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glass22
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5/18/2016 10:42:43 AM
Posted: 6 months ago
Hi,

Some things I don't understand about the economy.

1. Why do central banks raise rates? what's the purpose of raising rates? and what would force a central bank to raise rates?

2. If the US economy is as great as the fed has continued to say why don't they raise rates? more than a fractional move once.

3. How could the US raise rates when everyone else is making them lower, wouldn't this just result in a surging US dollar that hurts US exports?

4. What caused the huge fall in stocks and the dollar after the December rise?
ResponsiblyIrresponsible
Posts: 12,398
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5/18/2016 11:02:17 PM
Posted: 6 months ago
At 5/18/2016 10:42:43 AM, glass22 wrote:
Hi,

Some things I don't understand about the economy.

1. Why do central banks raise rates? what's the purpose of raising rates? and what would force a central bank to raise rates?

They raise rates to respond to the current and future risk of a buildup in inflationary pressures and, perhaps to a lesser extent, financial imbalances. A higher federal funds rate transmits to other overnight rates, then to short-term rates, and finally long-term rates. This makes borrowing throughout the economy more expensive, and thus cools off economic activity, applying downward pressure on the trajectory of inflation.

As for what might "force" them to raise: the best case might by the 1970s. Monetary policy had been far too loose and the US faced a massive oil shock from the OPEC embargo of 1973 and a somewhat less shock in 1979. Higher actual inflation translates into higher inflationary expectations, making the shock effectively permanent. That required the Fed to tighten monetary policy far more than it ever has since in a way of (what Ball and Mazumder in a pretty famous paper call) "shock anchoring": i.e., convincing people that inflation would remain low and stable close to target such that short-term deviations filter out of the data once the shocks wear off.

Right now, the argument behind raising -- and I'm skeptical of this argument, I should note -- is that raising sooner will let them proceed at a shallower path. The economy will improve at a more gradual pace overall, but the damage a steep path may cause to the housing and durable goods sectors, as well as to financial markets, would be largely mollified.

2. If the US economy is as great as the fed has continued to say why don't they raise rates? more than a fractional move once.

They could very well move again in June -- at least, that's what they've been saying.

The reason they haven't been moving is factors that aren't directly tethered to their modal forecast and in some sense aren't quantifiable. The forecasts suggest they ought to be moving, which is why many Fed officials sound extremely optimistic about the economy, but the weak global economy, as you note, and turbulence in global financial markets has sent the dollar on an upward trajectory and oil prices down (oil price movements may well be caused by greater production, but weak Chinese demand probably also plays a not insubstantial role). The former restrains exports and the prices of non-energy imports and the latter might boost consumption -- though a number of studies suggest that it hasn't, notwithstanding the difficulty in actually measuring or quantifying these gains -- but also restrains investment in energy-sensitive sectors and leads to declines in, say, mining employment.

Either way, both tend to push down on actual inflation and that arguably -- depending, again, on measurement -- has translated to lower longer-run inflation expectations, which could be extremely damaging to the Fed's credibility and to the actual, realized path of inflation. So the Fed is trying to approach that as casually as possible. They noted in their recent meeting minutes released today that these downside risks seem to have abated and that June is very much live and on the table, and financial markets, initially very pessimistic about this prospect, revised upward their expectations that this might occur -- though the implied probability is still quite low. You could make a good argument that the Fed wouldn't want to move when the move would take financial markets by surprise.

3. How could the US raise rates when everyone else is making them lower, wouldn't this just result in a surging US dollar that hurts US exports?

This is very true, and you could argue that global policy divergence -- i.e., even if the Fed does nothing, but the rest of the world eases policy further (QE in the Euro area, negative rates there, in Japan, Australia, Sweden, Switzerland, etc.), we're still technically becoming "relatively tighter" and our longer-term interest rates "relatively higher" -- has already pushed the dollar up whether or not the Fed actually goes through with a rate hike, but surely it would appreciate more if they actually raised. Obviously this is a chief concern, also, when a number of emerging market economies have so much dollar-denominated debt -- a function of capital outflows at the time of the financial crisis when interest rates around the world fell to zero. As the dollars rise, defaults in EME countries rise which could implications for the US, particularly for companies with EME exposure, so you might see risk spreads rise -- i.e., if we tighten monetary policy, financial conditions tighten to an even larger extent.

To make a long story short, as your question acknowledges, monetary policy is far more complex than a simple Taylor rule or simple modal-forecast targeting. There's a whole lot of uncertainty involved, and the Fed generally has acknowledged that the risks of tightening too slow, and having too move faster down the road, are far less severe than the risks of tightening too quickly and having to reverse a rate hike, as a dozen or so other central banks have had to do in recent years.

