How sustainable is high interest rates?
9 comments
Right now the dollar is increasing in value but Ray Dallio makes the case[0][1] that eventually we will have to drop rates low again and "monetize the debt" which is to say, print too much money inflating the value of the dollar and then pay the debt off with that
This could lead to the dollar no longer being the reserve currency which would have other, much stranger implications.
Today debt payments rival military spending but there is a point where debt service becomes greater than GDP. Before that there are points of unsustainability that will likely be reached.
One possibility is that inflation will be tamed before then and the fed can lower rates. This seems unlikely to me.
Another possibility might be austerity measures and deep political compromise to pay down the debt to levels that are sustainable during high rates, this also feels quite unlikely to me.
[0] https://youtube.com/watch?v=xguam0TKMw8
[1] https://www.amazon.com/Changing-World-Order-Nations-Succeed/...
This could lead to the dollar no longer being the reserve currency which would have other, much stranger implications.
Today debt payments rival military spending but there is a point where debt service becomes greater than GDP. Before that there are points of unsustainability that will likely be reached.
One possibility is that inflation will be tamed before then and the fed can lower rates. This seems unlikely to me.
Another possibility might be austerity measures and deep political compromise to pay down the debt to levels that are sustainable during high rates, this also feels quite unlikely to me.
[0] https://youtube.com/watch?v=xguam0TKMw8
[1] https://www.amazon.com/Changing-World-Order-Nations-Succeed/...
> Right now the dollar is increasing in value but Ray Dallio makes the case[0][1] that eventually we will have to drop rates low again and "monetize the debt" which is to say, print too much money inflating the value of the dollar and then pay the debt off with that
> This could lead to the dollar no longer being the reserve currency which would have other, much stranger implications.
It could, except most other major countries are in a similar position and would be doing something similar in the same time, which means that the relative strength of the dollar might not change that much.
It could, except most other major countries are in a similar position and would be doing something similar in the same time, which means that the relative strength of the dollar might not change that much.
QE is not printing money and QE increased debts although I guess it is a case of who owes who what and who you want to win? The US government?
Low interest rates are not sustainable as they will lead to entrenched run away inflation. Goverments will need to grow the fuck up and behave like responsible adults and not like spending addicted junkies.
exactly, low interest rates were the anomaly -- they have just been happening recently and long enough that entire generations have attached to the expectation.
I believe America is in a unique position to get away with zero interest rates and runaway inflation for far longer than anyone else without much consequence. Reserve currency does have its perks so I wouldn't worry too much if I lived in the US.
For the rest of the world, yes debt is not sustainable. So maybe governments should live within their budgets and not borrow from future generations. For Europe that includes being free from Anglo American influence and making peace with Russia no matter how painful that maybe.
For the rest of the world, yes debt is not sustainable. So maybe governments should live within their budgets and not borrow from future generations. For Europe that includes being free from Anglo American influence and making peace with Russia no matter how painful that maybe.
> I believe America is in a unique position to get away with zero interest rates and runaway inflation for far longer than anyone else without much consequence. Reserve currency does have its perks so I wouldn't worry too much if I lived in the US.
But they're not. T-bills are at 4.7%.
But they're not. T-bills are at 4.7%.
This seems like it would be economic malpractice to allow high inflation for an extended period. It is especially reckless considering the middle class is the most advervsely affected here. You could easily see the economy do a tailspin and never recover.
Higher interest rates would help pension funds which invest in bonds.
Agreed that high inflation hurts the lower tier who generally don't have assets which keep up with inflation.
Agreed that high inflation hurts the lower tier who generally don't have assets which keep up with inflation.
In the pandemic no one believed that you could shutdown large parts of the economy and everything would still worked. Now we are watching the world burn.
Are you saying our current state is due to lockdowns and not 12 years of ZIRP?
This question could not being answered with this model, because it is not complete, it is only part of world.
Complete model Smith model, with mostly free market. Exists range of meanings, how large could be government in economy, I think it should be less then 10%, other expert said numbers 10-30%.
So, if govt share is less than 10%, free market could just repair itself; also in this case, free market have plenty of resources, so will survive if govt will raise taxes (print is essentially special type of tax, because anyway, govt will got money much earlier than market).
