wall Street) and riots (2020, 2021).
At some point we're going to have to accept that you can't just direct the value created by an economy to equities indefinitely. You have to return an increasing amount of value to labor so that standards of living continue to rise. Raising interest rates won't do that.
selimnairb 3 hours ago [-]
It seems we are in a similar situation today (though not exactly the same as unemployment is generally low). At some point, it seems fairly obvious that high rates will start causing inflation as the cost of borrowing money is a factor of production for many goods and services. As much as I like earning fat interest on my savings, rates probably need to come down quite a bit (though not back to zero, which causes it’s own problems).
bmacho 5 minutes ago [-]
This is my view as well, high interest rates fuel inflation just because people want higher profit for the risk than they could get if they just rested their money in a bank deposit.
sgerenser 2 hours ago [-]
Erdogan, is that you? (For background, Turkey’s President Erdogan believes that high rates cause inflation, and up until recently has been trying to keep rates very low to control Turkey’s massive inflation. It didn’t work).
selimnairb 2 hours ago [-]
If you are a business and need to borrow money to fund production or expansion, it costs a lot more to borrow that money than it did two years ago. That means your cost of production is higher and you will seek to raise prices. I’m not saying that’s the only reason inflation remains high (greed-flation, shrink-flation, etc. are also factors), but it seems reasonable that this is having an effect.
disgruntledphd2 2 hours ago [-]
This is kinda the point, though.
Higher rates mean that it's more costly to expand with debt, encouraging people and businesses to take on less debt, and thus at the margin, decreasing prices.
Mind you, higher rates don't appear to have done much for housing prices in a bunch of markets (e.g. the US, Ireland and Israel) so clearly the lags are longer than I was expecting, at least.
dandy23 1 hours ago [-]
The relationship between interest and inflation is probably not as simple as people and experts seem to think. It's non-linear, involves hysteresis and also time delays. It's probably not possible to model.
disgruntledphd2 48 minutes ago [-]
I don't think it's possible to model using simple equations. Given much much better data (which is a total pipe dream), you could probably do much better than the relatively simple models in use today.
tcbawo 2 hours ago [-]
High rates don’t impact people without mortgages. There are lots of people who bought in ages ago and move their equity between homes.
At least according to the WSJ and others, there seems to be a decent chunk of investor-owned real estate. Someone probably has a study comparing real estate in countries that restrict ownership by investors to see how much this distorts prices.
alephnerd 2 hours ago [-]
Because in the US and Ireland financing for housing collapsed on 2008 and never recovered (so there are no more small and medium sized residential developers in most of the US).
In Israel's case there's literally no space (it's the same size and population as the Bay Area)
disgruntledphd2 51 minutes ago [-]
> Because in the US and Ireland financing for housing collapsed on 2008 and never recovered
Honestly, I can't speak confidently to the US here, but the Irish building rates were entirely unsustainable before 2008. Like, a fifth of national output was construction, which was definitely way too high.
The lag before construction started again (without the small builders getting bank financing) probably does explain some of the issue.
alephnerd 11 minutes ago [-]
Usually major building projects (eg. Toll Brothers type tract housing) are financed 7-10 years before the first sale. After 2008-12 happened, the entire financing industry for residential real estate collapsed, so large builders either switched to commercial or folded.
> but the Irish building rates were entirely unsustainable before 2008. Like, a fifth of national output was construction, which was definitely way too high.
Lotta corruption too on the Anglo Irish side by not doing due dilligence into connected developers like Bernard McNamara
selimnairb 1 hours ago [-]
Yeah, but people need to eat, get to work, etc. At some point businesses have to borrow replace aging equipment, etc. You need some base level investment in productive capacity to simply maintain that capacity. At some point it seems higher interest rates will make this investment more expensive.
disgruntledphd2 49 minutes ago [-]
Yes, and that's the entire point of manipulating interest rates to impact the economy. It's supposed to make things slow down.
Note that I'm not sure this is a good way of managing an economy, but it appears to be what much of the Western world does right now.
tcbawo 2 hours ago [-]
High rates also incentivizes your customers to save now and buy later, slowing sales activity and growth. This increases pressure to control costs.
