01/28/2014
The impact of low interest rates:
Wanton printing leads to capital misallocation. That is, bank printing is counter productive for the economy in the long run. Negative 5 year real equity return illustrates how bank printing has misallocated the economy into oblivion. If the bank keeps printing wantonly, bankers will turn the economy into a banana republic.
“Our economic policies are too much aligned with trying to revitalize the economy we had pre-2007,” she says. “To have a sustainable growth model for everybody, including banks, we need to get more jobs and we need to get real wages going up again.”
I have always been agnostic on gold. Its price is influenced by so many forces that it is hard to figure out how they play out on balance, and often they cancel each other out. Think about political risk, economic uncertainty, inflation and deflation, central-bank holdings, Indians who buy gold in good times and trade down to silver in bad, new gold-mining techniques, the gold bugs who hold a gold bar in one hand and an AK-47 and dried food in the other.
Let’s look at the beneficiaries. At a zero federal funds rate, the Fed can’t cut any further in reaction to economic weakness. If deflation occurs, the central bank can’t push real rates negative to stimulate borrowing. Furthermore, the lack of response to almost-zero interest rates by lenders and borrowers is what compelled the Fed, and earlier the Bank of Japan, into the new world of quantitative easing. This and other non- interest rate actions taken previously also have pushed the Fed uncomfortably close to fiscal policy and threatened its independence.
Hello David, By the Fed attempting to prevent economic havoc, it has created a dormancy where nothing much happens. The economy does not recover. The housing situation limps along. No one can borrow and few banks can lend. And only the squandering government will act, and always badly. Its Japan. Luckily, the US citizen has far less regard for its leaders than do the Japanese. In a few months, that impatience and contempt will come to bear on those in power. GM
bampbs Feb 5th 2013 21:14 GMT "Actually, the risk-free rate plus a risk premium. Working out this premium is the tricky bit." Understatement of the month, at least. Determining that risk premium is a journey into the human psyche, not an exercise in economics that habitually pretends it isn't there. I would bet that risk premium is one of Fischer Black's "unobservables" from the quote below. - Fischer’s independent thinking led him to unorthodox but well thought-out ideas, many of which sounded obvious once he articulated them. He voiced some of them in speeches, and others in a collection of brief, pointed notes that he circulated informally at Goldman in the early 1990s. In one short essay he struck at the foundation of financial economics, writing that “certain economic quantities are so hard to estimate that I call them ‘unobservables.’ ” One unobservable, he pointed out, is expected return, the amount by which people expect to profit when buying a security. So much of finance, from Markowitz on, deals with this quantity unquestioningly. Yet, wrote Fischer, “Our estimates of expected return are so poor they are almost laughable.” - Quoted from Emanuel Derman, My Life as a Quant. Note especially the last sentence. Recommend 12 Report Permalink reply
In the inflationary 1970s, gold leaped to more than $800 per ounce as it was sought as an inflation hedge. Then its price fell for two decades. The current jump seems to be a haven play and also reflects distrust for paper currencies in general. There has been little inflation lately, and the dollar has been trending up, so those factors aren’t responsible. Gold is also probably being propelled by low interest rates, which reduce its carrying costs, and the uncertain atmosphere that surrounds zero or even negative rates. Still, gold returns nothing, and even at zero interest rates, costs money to keep secure and to store.
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In August 2011, the University of Southern California issued $300 million in century bonds with a 5.25 percent coupon yield, compared with a 3.4 percent yield at the time on 30-year Treasuries. The relatively small premium for an additional 70 years suggests that buyers of that issue don’t see a danger of inflation for many years.
Are there no investment opportunities? Or are there no easy ones, and ones that are more attractive than boosting your own pay? The global trade imbalances imply opportunties. Growing consumption in the developing world. Import substitution, and ways to produce for and live on less without sacrificing too much quality of product and life, in the developed world.
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suvyboy in reply to bampbs Feb 11th 2013 19:29 GMT Keynes outlined the same concept many, many years ago. However, that concept is never taught in "Keynesian" economics. Recommend 5 Report Permalink reply
So there's a real method to the madness. To learn more about the Fed, interest rates and other related topics, follow the links on the next page.
All other things held constant, the rising demand for credit in expansions pushes interest rates up. If the rates that consumers and businesses have to pay to borrow rise too rapidly, however, spending may decline, leading to an economic slowdown.
Finally, I should note that the very purpose of the Federal Reserve was to create an “artificial” interest rate. In fact, there is not “natural” market for Federal Reserve rates. The Federal Reserve Act created that market and the Federal Reserve Board sets those rates with specific policy objectives in mind. The intent of the Federal Reserve Act was exactly to create an artificial market that could be manipulated by Board to minimize the problems cause by the “natural” behavior banks. Through US history, every economic downturn is preceded a liquidity crisis, “bank runs”, where banks do not have enough cash to cover demands for withdrawals and loan maintenance. After the “Panic of 1907″ the Federal Reserve was created exactly to minimize the liquidity crisis and control interest rates. To allow a “natural” interest rate, would the exact opposite of the intent of the Federal Reserve Act.
Right. And while this was going on, at least in the U.S. wages were falling behind inflation, which is why borrowing was required for consumption, not investment, if sales and thus stock prices were to rise. It's like a plan for serfdom.
Wells Fargo, the nation’s largest home lender, said the volume of its mortgage applications fell 25% in the January to March quarter versus the same quarter in 2012. It also acknowledged that its margins for originating and selling home loans would likely be squeezed in future quarters. JPMorgan revealed that its mortgage applications fell 8% last quarter, leading to a drop in mortgage banking income.
Interesting post, which brings forth all kinds of chicken-and-egg questions, i.e., "what drives what, and which in turn drives what?". . However, given that the last 4.5 years have seen very low interest rates in the US and a near-doubling of the stock market, it seems that this would place the hypotheses of the post in question.
Reference
How Do Interest Rates Affect the Economy? 1970, Viewed 26 July 2013, .
HowStuffWorks "The Effects of Changing Interest Rates" 1970, Viewed 26 July 2013, .
Investing: The impact of low interest rates | The Economist 1970, Viewed 26 July 2013, .
Jerry Bowyer 1970, The Price of Low Interest Rates? Weaker Economic Recoveries ..., Viewed 26 July 2013, .
Low Interest Rates Are Hurting, Not Helping, the Economy: Sheila Bair 1970, Viewed 26 July 2013, .
Who Benefits From Keeping Interest Rates Low? 1970, Viewed 26 July 2013, .
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