If govt share is more than 30%, things are much worse, as any taxes raise will lead to markets fall.
Complete model Smith model, with mostly free market. Exists range of meanings, how large could be government in economy, I think it should be less then 10%, other expert said numbers 10-30%.
So, if govt share is less than 10%, free market could just repair itself; also in this case, free market have plenty of resources, so will survive if govt will raise taxes (print is essentially special type of tax, because anyway, govt will got money much earlier than market).
If govt share is more than 30%, things are much worse, as any taxes raise will lead to markets fall.
It's low interest rates that weren't sustainable. And that's becoming apparent
Easily if the tax rate goes up while the rates come down.
What's unsustainable is a system that fuels debt speculators into billion dollar scams with zero enforcement.
The fed is only half of a functioning economy.
What's unsustainable is a system that fuels debt speculators into billion dollar scams with zero enforcement.
The fed is only half of a functioning economy.
> They can't raise like, they decades ago. It would collapse the goverment spending and economy.
And this is unprecedented and impossible because…?
And this is unprecedented and impossible because…?
Well if they dropped rates today then that would trigger more inflation. The economy is hovering around capacity and unemployment is still very low--even if the tech sector has seen some froth that has built up over the past 10 years come off of it.
They will have to hold rates high for 6-24 months. And there is no magic which will happen by doing that, what they'll do is trigger a recession and kick unemployment up to 6-8%. What will happen after that is that they'll cut rates again and congress will enact tax cuts for the rich again, but the Republican congress will ensure that any stimulus for the average worker will be very slim (this is important to understand that the stimulus and eviction freezes during the pandemic were very abnormal).
The recession is going to be caused by loans readjusting to higher rates (which happens over the timescale of ~2 years or so) and entities that were skirting by on the edges of bankruptcy will be pushed into bankruptcy by having to pay higher debt service (very similar to ARMs in the US or pretty much all mortgages in places like the UK). My expectation is that commercial real estate melts down (but we're probably 12+ months away from that, right now it doesn't look very distressed).
And starting from an unemployment rate of well over 6% the Fed will once again be able to ZIRP without seeing the kind of inflation that worries policymakers and economics (housing appreciation and asset bubbles don't count as inflation to them).
The game hasn't really fundamentally changed at all, that is the wrong lesson to take from the pandemic, which was a policy outlier.
The open questions are how bad the recession is going to be, and how bad it will be before congress bails out the system (in 2008 we had a Democratic House and Senate and a Republican President desperate to fix the problem -- now we're going to have a Republican House who would love to hang the Biden administration with an economic disaster). Along with the question of what kind of civil strife it is going to cause over the next 5-10 years.
They will have to hold rates high for 6-24 months. And there is no magic which will happen by doing that, what they'll do is trigger a recession and kick unemployment up to 6-8%. What will happen after that is that they'll cut rates again and congress will enact tax cuts for the rich again, but the Republican congress will ensure that any stimulus for the average worker will be very slim (this is important to understand that the stimulus and eviction freezes during the pandemic were very abnormal).
The recession is going to be caused by loans readjusting to higher rates (which happens over the timescale of ~2 years or so) and entities that were skirting by on the edges of bankruptcy will be pushed into bankruptcy by having to pay higher debt service (very similar to ARMs in the US or pretty much all mortgages in places like the UK). My expectation is that commercial real estate melts down (but we're probably 12+ months away from that, right now it doesn't look very distressed).
And starting from an unemployment rate of well over 6% the Fed will once again be able to ZIRP without seeing the kind of inflation that worries policymakers and economics (housing appreciation and asset bubbles don't count as inflation to them).
The game hasn't really fundamentally changed at all, that is the wrong lesson to take from the pandemic, which was a policy outlier.
The open questions are how bad the recession is going to be, and how bad it will be before congress bails out the system (in 2008 we had a Democratic House and Senate and a Republican President desperate to fix the problem -- now we're going to have a Republican House who would love to hang the Biden administration with an economic disaster). Along with the question of what kind of civil strife it is going to cause over the next 5-10 years.
They can't raise like, they decades ago. It would collapse the goverment spending and economy. So at some point they will have to lower rates and print? Not soon but does anyone realize that in next few years? Debt has to grow. It's even much worse for EU. What am I missing?