The fed is in a box. If they raise interest rates, they will have to service their $18 trillion national debt and expose a lot of malinvestment in the private sector. If they don't raise interest rates, their only tool to fight the next recession will be to print money, which could cause the currency to collapse. Choose your poison.
The existing national debt already has an interest rate attached to it. It's cheaper to buy that back once you raise interest rates because its value goes down immediately! The US will always be able to pay back its US dollar debt. That is not a factor here. It is true that new debt will have a higher rate attached to it but the US has served debt with rates of over 10% in the past with no problem (wish I could have gotten my hands on some of those).
You can't cause the currency to collapse simply by printing money. That money has to go somewhere. As long as the government isn't spending money it doesn't make a difference. We've been printing money for almost 10 years now and giving it away as loans with very low interest rates. This is what many people also call pushing on a rope, there's no uptake for that money in the real economy. Higher inflation is what the Fed wants and has been unable to achieve.
You're right though that the Fed does have a dilemma but it's not the one you mentioned. The real problem is that higher interest rates cause other asset prices to go down. I.e. the stock market will go down, real estate will go down etc. That can do damage to the real economy. This is the real problem here. Even the hint of raising interest rates sends the stock market into a spiral. The other thing higher rates do is strengthen the dollar. This makes the US economy less competitive and adds a deflationary pressure. Those are the two things the Fed is concerned about.
You're right about having less bullets in the chamber, so to speak, for dealing with future emergencies when the rates are already so low. There's still QE to the rescue and negative interest rates though.
Isn't it 'technically' in the economy's best interest, in the long run, to expose the malinvestment in the private sector? The longer it continues, the more painful it's going to be when we rip off the band-aid that is historically low interest rates.
Didn't we just read about China's stock exchange practically collapsing due to easy money being pumped into poorly vetted investments? True, the regulations are much different, but the lesson at the heart of it appears to be the same: the party can't go on forever.
The debt could easily be serviced by raising taxes on those who could afford it (i.e., high income) and to de-emphasize the kind of things that don't service the markets (i.e., HFT & front-running) by introducing a small financial transaction tax.
The country doesn't have a debt problem - it has a revenue problem.
If they raise interest rates, they will have to service their $18 trillion national debt and expose a lot of malinvestment in the private sector.
1. I think the Fed wants to "expose malinvestment". There's some debate about whether avoiding bubbles (i.e. malinvestment) should be a formal part of the Fed's mandate. IIRC, as it currently stands avoiding bubbles isn't a formal part of the Fed's mandate but it would certainly be a desirable policy goal (i.e. the Fed wants to prevent malinvestment from running to far). Also, wrt to servicing debt, the article was about how interest rates are likely to remain low.
If they don't raise interest rates, their only tool to fight the next recession will be to print money, which could cause the currency to collapse.
2. Your claim implies that the Fed raises rates so they have a tool to fight economic slowdowns. That's wrong. The Fed has 2 mandates: stable inflation and full employment. The Fed is raising rates to avoid inflation. You also claim that the Fed will "print money" which could cause the currency to collapse. Its astounding that we literally just went through this scenario, the Fed printed money, the currency didn't collapse. However people haven't re-examined their beliefs. We've now had 2 episodes where major economies resorted to "printing money" (Japan in the 1990's, US in 2000s) ... no currency collapses. In fact, as far as I'm aware, there's no precedent for a country that issues their debts in their own currency having a currency "collapse".
It's a complicated question, but in my world I'll take higher interest rates!
In my world, the only people, I know, who have benefitted from these rediculiously low interest rates, are rich people(entities that were doing great before the ression, and will probally still do well in a depression?). I've heard if you have a great job, and great credit, and you live on the right zip code; you can get some of this free money? (yes--I believe they still redline.)
In my world, my cd is making nothing. I pay to just cash a check.
Supposedly the economy is doing great because of these low interest rates? In my world, a lot of people just stopped looking for work, or work that payed a livable wage. (I know Obama administration didn't have any solution, but to lower interest rates. Yes--I know the federal reserve is a separate entity.)
I, and a lot of people like me, didn't benefit from these low interest rates. Yes--there are those that did. I see it in tech, and I'm glad!
Granted my world is small. I'm a nobody, and close to being homeless. I guess the part of the low interest rate dilemma(the one "I'm experiencing" is partially due to Dodd-Frank? It's too strict? I guess? I really don't know. I know when they make it easier for guys like me to get low interest rates, Rebublicans try to make it more difficult to file for Bankruptcy.
As to more gas taxes--no. Poor, middle class have to commute. Now if we could tie all fees/fines to income; I'd be doing backflips. A rich man gets a ticket. He tells the wife over dinner. A poor man gets a $600 red light fine; that just might be the final straw?
As I said earlier, it's complicated, but these low interest rates did not benefit me. They benefitted my wealthy neighbors. I don't want to argue with anyone--I'm a nobody. So, my opinion really doesn't matter. I just question exactly who benefitted from this free money?
the graph is a little bit deceptive; Before Nixon, dollars were more-or-less tied to the value of gold; sometimes more, sometimes less, and yeah, you can point at the "greenback" and a few other times we left the reservation, but... more or less, before nixon, the dollar had something to do with gold. After Nixon, that went out the window.
Now, some of you like the gold standard... me, I don't, but whatever you think about the gold standard, you can't really compare the interest rate on gold-backed currency to the interest rate on currency that isn't backed by gold. They are qualitatively different things.
Go back and look at the graph from, say, 1968 to now, and, well, it shows that we know a lot less than we think we know, or at least we have a lot less history to draw lessons from than we think we do.