4. What caused the huge fall in stocks and the dollar after the December rise?

To be honest, it was news to me that the dollar also fell with the giant sell-off, though I was aware that it tapered off much of its gains. If you extend the graph slightly outward [https://research.stlouisfed.org...], the fall seems to have begun around January. It's extremely hard to actually explain movements in market prices, especially without fancy econometric models -- and even then it's hard to say for sure -- but if I had to guess, I would say the sell off caused the decline in the dollar. Financial markets, since October (if you look at the graph, that's really when we saw perhaps the largest appreciation within a narrow window in preparation for the December rate hike, that was largely anticipated), were pricing in a series of rate hikes because once the Fed moves once, historically, they go on to move several more times. The Fed largely confirmed this by projecting four rate hikes in the coming year. The sell off was either a function of this expectation or of weaker data from China and Europe. If financial markets perceived four rate hikes as a commitment, notwithstanding incoming data, this would push the dollar upward and stocks down, but more likely than not, financial markets believed the Fed would respond with relatively easier policy and thus reduced their forecasts for interest rate increases this year.
~ResponsiblyIrresponsible

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ResponsiblyIrresponsible
Posts: 12,398
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5/18/2016 11:05:17 PM
Posted: 6 months ago
At 5/18/2016 11:02:17 PM, ResponsiblyIrresponsible wrote:
At 5/18/2016 10:42:43 AM, glass22 wrote:
Hi,

Some things I don't understand about the economy.

1. Why do central banks raise rates? what's the purpose of raising rates? and what would force a central bank to raise rates?

They raise rates to respond to the current and future risk of a buildup in inflationary pressures and, perhaps to a lesser extent, financial imbalances. A higher federal funds rate transmits to other overnight rates, then to short-term rates, and finally long-term rates. This makes borrowing throughout the economy more expensive, and thus cools off economic activity, applying downward pressure on the trajectory of inflation.

As for what might "force" them to raise: the best case might by the 1970s. Monetary policy had been far too loose and the US faced a massive oil shock from the OPEC embargo of 1973 and a somewhat lesser shock in 1979. Higher actual inflation translates into higher inflationary expectations, making the shock effectively permanent. That required the Fed to tighten monetary policy far more than it ever has since in a way of (what Ball and Mazumder in a pretty famous paper call) "shock anchoring": i.e., convincing people that inflation would remain low and stable, close to target, such that short-term deviations filter out of the data once the shocks wear off.

Right now, the argument behind raising -- and I'm skeptical of this argument, I should note -- is that raising sooner will let them proceed at a shallower path. The economy will improve at a more gradual pace overall, but the damage a steep path may cause to the housing and durable goods sectors, as well as to financial markets, would be largely mollified.

2. If the US economy is as great as the fed has continued to say why don't they raise rates? more than a fractional move once.

They could very well move again in June -- at least, that's what they've been saying.

The reason they haven't been moving is factors that aren't directly tethered to their modal forecast and in some sense aren't quantifiable. The forecasts suggest they ought to be moving, which is why many Fed officials sound extremely optimistic about the economy, but the weak global economy, as you note, and turbulence in global financial markets has sent the dollar on an upward trajectory and oil prices down (oil price movements may well be caused by greater production, but weak Chinese demand probably also plays a not insubstantial role). The former restrains exports and the prices of non-energy imports and the latter might boost consumption -- though a number of studies suggest that it hasn't, notwithstanding the difficulty in actually measuring or quantifying these gains -- but also restrains investment in energy-sensitive sectors and leads to declines in, say, mining employment.

Either way, both tend to push down on actual inflation and that arguably -- depending, again, on measurement -- has translated to lower longer-run inflation expectations, which could be extremely damaging to the Fed's credibility and to the actual, realized path of inflation. So the Fed is trying to approach that as carefully as possible. They noted in their recent meeting minutes released today that these downside risks seem to have abated and that June is very much live and on the table, and financial markets, initially very pessimistic about this prospect, revised upward their expectations that this might occur -- though the implied probability is still quite low. You could make a good argument that the Fed wouldn't want to move when the move would take financial markets by surprise.

3. How could the US raise rates when everyone else is making them lower, wouldn't this just result in a surging US dollar that hurts US exports?

