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A huge stimulus would cause interest rates to rise.

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Kurt_and_Hunter Donating Member (1000+ posts) Send PM | Profile | Ignore Wed Aug-11-10 01:31 PM
Original message
A huge stimulus would cause interest rates to rise.
Edited on Wed Aug-11-10 01:54 PM by Kurt_and_Hunter
A huge stimulus would cause interest rates to rise.

It would.

But not for the reason the average RW bozo thinks.

Bond interest rates are not very much about supply and demand. There is an element of supply and demand, as in all things, but the bottom line is that nobody is absolutely forced to buy any government bonds.

If the supply of bonds was low and that caused the interest rate to go down (meaning the price of the bond to go up--low interest rate paid means a bond is more "expensive") then people... would... not... buy... the... freaking...bonds.

There are some institutions and nations that want to turn cash into bonds and will pay a *little* extra for the privilege. But past a point nobody will buy bonds that are too expensive, no matter how few of them are available.

The RW loves to talk about government borrowing "squeezing out" private borrowing. That is possible in some extreme academic hypothetical but is it a real thing in the real world?

Nope. Certainly not today. The total amount of borrowing in the USA is way down. The federal government has borrowed up only a fraction of what the private sector stopped borrowing when the wheels came off the economy. There is an incredible amount of money around to borrow but it is too expensive to borrow it because there is no hope of inflation or economic growth on the horizon.

When you borrow money (like a 30-year mortgage) you know you have to pay back a lot more than you borrowed, but that extra is going to be paid back in inflation-devalued dollars. Without inflation a 4.5% mortgage is a screw-job. With some inflation a 7% mortgage might be attractive. It's all relative.

Interest rates are super low but the actual cost of borrowing is not super low. With the looming risk of deflation borrowing is riskier than ever. (The extra money to pay the interest will be worth even more than it is worth today!)

There is, as noted, a small supply-demand effect but the amount of money available for lending is not a fixed amount. You start paying enough interest on a bond and people will find the money to buy it!

The primary factor that determines interest rates is inflation expectations.

Lend me a million dollars and I'll pay you 6% on your money. If inflation is 1% that's a sweet deal. If you think I will actually be able to pay off the bond you'd jump at it. If inflation is 7% that 6% interest is a dead loss. Almost nobody will want that deal.

The freaking BOZOS said that when we started borrowing money to stimulate the economy interest rates would go up.

Instead interest rates have gone down.

Why?

Because we didn't do enough to stimulate the economy! If we had there would be some hope of future economic activity and thus a possibility of inflation and thus higher interest rates would be needed to make a bond/loan a good deal.

But the economy is so fucked that investors are expecting no growth, like ever.

And thus 10 year T-Bills at 2.7% look attractive. The bond buyers are predicting that we are not going to see any meaningful growth for ten years.

Stimulus deficit spending big enough to work will cause higher interest rates because it will cause people to expect there to be more economic growth in the future. Not only does that suggest there might be some inflation, requiring higher interest rate yields to be profitable, it also suggests that there might be something better to do with the money. Buy stocks or a house or start a business. In a growing economy such things will do better than bonds.

SUMMARY: Stimulus spending causing higher interest rates? Only if we're lucky. (It's a feature, not a bug.)
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xchrom Donating Member (1000+ posts) Send PM | Profile | Ignore Wed Aug-11-10 02:21 PM
Response to Original message
1. Recommend
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truedelphi Donating Member (1000+ posts) Send PM | Profile | Ignore Wed Aug-11-10 02:53 PM
Response to Original message
2. Uh, I don't quite understand this. You say that giving us
people, real people, the ability to have jobs, would cause interest rates to rise.

How? How come interest rates did not increase when thirteen trillion bucks made its way into the hands of the Upper One Percent on Wall Street? (and don't give me that ol' saw about the money being paid back - it was paid back because of tax breaks offered to these corrupt Corporate Scum.)

How come with interest rates near zero, the bonds that get bought with almost zero interest freebie Bailout money by banks will cost this nation plenty when the bonds are redeemed, but no one but Jon Stewart is willing to discuss this fact?

how come it is socialistic to expect this government to provide jobs, but not socialistic to Bailout the banks. That the Big Money people pass their losses on to us the tax payers, so that their bonuses can be paid. But their profits are held in house, for them to invest as they want.

