Interest Rates: Actions Not Words

[Seeker]

When do you think Central Banks in the 'naughty' countries (ultra-low to 0 %) are going to return to sanity? (4% +)

I think they are going to BS and jawbone, and make positive sounding-noises.

I will not actually believe such a thing until I see it.

In the mean time, join the gold party!

[KrazyHorse]

What the **** is your problem, dude? Inflation continues to be low or negative. Why do you think that higher interest rates are necessary?

[KrazyHorse]

You never responded to me the last time I asked you this question.

You give every impression of somebody who's formed very strong opinions with little to no real reflection.

[Seeker]

"Inflation continues to be low or negative"

It's true that CPI was reported as 0.8%.

However, there are many who have doubts about the accuracy or meaningfulness of this figure (example, the abuse of the hedonic deflator).

1. If you define 'inflation' as primarily a monetary rather than asset phenomenon then the apparently low rate is just a artifact of banks continued unwillingness to lend for the time being and the fact that bank reserves don't cause asset inflation. Arguably, they should be considered part of the money supply and thus part of monetary inflation.

2. I assume that banks are still actually in the moneylending business and not yet completely government operated (i.e. Royal Bank of Scotland situation). Therefore all that newly created money they are not loaning into circulation must inevitably come into circulation. Monetary inflation eventually leads to asset inflation.

3. The obviousness of the fact that no country in history has succeeded in depreciating its way to prosperity. Weak currencies are a sign of eventual inflation. Even the Asian economies needed productive enterprises and industry, not just weak currencies. A 0% effective rate inevitably produces monetary inflation. Asset inflation and monetary inflation may not always co -relate over the short term, but they do over the long term.

Unless you are trying to argue that there is only such a thing as asset inflation (increase in prices), in which case there's no point in continuing this.

[KrazyHorse]

1. If you define 'inflation' as primarily a monetary rather than asset phenomenon then the apparently low rate is just a artifact of banks continued unwillingness to lend for the time being and the fact that bank reserves don't cause asset inflation. Arguably, they should be considered part of the money supply and thus part of monetary inflation.

I have no idea what the **** you're on about here. The money supply ONLY MATTERS insofar as it affects inflation. If and when money multipliers and monetary velocity go up the central banks will increase interest rates. If they were to do so before then, the effect would be rampant deflation. A proponent of a stable currency should be against radical swings in the value of the currency whether they're up or down, and further, anybody with a lick of sense can see why it's easier to adjust to inflation than to deflation

I assume that banks are still actually in the moneylending business and not yet completely government operated (i.e. Royal Bank of Scotland situation). Therefore all that newly created money they are not loaning into circulation must inevitably come into circulation. Monetary inflation eventually leads to asset inflation.

You need to get a little more informed about your terms. Asset inflation is not the same as CPI. Asset inflation has a number of causes, most notably a decrease in the risk premium.

The obviousness of the fact that no country in history has succeeded in depreciating its way to prosperity. Weak currencies are a sign of eventual inflation. Even the Asian economies needed productive enterprises and industry, not just weak currencies. A 0% effective rate inevitably produces monetary inflation. Asset inflation and monetary inflation may not always co -relate over the short term, but they do over the long term.

a) the standard term for "monetary inflation" is "growth in the money supply", by the way. Please stop inventing terminology when perfectly good terminology exists and your substitute is horribly confusing

b) ALL ELSE BEING EQUAL ("all else" referring to the other elements in the monetary velocity equation, of course), monetary growth = inflation. That is a tautology. But other things are NOT equal. Monetary velocity and the money multiplier dropped like a rock, the central banks responded. When they begin to increase the central banks will respond again.

[DanS]

In answer to the OP in relation to the US, it will be when the CPI-U and other measures of inflation go above a 2% annual increase on a sustained basis. On a year-over-year basis, we're still experiencing deflation. But in comparison to the low in December '08, we're experiencing a little lower than 2% inflation.

I doubt the Fed will be too eager to raise rates considering the deflation we experienced at the end of last year. Deflation is a rare bird, with November '08 being the worst monthly deflationary reading by far in the post-War era.

[trev]

I think the current zero level of interest rates in many countries is dangerous and should be ended soon. Credit growth depends on 2 things, a willingness to lend as well as a demand to borrow. At zero interest rates the demand to borrow is there, but not the willingness to lend, not sufficient profit in it to balance the risk. A low interest rate, but not zero, ie about 1.5% would not dampen the demand to borrow significantly, but would increase the willingness to lend. Such an increase would aid the economy, not damage it and should be instigated over a period of 6 months or so from now in all countries.
Later as economies improve further interest rate rises to about 3% should be instigated to prevent renewed excessive asset inflation.

[KrazyHorse]

I love the fact that trev thinks he's qualified to give advice on what "the interest rate" should be, when he's apparently completely ignorant of the fact that there are actually many, many interest rates.

Trev, "the interest rate" is, at least in the US and Canada, the target for short-term yield on government bonds. Generally, movements in this rate affect the more relevant rates like the risk-free rate (say, LIBOR rates), and movements in this rate directly affect consumer rates.

Trev, nobody is FORCING THE BANKS TO LEND AT 0%.



They charge a spread between the price they pay for credit and the price the consumer pays.

[trev]

Noone forces them too and therefore they do not. There is almost no interbank lending now, largely because the risk is greater than the return. An increase in official interest rates will assist interbank lending, leading to greater money velocity and corresponding increase in lending and economic activity. I of course am aware of banks adding a margin for their lending etc, but who is lending money to the banks at current interest rates in many countries so they have money they can lend out.
The countries that have used extremely low interest rates in the last decade or so, Japan and more recently since September 11th USA have shown no sustainable benefit from those rates, nor have any country that have adopted them in the last 12 months or so. Lower interest rates no lower than about 1.5% and then stimulate with fiscal policy if needed, it is more effective.
There is no benefit in using the failed policies of Japan in the last decade and more and keeping near zero interest rates. Japan has proved it does not work, and USA in last 7 years or so have confirmed the lack of benefit of that policy and the fact it leads to economic distortions and financial crises.

[KrazyHorse]

Noone forces them too and therefore they do not. There is almost no interbank lending now, largely because the risk is greater than the return

Are you ****ing stupid? There's plenty of interbank lending. When there wasn't much (9-12 months ago), the TED spread (that's the SPREAD between treasury rates and, basically, interbank rates) went UP. What the **** does the spread have to do with the ABSOLUTE VALUE of the lower quantity?

Get a ****ing clue, dude. Do some reading before sounding off.

[Dale]

It's obvious trev knows NOTHING about how an economy, economics and financial systems work based on the various threads he's posted in. I advise ignoring him.

[trev]

The countries that have used extremely low interest rates in the last decade or so, Japan and more recently since September 11th USA have shown no sustainable benefit from those rates, nor have any country that have adopted them in the last 12 months or so.

I advise ignoring him.

Rather than comment on the lessons from history, he chooses to ignore me. That is his choice, others can chose to learn from history that zero interest rates are bad.

[Drake Tungsten]

It's obvious trev knows NOTHING about how an economy, economics and financial systems work based on the various threads he's posted in. I advise ignoring him.

No one cares what you think.

[ShaneWalter]

Rather than comment on the lessons from history, he chooses to ignore me. That is his choice, others can chose to learn from history that zero interest rates are bad.

People currently admitted to a hospital are many more times likely to die than people in the general populace! Clearly the solution is to never seek medical care, then you won't die.

[KrazyHorse]

Apt analogy, Shane.