This is very true, and you could argue that global policy divergence -- i.e., even if the Fed does nothing, but the rest of the world eases policy further (QE in the Euro area, negative rates there, in Japan, Australia, Sweden, Switzerland, etc.), we're still technically becoming "relatively tighter" and our longer-term interest rates "relatively higher" -- has already pushed the dollar up whether or not the Fed actually goes through with a rate hike, but surely it would appreciate more if they actually raised. Obviously this is a chief concern, also, when a number of emerging market economies have so much dollar-denominated debt -- a function of capital outflows at the time of the financial crisis when interest rates around the world fell to zero. As the dollars rise, defaults in EME countries rise which could implications for the US, particularly for companies with EME exposure, so you might see risk spreads rise -- i.e., if we tighten monetary policy, financial conditions tighten to an even larger extent.

To make a long story short, as your question acknowledges, monetary policy is far more complex than a simple Taylor rule or simple modal-forecast targeting. There's a whole lot of uncertainty involved, and the Fed generally has acknowledged that the risks of tightening too slow, and having too move faster down the road, are far less severe than the risks of tightening too quickly and having to reverse a rate hike, as a dozen or so other central banks have had to do in recent years.

4. What caused the huge fall in stocks and the dollar after the December rise?

To be honest, it was news to me that the dollar also fell with the giant sell-off, though I was aware that it tapered off much of its gains. If you extend the graph slightly outward [https://research.stlouisfed.org...], the fall seems to have begun around January. It's extremely hard to actually explain movements in market prices, especially without fancy econometric models -- and even then it's hard to say for sure -- but if I had to guess, I would say the sell off caused the decline in the dollar. Financial markets, since October (if you look at the graph, that's really when we saw perhaps the largest appreciation within a narrow window in preparation for the December rate hike, that was largely anticipated), were pricing in a series of rate hikes because once the Fed moves once, historically, they go on to move several more times. The Fed largely confirmed this by projecting four rate hikes in the coming year. The sell off was either a function of this expectation or of weaker data from China and Europe. If financial markets perceived four rate hikes as a commitment, notwithstanding incoming data, this would push the dollar upward and stocks down, but more likely than not, financial markets believed the Fed would respond with relatively easier policy and thus reduced their forecasts for interest rate increases this year.

Fixed somewhat.
~ResponsiblyIrresponsible

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BillSPrestonEsq
Posts: 140
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5/20/2016 2:52:30 AM
Posted: 6 months ago
At 5/18/2016 11:02:17 PM, ResponsiblyIrresponsible wrote:
At 5/18/2016 10:42:43 AM, glass22 wrote:
Hi,

Some things I don't understand about the economy.

1. Why do central banks raise rates? what's the purpose of raising rates? and what would force a central bank to raise rates?

They raise rates to respond to the current and future risk of a buildup in inflationary pressures and, perhaps to a lesser extent, financial imbalances. A higher federal funds rate transmits to other overnight rates, then to short-term rates, and finally long-term rates. This makes borrowing throughout the economy more expensive, and thus cools off economic activity, applying downward pressure on the trajectory of inflation.

As for what might "force" them to raise: the best case might by the 1970s. Monetary policy had been far too loose and the US faced a massive oil shock from the OPEC embargo of 1973 and a somewhat less shock in 1979. Higher actual inflation translates into higher inflationary expectations, making the shock effectively permanent. That required the Fed to tighten monetary policy far more than it ever has since in a way of (what Ball and Mazumder in a pretty famous paper call) "shock anchoring": i.e., convincing people that inflation would remain low and stable close to target such that short-term deviations filter out of the data once the shocks wear off.

Right now, the argument behind raising -- and I'm skeptical of this argument, I should note -- is that raising sooner will let them proceed at a shallower path. The economy will improve at a more gradual pace overall, but the damage a steep path may cause to the housing and durable goods sectors, as well as to financial markets, would be largely mollified.

Why set rates artificially? If the FED's purpose is keep the economy stable, why is it that since the beginning there has been repeated booms and busts? Couldn't it be said that allowing interest rates to find a 'natural' equilibrium in the market would be much more stable?
It would seem to me that since the start of the FED the rates are lowered, credit is building up the economy and values of most securities, real estate etc. rise. Then the FED says, "Oh woah better slow this train down to ward of 'inflation'!" and the rates are raised until recession and they say, "Uh oh too much! Lower rates back down again, we need more liquidity!" and the economy gets back the credit it's built on and the cycle repeats every ten years or so.
Is this not madness? How can manipulating rates like that possibly help to stabilize or grow the economy? We know it does not stabilize it because of all the boom and busts over the last 100 years, which I would directly attribute to monetary and fiscal policy. We know that creating money does not create wealth, and so growth cannot be a consequence of the FED unless it is artificial and will be reined in on as soon as the rates are raised again.
What am I missing? What is the benefit of having rates manipulated like that?
I really think pinning the money supply to population is the most stabile, if we are to have a national currency, and the treasury could do that. I don't see the benefit of the FED.
ResponsiblyIrresponsible
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5/20/2016 3:28:55 AM
Posted: 6 months ago
At 5/20/2016 2:52:30 AM, BillSPrestonEsq wrote:
Why set rates artificially?