Oh, and by the way, since maybe you do not understand this either, the "needed" tax cut extension is not needed.

Instead, the Big Money People should start creating jobs for their fellow citizens. Were they to do that with their profits, they would find that there are already plenty of tax breaks for them.

It is only because the Big Money people refuse to create jobs inside this country that they don't see those particular tax breaks.
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Kurt_and_Hunter Donating Member (1000+ posts) Send PM | Profile | Ignore Wed Aug-11-10 03:06 PM
Response to Reply #2
4. ???
Edited on Wed Aug-11-10 03:07 PM by Kurt_and_Hunter
The OP is a statement that the RW claim that stimulus will lead to higher interest rates is FALSE in the way the RW means it and is a TAUTOLOGY in the way they do not mean it.

Interest rates reflect expectations of inflation.

Inflation correlates with economic growth.

If stimulus spending worked to stimulate economic growth (good thing) then of course interest rates would rise.

That is unsurprising and inevitable and desirable.

The fact that interest rates have gone down shows how insufficient our stimulus efforts have been. We have not created expectations of future economic growth.
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truedelphi Donating Member (1000+ posts) Send PM | Profile | Ignore Thu Aug-12-10 02:46 AM
Response to Reply #4
8. Here's what I am talking about:
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truedelphi Donating Member (1000+ posts) Send PM | Profile | Ignore Wed Aug-11-10 02:59 PM
Response to Original message
3. This sig line borrowed from a fellow DU'er says it nicely
Edited on Wed Aug-11-10 03:00 PM by truedelphi
"If America is circling the drain, Goldman Sachs has found a way to be that drain - an extremely unfortunate loophole in the system of Western democratic capitalism, which never foresaw that in a society governed passively by free markets and free elections, organized greed always defeats disorganized democracy."~Matt Taibbi

You can defend the master minds of our destruction, the (Greenspan,)/ Bernanke, (Paulson) /Geithner group all all you want, but in the end it will be seen that they destroyed the middle class.

No nation without a middle class has ever participated in having a Democracy.
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taught_me_patience Donating Member (1000+ posts) Send PM | Profile | Ignore Wed Aug-11-10 03:11 PM
Response to Original message
5. Why do you want interest rates to rise?
wouldn't that stifle any chance of a recovery?
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Kurt_and_Hunter Donating Member (1000+ posts) Send PM | Profile | Ignore Wed Aug-11-10 03:25 PM
Response to Reply #5
6. The point of the OP is that the rise *follows* a recovery
When RW people say a huge stimulus would cause rates to rise they are implying that is a bad thing, but of course rates would rise if we had a recovery.

It's like if I said that a huge stimulus would cause the average American to pay more in payroll taxes.

It would... assuming it worked and cut unemployment. More people working would mean the average person would be likelier to have a job and would thus pay more payroll taxes.

When they say huge stimulus would cause interest rates to rise it is presented as an argument against, as if it is desirable to be in a depression because of the low interest rates.

(Depressions always feature incredibly low interest rates but they do not make people happy.)
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pitohui Donating Member (1000+ posts) Send PM | Profile | Ignore Wed Aug-11-10 03:36 PM
Response to Reply #5
7. the interest rate is almost nothing & it destroys the value of saving
i suppose there's a theory that we don't want people to save, we want them to consume

however, in the real world, we have an ageing population and, at some point, these folks are going to be too disabled to work, facing too much age discrimination to find work, or just plain too damn old and feeble to work -- at some point, you cannot work, even if you fantasize that you will be one of the chosen few who will work until he dies, that's just not reality for most people, that can't happen unless you are very fortunate in your genetic heritage AND you never encounter age discrimination, after age 80 you are just not gonna get a lot of job offers, no matter how good you are

the interest rate is very low and it has been painfully low for a long time

if you are 80 years old, your money is in a CD paying 0.5% interest, and despite claims of "deflation," you can see that food costs have doubled, gasoline costs have doubled, you can't heat or cool your home anymore, teevee was once free but now you pretty much have to have cable and so on...a low interest rate just destroys you

the interest rates dropped real low around the turn of the century, around 9-11, at the same time the stock market crashed (enron) -- people had no choice but to dip into capital savings, this time of century, those people have no choice but to hope to hurry up and die, they can't even sell their houses and live off that, because nobody's buying

low interest rates just destroy savers, esp. where you have continued but unacknowledged inflation, as we have today

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