Quote:
Originally Posted by bunt_q
This is true, but the sole purpose of interest rates is not to represent investment and default risk. That is one function of interest rates - and certainly higher risk investments go along with higher interest rates. But to assume that must always be the case, as if that is the sole determinant of interest rates, is simply incorrect. There is nothing "real" about your definition of "real" interest rates. They are real if you only look at one or two variables, and not the whole picture.
Absolutely. But we were discussing "artificially" low. But QE and the Fed are part of the system that determines what the market rate for interests rates is. You seem to operate on the assumption that there is some magically market-based interest rate, independent of central bank monetary policy, that should be what's "correct," and anything that diverges from the imaginary ideal rate is "artificial." But that's not true. You can;t separate market rates and monetary policy, because without one, the other would not exist. (If we were having the same discussion in the Chinese context, you would never say what you're saying here... obviously currency rates are affected by their policy. So why wouldn't interest rates be also? Of course, they are.)
If monetary policy drives interests rates down without inflation, which is what's happening now... then that's just good policy. If QE was running counter to market forces, then we should be seeing a jump in inflation. But we're not, at least not so far. And that's due to global economic factors, which also cannot be separated from the "system" that creates market interest rates. Can QE last forever? Of course not. And will rates go up them, when market fundamentals change? Absolutely. But to say current rates "artificial" just because they might not last forever makes no sense. Today, rates are what they are - there is no brute force working against the market, or else we would see indicators. And so far, Wizened hasn't pointed out any indicators that point to an imbalance. Instead, all you guys have presented is a fear of future change. Which is obvious. Conditions always change.
Being a central banker would —. Because you're always wrong in the eyes of people who imagine some mythical world of the market guiding itself (probably wishing for a gold standard too) - in which case, your very existence supposedly interferes with market forces. Those people are incapable of viewing government or central banks as part of the market. But that has more to do with philosophical principle than any reality we actually live in.
I'd hate to see yours and Wizened's take on fiscal policy. If whatever is happening today is less important than the fear of what could happen in the future, what incentive is there for politicians to fix anything? You guys are part of the budget problem, if you ask me. If all you're going to do is complain about the total debt number, and the years it'll take to pay off, then there is no incentive for me to practice sound budget policy today, because you won't give me any credit for it. I have already lost. You guys are exactly why we can't fix problems - because you refuse to accept possible solutions that don't involve a time machine.
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You are asking a lot.
My basic view on monetary policy is that we are 'kicking the can down the road.'
The real price of printing $85 billion in virtual money monthly, and, investing too much of this money in buying our OWN bonds to maintain equity markets is unknown.
The impact of the Feds buying government bonds to maintain artificially low interest rates to subsidize the housing market has been mixed. While, short term, this non-market lowering of the prime rate is maintaining- to a degree the value of residential (and commercial real estate) which helps the property tax stream nation wide, IMO, with the next 5 or 10 years there will be an inevitable mark-to-market correction. Now, whether this is done through a large inflationary surge where real estate values adjust via increasing slower than inflation or in dollar figures, IMO, no one can say today.
A hugely important reason for the Reserve to keep the prime rate artificially low, is to to keep the Federal Debt Service costs down. A rough yardstick might be that for every $1,000,000,000,000.00 in Federal debt, a 1% increase in the cost of money would cost the taxpayer $10,000,000,000. A total Federal debt of $15,000,000,000,000 similarly would cost the taxpayer $150,000,000,000 per 1% increase in money cost.
This, of course, extends beyond the Federal Government's debt, to commercial and private debt. If the total debt in the US were $100,000,000,000,000 then the service cost would be $1,000,000,000,000 per year per percent increase (hard to keep the zero's straight).
(there is so much more- to start look at a few dozen financial sites)
There are multiple schools of thought about how to get out of this mess. Most, IMO, talk about expanding the economy out of the debt crisis, radically reducing the size of the Federal (and State) governments, raising taxes selectively, or some combination of this. The variations in the combination, IMO, are a function of individual wealth, i.e., class determinate. Those with capital who can afford to play the system, are almost entirely oriented towards reducing government spending and government liabilities. Those in the upper middle to lower middle classes (those who, in general do not have the capital to survive on profits) want increased job opportunity achievable through a combination of tariffs, closing loopholes in corporate tax law, and, other measures to help corporations hire US workers. The lower classes, IMO, want an 'equal' part of the educational market, jobs, and, to have the Federal and State safety nets strengthen.
Regardless, these three groups cannot all be satisfied even during times where the US balance of payments deficit is low and the Federal government is running close to a balanced budget. Today, when the Federal debt is very high, high quality manufacturing jobs are dwindling, the age demographics are shifting,* intelligent internet software is automating administrative and customer service jobs, and, creative type jobs are being increasingly exported, IMO we cannot grow out of this crisis short term.
I have felt for at least 5 years that the US and the world should have gone mark-to-market starting in 2008. I also believe that after the TARP bailouts in 2009, that we should have tightened up monetary policy in 2010 in the sense of having smaller QE packages. I believe in 2013, that finally, the Reserve is talking about what should have been done earlier: taper off the QE stimulus. I strongly believe that the longer we have waited, the more serious the mark-to-mark and true inflationary costs (rent, medicine, energy, automobiles, other commodities) issues will become.
The issue, then, is the when will we as a Nation face the cost of capital and debt service? The Nation is like a patient with cancer in the denial stage: regardless the debt service and employment issues will not go away without a lot of pain. All is a question of pain, and, when the pain hits.
*The irony is the Baby boomers did not have the number of children per family their parents had. Had they done so, there would have been a higher ratio of tax payers to the old. Another irony is that had the undocumented immigration wave not occurred, the Nation, IMO, would have been in something like our current crisis a decade or more ago.
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