There isn't anything "artificial" about it. Interest rates move with fundamentals. The equilibrium interest rate that clears financial markets is unobservable and not impacted by monetary policy -- the Federal Reserve nudges interest rates in the direction of this time-varying rate with the intention of restoring equilibrium, but cannot materially push interest rates beyond equilibrium for too long, lest it lead to a whole slew of consequences the Fed regularly tries to avoid. The Fed isn't setting interest rates; they're nudging them up and down in the direction of underlying fundamentals.

If the FED's purpose is keep the economy stable, why is it that since the beginning there has been repeated booms and busts?

There were far more booms and busts before the Fed even existed -- this latest boom and bust was a function of regularly oversight and tight monetary policy. That's why the Fed should target nominal GDP in a forward-looking, rule-based manner. With reasonable capital, leverage and liquidity requirements -- probably a bit more than exist under the current Dodd-Frank Act -- the "boom and bust" narrative would be an aberration.

Couldn't it be said that allowing interest rates to find a 'natural' equilibrium in the market would be much more stable?

And that's the goal of monetary policy -- but left to their own devices, financial markets will NOT just magically clear. That's the essence of the financial crisis and of the Great Depression because so much leverage is built into the system that allowing, for instance, home prices to just find their bottom will might make them more affordable, but also will wipe out the largest asset on the majority of consumer's balance sheet and consequently any financial assets for which those homes were collateral.

I mean, your narrative sounds nice, but the truth of the matter is that *someone* needs to set the monetary base because deviations in that base affect interest rates. If left to their own devices, we're not obviating the so-called "artificial setting" of interest rates -- monetary policy just becomes THAT MUCH MORE contractionary. That's actually contrary to your narrative of finding equilibrium because when output falls below potential, that means real interest rates are TOO HIGH (demand for safe assets rises) and thus needs to be brought downward.

It would seem to me that since the start of the FED the rates are lowered, credit is building up the economy and values of most securities, real estate etc. rise.

Some valuations are a tad high, yes, and in some sense that's correlated with movements in interest rates -- but the problem is that the REASON that prices are rising (i.e., the growth rate, not the level) is to stabilize the level, because the financial crisis caused housing prices to come falling downward. Even then, housing prices aren't consistent with even their pre-bubble trend, and there is absolutely zero evidence of froth. The reason for this is, simply, that the state of the economy MERITS relatively higher valuations -- if the economy is weak, equilibrium rates are low, so actual real interest rates need to be low, which bids up securities prices. A lot of people like to have their cake and eat it too, arguing that the economy sucks (in which case lower rates are merited because equilibrium rates are lower) AND valuations are too high (in which case equilibrium rates, and thus actual rates, should be higher, which would be consistent with a stronger economy: it's inherently contradictory).

Then the FED says, "Oh woah better slow this train down to ward of 'inflation'!" and the rates are raised until recession and they say, "Uh oh too much! Lower rates back down again, we need more liquidity!" and the economy gets back the credit it's built on and the cycle repeats every ten years or so.

That's actually.... completely and utterly inconsistent with the historical record, for one, and I don't think you can reasonably blame the Fed for stoking credit market allocations -- if anything, the Fed has been far too passive and far too likely to listen to people worried about inflation.

In fact, this is actually totally inconsistent with what the Fed has even been saying as late. The argument as late has been to raise now when inflation is still relatively low, but making progress, so that they DON'T have to raise faster down the road, which might cause a "recession." Granted, I don't buy it, because steeper rates are only actually merited if the economy is on the brink of overheating, in which case equilibrium rates are higher and the real interest rate gap is sharply negative, in which case narrowing that gap will tend to slow the economy, but from an already strong base: so the growth rate will fall, but the level will be more consistent with a "sustainable" long-run steady state.

Is this not madness?

Nope: the only madness is the people who have been wrong for almost a decade on bubbles, hyperinflation, etc. and yet are still peddling the narrative, undeterred by the actual, demonstrable truth that their worldview is totally inconsistent with reality.

How can manipulating rates like that possibly help to stabilize or grow the economy?

It has nothing to do with manipulating rates. The Fed doesn't set rates. If the Fed tried to set rates, they'd end up like the dozen other central banks that had to reverse their first rate hike. Again, the Fed nudges rate in the direction of the equilibrium rate which is an endogenous function of the state of the economy.