Trying to engineer a soft landing is hard. It’s like trying to perform a moon landing. There are so many variables: changing demographics, shifting energy production, global macroeconomic events. Time will tell in the end.
lesam 1 hours ago [-]
Except in the moon landing I think they had more useful controls, not just a single lever to be moved up or down.
throw0101b 1 hours ago [-]
> If you are a business and need to borrow money to fund production or expansion, it costs a lot more to borrow that money than it did two years ago.
Yes, and so the hurdle rate to break even is that much higher, a higher needed-ROI discourages economic activity as it is much harder to get that ROI, and slower economic activity will hopefully reduce inflation.
> That means your cost of production is higher and you will seek to raise prices.
Or discourage you from expanding, which can have knock-on effects of slower economic activity (hiring fewer works so less competition on labour wages, building few plants so not spending on construction, etc).
Business do not expand for the sake of expanding regardless of external factors: they expand to increase revenues on which they earn a profit on. If the cost of expansion is high(er), and so a larger margin is needed, then the business may forgo expansion if they can't get that margin.
If you know can sell something for 10% over the raw material cost, and your production costs add 5%, then the cost of capital being 2% or 6% is the different between a 3% profit or a 1% loss.
foolswisdom 2 hours ago [-]
I understand why it would increase the cost versus when interest rates are low, but I don't see why high interest rates should cause continuing inflation?
detourdog 1 hours ago [-]
If the rate stays steady it should not drive continuing inflation. Increasing interest rates only effecting shaky businesses. If a business has sufficient cash flow interest rates will have a small effect.
detourdog 1 hours ago [-]
I think the cost of borrowing to purchase goods for production could have a one time hit to prices. The production cycle should price in the new cost of borrowing on the next round.
delfinom 1 hours ago [-]
And record near 0% rates have led to the richer becoming richer and poorer becoming poorer.
The problem is, the people best suited to exploit near 0% are the wealthy who can take out absolutely massive loans, buy up companies, real estate and more, and jack prices. Which all leads to inflation ~~.
It's a death spiral.
trey-jones 60 minutes ago [-]
This is how I see it. Current rates aren't high, they just seem high because of the free money that's been available since the 2008 crash. I always thought that we kicked the can down the road for too long and we would pay for it. So far, I think we're still kicking. Who knows, maybe the country's top economists have something going for them and the pullback won't be a crash.
ta988 19 minutes ago [-]
Extreme wealth has a net negative impact on economy. Both because of direct impact but also politicians trying to please them with tax incentives and what not. Plus the insanity of a single person can disrupt a whole sector.
detourdog 1 hours ago [-]
I have hard time believing current rates are unusually high. They might be slightly above ideal.
refurb 19 minutes ago [-]
You're ignoring an alternative - you simply reduce borrowing as much as possible, even if that sacrifices expansion.
Hence why high interest rates suppress economic growth.
sobellian 22 minutes ago [-]
Except Volcker's interest rate hikes (far outstripping rate hikes recently) brought down inflation. If your model is that high interest rates beget inflation, then it is necessarily incomplete since it doesn't explain Volcker's success.
In fact, most empirical observation indicates the exact opposite.
justin66 1 hours ago [-]
Is that what you think happened? It's not the most technically detailed article, but that is not what happened.
detourdog 1 hours ago [-]
I wish the article touched on "Reaganomics". I would like a similar article with a discussion of Volcker's policy and the Treasury Secretaries actions.
neom 21 minutes ago [-]
I tried to write to them with your request, but their contact form only allows you to send a questions with 255 characters, hah... worked out to around 30 words.
detourdog 2 minutes ago [-]
Wow!
Thank you I hope something comes of it
siftrics 3 hours ago [-]
Inflation far outpaces whatever "fat interest" rates you have on your savings. You need to hold real assets, not fiat currency.
That's theatrics. Everyone on Wall Street and Main Street knows the true cost of living — housing, gas, and grocery prices — has increased dramatically more than any Fed-anointed number with the word "inflation" near it.
bryanlarsen 1 hours ago [-]
Certainly not for everyone. If you have a fixed mortgage, and are careful what you buy, you can live like its 2019.
I was at the grocery store a week ago and everything in my basket was reasonably priced for 2019: pork, bread, bananas, carrots and potatoes. Is it a coincidence I happened to buy only things that didn't experience inflation? Heck no. Avoid name brands.