Heavy burden (and power) given to the Fed knowing that with every rise or decrease in the interest rate, even the slightest, can economically impacts every corner of the world.
The low interest rates will stick around until the dollar stops being the world's reserve currency in about 25 years, taking the US economy down with it.
They Fed needs to get a grip. Interest rates cannot sustain a functioning economy at near 0 percent rates. This is getting ridiculous already. If they do not raise the rates on Wednesday they will have lost a lot of legitimacy
[+] [-] um_ya|10 years ago|reply
[+] [-] YZF|10 years ago|reply
You can't cause the currency to collapse simply by printing money. That money has to go somewhere. As long as the government isn't spending money it doesn't make a difference. We've been printing money for almost 10 years now and giving it away as loans with very low interest rates. This is what many people also call pushing on a rope, there's no uptake for that money in the real economy. Higher inflation is what the Fed wants and has been unable to achieve.
You're right though that the Fed does have a dilemma but it's not the one you mentioned. The real problem is that higher interest rates cause other asset prices to go down. I.e. the stock market will go down, real estate will go down etc. That can do damage to the real economy. This is the real problem here. Even the hint of raising interest rates sends the stock market into a spiral. The other thing higher rates do is strengthen the dollar. This makes the US economy less competitive and adds a deflationary pressure. Those are the two things the Fed is concerned about.
You're right about having less bullets in the chamber, so to speak, for dealing with future emergencies when the rates are already so low. There's still QE to the rescue and negative interest rates though.
[+] [-] intopieces|10 years ago|reply
Didn't we just read about China's stock exchange practically collapsing due to easy money being pumped into poorly vetted investments? True, the regulations are much different, but the lesson at the heart of it appears to be the same: the party can't go on forever.
[+] [-] r00fus|10 years ago|reply
The country doesn't have a debt problem - it has a revenue problem.
[+] [-] riggins|10 years ago|reply
1. I think the Fed wants to "expose malinvestment". There's some debate about whether avoiding bubbles (i.e. malinvestment) should be a formal part of the Fed's mandate. IIRC, as it currently stands avoiding bubbles isn't a formal part of the Fed's mandate but it would certainly be a desirable policy goal (i.e. the Fed wants to prevent malinvestment from running to far). Also, wrt to servicing debt, the article was about how interest rates are likely to remain low.
If they don't raise interest rates, their only tool to fight the next recession will be to print money, which could cause the currency to collapse.
2. Your claim implies that the Fed raises rates so they have a tool to fight economic slowdowns. That's wrong. The Fed has 2 mandates: stable inflation and full employment. The Fed is raising rates to avoid inflation. You also claim that the Fed will "print money" which could cause the currency to collapse. Its astounding that we literally just went through this scenario, the Fed printed money, the currency didn't collapse. However people haven't re-examined their beliefs. We've now had 2 episodes where major economies resorted to "printing money" (Japan in the 1990's, US in 2000s) ... no currency collapses. In fact, as far as I'm aware, there's no precedent for a country that issues their debts in their own currency having a currency "collapse".
[+] [-] RobertoG|10 years ago|reply
This is not true. The USA is not Zimbabwe.
If this was true the yen would have collapsed now: http://bilbo.economicoutlook.net/blog/?p=26054
[+] [-] marincounty|10 years ago|reply
In my world, the only people, I know, who have benefitted from these rediculiously low interest rates, are rich people(entities that were doing great before the ression, and will probally still do well in a depression?). I've heard if you have a great job, and great credit, and you live on the right zip code; you can get some of this free money? (yes--I believe they still redline.)
In my world, my cd is making nothing. I pay to just cash a check.
Supposedly the economy is doing great because of these low interest rates? In my world, a lot of people just stopped looking for work, or work that payed a livable wage. (I know Obama administration didn't have any solution, but to lower interest rates. Yes--I know the federal reserve is a separate entity.)
I, and a lot of people like me, didn't benefit from these low interest rates. Yes--there are those that did. I see it in tech, and I'm glad!
Granted my world is small. I'm a nobody, and close to being homeless. I guess the part of the low interest rate dilemma(the one "I'm experiencing" is partially due to Dodd-Frank? It's too strict? I guess? I really don't know. I know when they make it easier for guys like me to get low interest rates, Rebublicans try to make it more difficult to file for Bankruptcy.
As to more gas taxes--no. Poor, middle class have to commute. Now if we could tie all fees/fines to income; I'd be doing backflips. A rich man gets a ticket. He tells the wife over dinner. A poor man gets a $600 red light fine; that just might be the final straw?
As I said earlier, it's complicated, but these low interest rates did not benefit me. They benefitted my wealthy neighbors. I don't want to argue with anyone--I'm a nobody. So, my opinion really doesn't matter. I just question exactly who benefitted from this free money?
[+] [-] lsc|10 years ago|reply
Now, some of you like the gold standard... me, I don't, but whatever you think about the gold standard, you can't really compare the interest rate on gold-backed currency to the interest rate on currency that isn't backed by gold. They are qualitatively different things.
Go back and look at the graph from, say, 1968 to now, and, well, it shows that we know a lot less than we think we know, or at least we have a lot less history to draw lessons from than we think we do.
[+] [-] Eliana|10 years ago|reply
[+] [-] emblem21|10 years ago|reply
[deleted]
[+] [-] cft|10 years ago|reply
[+] [-] dualogy|10 years ago|reply
Nice timing, since nobody will recall your comment in 25 years.
[+] [-] aburan28|10 years ago|reply