We know it does not stabilize it because of all the boom and busts over the last 100 years, which I would directly attribute to monetary and fiscal policy.

That's just total and complete nonsense, a misreading of history, and in fact DIRECTLY in opposition with reality -- to the contrary, this was the case BEFORE the Fed was created and before we had a reliable lender of last resorts. That's what brings self-fulfilling panics: credit crunches with no feasible way to provide liquidity to get money flowing through the system.

We know that creating money does not create wealth, and so growth cannot be a consequence of the FED unless it is artificial and will be reined in on as soon as the rates are raised again.

Again, this is totally wrong. Even the most basic accounting equation in macroeconomics, MV = PY, demonstrate just how unbelievably asinine this is. Not to mention, this is a misreading of what the Fed actually does. It's not "creating money." It's creating base money in exchange for securities which eventually turns into money once banks lend it out -- because we are NEVER going to have a static supply of money in an age of population growth and innovation. The extent to which those dollars turn over, the V in that equation, is another key determinant. This is just reality, and there isn't much sophistry can do to undermine it.

What am I missing? What is the benefit of having rates manipulated like that?

A lot -- particularly that your second question is a misrepresentation of reality.

I really think pinning the money supply to population is the most stabile, if we are to have a national currency, and the treasury could do that. I don't see the benefit of the FED.

Interest rates and the money supply are inversely proportional, but the RATE of money supply growth doesn't correspond to a RATE of interest or to a rate of nominal GDP (or real because prices are sticky) because velocity is unstable. The rate of population growth is roughly equal to the equilibrium rate -- how much money is needed to generate that is completely unknown, and should it prove inadequate or should there be a shock to velocity, necessarily you get booms and busts.

For the first part: All the research show that independent central banks are what keep inflation low and stable bec
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BillSPrestonEsq
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5/20/2016 10:35:59 PM
Posted: 6 months ago
At 5/20/2016 3:28:55 AM, ResponsiblyIrresponsible wrote:
At 5/20/2016 2:52:30 AM, BillSPrestonEsq wrote:
Why set rates artificially?

There isn't anything "artificial" about it. Interest rates move with fundamentals. The equilibrium interest rate that clears financial markets is unobservable and not impacted by monetary policy -- the Federal Reserve nudges interest rates in the direction of this time-varying rate with the intention of restoring equilibrium, but cannot materially push interest rates beyond equilibrium for too long, lest it lead to a whole slew of consequences the Fed regularly tries to avoid. The Fed isn't setting interest rates; they're nudging them up and down in the direction of underlying fundamentals.


How is it that 'nudging' in any direction is going to prove to be the correct direction at any given time? This is such a joke. They have "the intention of restoring equilibrium"?
How can anyone possibly decide the what the market's equilibrium actually is besides the market? This makes no sense whatsoever. And if that is true, if their stated goal is truly being accomplished there would NOT be a recession roughly every ten or so years or at all.
:

If the FED's purpose is keep the economy stable, why is it that since the beginning there has been repeated booms and busts?

There were far more booms and busts before the Fed even existed -- this latest boom and bust was a function of regularly oversight and tight monetary policy. That's why the Fed should target nominal GDP in a forward-looking, rule-based manner. With reasonable capital, leverage and liquidity requirements -- probably a bit more than exist under the current Dodd-Frank Act -- the "boom and bust" narrative would be an aberration.


There was not more, maybe an equal amount BUT we also have had governments (foreign as well) involved in creating those booms and busts just the same. We (the US and Europe) have had central banks for hundreds of years, and so for hundreds of years we have had the same credit expansion and subsequent contraction. Either that or war, some sort of currency debasement, or some manipulation of currency in some form or another. We have NEVER had a stable currency in human history. I would argue gold has been the most stable, and national currencies have fluctuated around the value of gold. I am not arguing for a gold standard by the way.


Couldn't it be said that allowing interest rates to find a 'natural' equilibrium in the market would be much more stable?

And that's the goal of monetary policy -- but left to their own devices, financial markets will NOT just magically clear. That's the essence of the financial crisis and of the Great Depression because so much leverage is built into the system that allowing, for instance, home prices to just find their bottom will might make them more affordable, but also will wipe out the largest asset on the majority of consumer's balance sheet and consequently any financial assets for which those homes were collateral.