Also if you "have a fixed mortgage" you probably have a fixed mortgage that was locked in at drastically lower rates than current market rates, which is the most advantageous position possible
bryanlarsen 45 minutes ago [-]
Yes, name brand bread has gone up in price. So don't buy name brand bread.
satiated_grue 2 hours ago [-]
"The cure for high prices is... high prices."
Rendered at 13:48:31 GMT+0000 (Coordinated Universal Time) with Vercel.
It was a moment from the Fed (and government in general) where they favored long term prosperity at the expense of near term possible recession. I think we need a little more of that, not necessarily in what central banks do, but governments in general.
I don't know why we're surprised. The fed has been consistently wrong since Covid. Now they're trying to help the gov fund itself by keeping rates low in coordination with the treasury(or it sure seems like that). Also, it's an election year, and probably no one at the fed wants the orange man elected.
Powell keeps talking out of both sides of his mouth. Endless statements about how much inflation hurts poor people(i.e. most Americans, who own very little inflation linked assets), yet they're followed by inaction or outright dovishness, like yesterday's statement ruling out further hikes(what happened to data dependency?).
It's not about owning assets, it's about being able to afford food, fuel, housing, medicine, and basic savings.
Most Americans live paycheck-to-paycheck because our financial industry decided 45 years ago that it'd be awesome to have Americans pay interest on everyday purchases instead of just major purchases like their home, car, or business startup capital. Since this has also coincided with stagnant wages, that interest can't go much higher without the masses getting pissed off, and over the last 15 years, "pissed off" has escalated into mass demonstrations (Occupy Wall Street) and riots (2020, 2021).
At some point we're going to have to accept that you can't just direct the value created by an economy to equities indefinitely. You have to return an increasing amount of value to labor so that standards of living continue to rise. Raising interest rates won't do that.
Higher rates mean that it's more costly to expand with debt, encouraging people and businesses to take on less debt, and thus at the margin, decreasing prices.
Mind you, higher rates don't appear to have done much for housing prices in a bunch of markets (e.g. the US, Ireland and Israel) so clearly the lags are longer than I was expecting, at least.
In Israel's case there's literally no space (it's the same size and population as the Bay Area)
Honestly, I can't speak confidently to the US here, but the Irish building rates were entirely unsustainable before 2008. Like, a fifth of national output was construction, which was definitely way too high.
The lag before construction started again (without the small builders getting bank financing) probably does explain some of the issue.
> but the Irish building rates were entirely unsustainable before 2008. Like, a fifth of national output was construction, which was definitely way too high.
Lotta corruption too on the Anglo Irish side by not doing due dilligence into connected developers like Bernard McNamara
Note that I'm not sure this is a good way of managing an economy, but it appears to be what much of the Western world does right now.
Yes, and so the hurdle rate to break even is that much higher, a higher needed-ROI discourages economic activity as it is much harder to get that ROI, and slower economic activity will hopefully reduce inflation.
> That means your cost of production is higher and you will seek to raise prices.
Or discourage you from expanding, which can have knock-on effects of slower economic activity (hiring fewer works so less competition on labour wages, building few plants so not spending on construction, etc).
Business do not expand for the sake of expanding regardless of external factors: they expand to increase revenues on which they earn a profit on. If the cost of expansion is high(er), and so a larger margin is needed, then the business may forgo expansion if they can't get that margin.
If you know can sell something for 10% over the raw material cost, and your production costs add 5%, then the cost of capital being 2% or 6% is the different between a 3% profit or a 1% loss.
The problem is, the people best suited to exploit near 0% are the wealthy who can take out absolutely massive loans, buy up companies, real estate and more, and jack prices. Which all leads to inflation ~~.
It's a death spiral.
Hence why high interest rates suppress economic growth.
In fact, most empirical observation indicates the exact opposite.
Thank you I hope something comes of it
I was at the grocery store a week ago and everything in my basket was reasonably priced for 2019: pork, bread, bananas, carrots and potatoes. Is it a coincidence I happened to buy only things that didn't experience inflation? Heck no. Avoid name brands.
https://www.in2013dollars.com/Fresh-vegetables/price-inflati...
https://www.in2013dollars.com/Bread/price-inflation/2019-to-...
Also if you "have a fixed mortgage" you probably have a fixed mortgage that was locked in at drastically lower rates than current market rates, which is the most advantageous position possible