I hate this answer, "but left to their own devices, financial markets will NOT just magically clear". WHY? How can the FED possibly improve on what the market deems valuable and invaluable? And I hate this even more "so much leverage is built into the system that allowing, for instance, home prices to just find their bottom will might make them more affordable, but also will wipe out the largest asset on the majority of consumer's balance sheet "
So we would instead choose to keep home prices high so that we can all pay 100% interest on a $500,000 house? HA! My biggest bills are in this order: Income tax, mortgage. WHY? Because we have most of our money in housing? EXACTLY! And I love that because of the 10% reserve requirement the banks make the money while our savings accounts pay nothing. We'll just have to put it in the stock market casino then to avoid losing it all to inflation. And keep those banks 'too big to fail' at the same time.
Look this whole system is insane, it is very simple, after studying economic theory for many years it all comes down to two things
1. Supply and Demand
2. Division of Labor
There is no need to complicate it, there is NOTHING you can do to improve upon supply and demand. NOTHING, and just as you have argued against protectionism, I argue against any manipulation. Just like raising minimum wage, raising interest rates or as you would describe it as 'nudging' them down, is an artificial demand just like minimum wage. It has the same two sided negative consequences as we saw with 'stagflation'. And by the way is quantitative easing a nudge? Or raising rates up to whatever 15%? in the eighties? After admittedly a long period of 'loose' monetary policy.
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5/21/2016 12:48:40 AM
Posted: 6 months ago
At 5/20/2016 3:28:55 AM, ResponsiblyIrresponsible wrote:
At 5/20/2016 2:52:30 AM, BillSPrestonEsq wrote:


I mean, your narrative sounds nice, but the truth of the matter is that *someone* needs to set the monetary base because deviations in that base affect interest rates. If left to their own devices, we're not obviating the so-called "artificial setting" of interest rates -- monetary policy just becomes THAT MUCH MORE contractionary. That's actually contrary to your narrative of finding equilibrium because when output falls below potential, that means real interest rates are TOO HIGH (demand for safe assets rises) and thus needs to be brought downward.


But the deviations are created by the market. It is the input of hundreds of millions of people constantly evaluating and acting, not a handful of people either, in vain trying to 'stabilize' the economy, or intentionally manipulating to their advantage.
"If left to their own devices....monetary policy just becomes THAT MUCH MORE contractionary" What monetary policy? If the market for capital at least was 'free' there would be no monetary policy. The 'surplus capital' available for loan would find it's own value based on... supply and demand. Contractionary compared to what?


"because when output falls below potential, that means real interest rates are TOO HIGH (demand for safe assets rises) and thus needs to be brought downward."
If output falls below potential that does not mean interest rates are too high, it means for any number of reasons spending is down, and yes interest rates will drop as a result. But they will do so as a natural reaction to supply and demand whatever it may be that is effecting it.


It would seem to me that since the start of the FED the rates are lowered, credit is building up the economy and values of most securities, real estate etc. rise.

Some valuations are a tad high, yes, and in some sense that's correlated with movements in interest rates -- but the problem is that the REASON that prices are rising (i.e., the growth rate, not the level) is to stabilize the level, because the financial crisis caused housing prices to come falling downward. Even then, housing prices aren't consistent with even their pre-bubble trend, and there is absolutely zero evidence of froth. The reason for this is, simply, that the state of the economy MERITS relatively higher valuations -- if the economy is weak, equilibrium rates are low, so actual real interest rates need to be low, which bids up securities prices. A lot of people like to have their cake and eat it too, arguing that the economy sucks (in which case lower rates are merited because equilibrium rates are lower) AND valuations are too high (in which case equilibrium rates, and thus actual rates, should be higher, which would be consistent with a stronger economy: it's inherently contradictory).


And I bet we will see stagflation as a result in the coming years. But my point there was, when the FED was first created interest rates were lowered and then 'the roaring twenties' until the FED raised rates, then the great depression, then they lowered the rates, then to combat inflation they raised the rates, until recession, then they
lowered the rates ad infinitum. And to that you would say...


That's actually.... completely and utterly inconsistent with the historical record, for one, and I don't think you can reasonably blame the Fed for stoking credit market allocations -- if anything, the Fed has been far too passive and far too likely to listen to people worried about inflation.


https://upload.wikimedia.org...
I've posted this once before on another thread. This is some evidence supporting my historical claim.


In fact, this is actually totally inconsistent with what the Fed has even been saying as late. The argument as late has been to raise now when inflation is still relatively low, but making progress, so that they DON'T have to raise faster down the road, which might cause a "recession." Granted, I don't buy it, because steeper rates are only actually merited if the economy is on the brink of overheating, in which case equilibrium rates are higher and the real interest rate gap is sharply negative, in which case narrowing that gap will tend to slow the economy, but from an already strong base: so the growth rate will fall, but the level will be more consistent with a "sustainable" long-run steady state.

Is this not madness?

Nope: the only madness is the people who have been wrong for almost a decade on bubbles, hyperinflation, etc. and yet are still peddling the narrative, undeterred by the actual, demonstrable truth that their worldview is totally inconsistent with reality.


I haven't made any of those claims. I am merely saying that the FED lowering interest rates raises the demand for capital artificially. All other factors being equal, spending WILL increase. When the FED raises interest rates demand for capital will go down, spending WILL decrease. The first creates a bubble, because the rates are artificially lowered instead of by market forces, and the second bursts the bubble because no REAL wealth was created, just spending has slowed, lowering the demand for the businesses that had relied on the extra spending due to lower rates. I am arguing supply and demand here. All other factors being equal.
ResponsiblyIrresponsible
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5/21/2016 1:00:24 AM
Posted: 6 months ago
At 5/21/2016 12:48:40 AM, BillSPrestonEsq wrote:

My account isn't active, so I have to physically reactivate and then deactivate to respond to your posts. I say this in the nicest way I can possibly say it: this is not worth my time. I'm interested in stimulating conversation with people who know about as much, if not more, than I do: there are a few people on this website (slo1, 16k, etc.) who fall into this category, though judging by your posts, it's very clear that you have a very narrow, ideological view of the world not unlike how I thought of it back when I was a teenager. It's an incredibly naive mindset backed by ideology and perceptions of how things *should work* that eschews all evidence to the contrary even when I go through efforts to make distinctions between, for instance, "nudging" interest rates up and down and the Volcker disinflation: these are important distinctions, but they're clearly way over your head -- the best evidence of this is your above comment that this is about supply and demand and division of labor. Maybe in the 1800s it was; now, it's a whole lot more complex.

I'm uninterested in this conversation, which is really not worth reopening my account for.
~ResponsiblyIrresponsible

DDO's Economics Messiah
BillSPrestonEsq
Posts: 140
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5/21/2016 1:53:35 PM
Posted: 6 months ago
At 5/21/2016 1:00:24 AM, ResponsiblyIrresponsible wrote:
At 5/21/2016 12:48:40 AM, BillSPrestonEsq wrote:

My account isn't active, so I have to physically reactivate and then deactivate to respond to your posts. I say this in the nicest way I can possibly say it: this is not worth my time. I'm interested in stimulating conversation with people who know about as much, if not more, than I do: there are a few people on this website (slo1, 16k, etc.) who fall into this category, though judging by your posts, it's very clear that you have a very narrow, ideological view of the world not unlike how I thought of it back when I was a teenager. It's an incredibly naive mindset backed by ideology and perceptions of how things *should work* that eschews all evidence to the contrary even when I go through efforts to make distinctions between, for instance, "nudging" interest rates up and down and the Volcker disinflation: these are important distinctions, but they're clearly way over your head -- the best evidence of this is your above comment that this is about supply and demand and division of labor. Maybe in the 1800s it was; now, it's a whole lot more complex.

I'm uninterested in this conversation, which is really not worth reopening my account for.

Ha, sure thing. I don't want to waste your time. You can claim that your answers are 'over my head', that's good, you never actually rebutted anything I said though. and you can't because I'm right, but that's ok run along now.
Chang29
Posts: 732
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5/22/2016 12:33:14 AM
Posted: 6 months ago
At 5/20/2016 10:35:59 PM, BillSPrestonEsq wrote:
At 5/20/2016 3:28:55 AM, ResponsiblyIrresponsible wrote:
At 5/20/2016 2:52:30 AM, BillSPrestonEsq wrote:
Why set rates artificially?

There isn't anything "artificial" about it. Interest rates move with fundamentals. The equilibrium interest rate that clears financial markets is unobservable and not impacted by monetary policy -- the Federal Reserve nudges interest rates in the direction of this time-varying rate with the intention of restoring equilibrium, but cannot materially push interest rates beyond equilibrium for too long, lest it lead to a whole slew of consequences the Fed regularly tries to avoid. The Fed isn't setting interest rates; they're nudging them up and down in the direction of underlying fundamentals.


How is it that 'nudging' in any direction is going to prove to be the correct direction at any given time? This is such a joke. They have "the intention of restoring equilibrium"?
How can anyone possibly decide the what the market's equilibrium actually is besides the market? This makes no sense whatsoever. And if that is true, if their stated goal is truly being accomplished there would NOT be a recession roughly every ten or so years or at all.
:

If the FED's purpose is keep the economy stable, why is it that since the beginning there has been repeated booms and busts?

There were far more booms and busts before the Fed even existed -- this latest boom and bust was a function of regularly oversight and tight monetary policy. That's why the Fed should target nominal GDP in a forward-looking, rule-based manner. With reasonable capital, leverage and liquidity requirements -- probably a bit more than exist under the current Dodd-Frank Act -- the "boom and bust" narrative would be an aberration.


There was not more, maybe an equal amount BUT we also have had governments (foreign as well) involved in creating those booms and busts just the same. We (the US and Europe) have had central banks for hundreds of years, and so for hundreds of years we have had the same credit expansion and subsequent contraction. Either that or war, some sort of currency debasement, or some manipulation of currency in some form or another. We have NEVER had a stable currency in human history. I would argue gold has been the most stable, and national currencies have fluctuated around the value of gold. I am not arguing for a gold standard by the way.


Couldn't it be said that allowing interest rates to find a 'natural' equilibrium in the market would be much more stable?

And that's the goal of monetary policy -- but left to their own devices, financial markets will NOT just magically clear. That's the essence of the financial crisis and of the Great Depression because so much leverage is built into the system that allowing, for instance, home prices to just find their bottom will might make them more affordable, but also will wipe out the largest asset on the majority of consumer's balance sheet and consequently any financial assets for which those homes were collateral.

I hate this answer, "but left to their own devices, financial markets will NOT just magically clear". WHY? How can the FED possibly improve on what the market deems valuable and invaluable? And I hate this even more "so much leverage is built into the system that allowing, for instance, home prices to just find their bottom will might make them more affordable, but also will wipe out the largest asset on the majority of consumer's balance sheet "
So we would instead choose to keep home prices high so that we can all pay 100% interest on a $500,000 house? HA! My biggest bills are in this order: Income tax, mortgage. WHY? Because we have most of our money in housing? EXACTLY! And I love that because of the 10% reserve requirement the banks make the money while our savings accounts pay nothing. We'll just have to put it in the stock market casino then to avoid losing it all to inflation. And keep those banks 'too big to fail' at the same time.
Look this whole system is insane, it is very simple, after studying economic theory for many years it all comes down to two things
1. Supply and Demand
2. Division of Labor
There is no need to complicate it, there is NOTHING you can do to improve upon supply and demand. NOTHING, and just as you have argued against protectionism, I argue against any manipulation. Just like raising minimum wage, raising interest rates or as you would describe it as 'nudging' them down, is an artificial demand just like minimum wage. It has the same two sided negative consequences as we saw with 'stagflation'. And by the way is quantitative easing a nudge? Or raising rates up to whatever 15%? in the eighties? After admittedly a long period of 'loose' monetary policy.


All your points make sense.

A major problem problem with fiat currency is that laws of scarcity do not apply, thus markets can not set an accurate price (interest rate). Scarcity of a resource is required for a free market to set a price. Until, currency is subject to these simple laws any interest rate is artificial.
A free market anti-capitalist

If it can be de-centralized, it will be de-centralized.
Chang29
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5/22/2016 12:44:55 AM
Posted: 6 months ago
At 5/18/2016 10:42:43 AM, glass22 wrote:
Hi,

Some things I don't understand about the economy.

1. Why do central banks raise rates? what's the purpose of raising rates? and what would force a central bank to raise rates?

2. If the US economy is as great as the fed has continued to say why don't they raise rates? more than a fractional move once.

3. How could the US raise rates when everyone else is making them lower, wouldn't this just result in a surging US dollar that hurts US exports?

4. What caused the huge fall in stocks and the dollar after the December rise?

Your questions show that you already know the answers, and if not you will.

On question 3, strong currency is good for every consumer. Most people state that they want to help the little guy, well a strong currency helps the little guy get the most for each dollar.
A free market anti-capitalist

If it can be de-centralized, it will be de-centralized.
lomrun
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5/31/2016 8:47:28 PM
Posted: 6 months ago
At 5/18/2016 10:42:43 AM, glass22 wrote:
Hi,

Some things I don't understand about the economy.

1. Why do central banks raise rates? what's the purpose of raising rates? and what would force a central bank to raise rates?

2. If the US economy is as great as the fed has continued to say why don't they raise rates? more than a fractional move once.

3. How could the US raise rates when everyone else is making them lower, wouldn't this just result in a surging US dollar that hurts US exports?

4. What caused the huge fall in stocks and the dollar after the December rise?
Answer
The economy depends on interest, if it is low the Prices are low .
Even for large developing countries like China the decision of Fed is important. Low interest makes a better commerce, especially important in the finance crisis.
Now the finance crisis is nearly in the past, the People has more Money so diversity for loan for example raise up. However, if you Need better Information watch http://celebnetworths.com..., a site for Business, Politicians, Music ,Sport or what you want.