It's worth taking a look at the effective federal funds rate over time, which clearly shows how low it's been recently: https://www.macrotrends.net/2015/fed-funds-rate-historical-c...
b) Reducing taxes without cutting spending (because it will "pay for itself in growth") leads to a larger deficit, which requires increased debt to cover, which triggers the money-printers.
Your second point is wrong: you can continue to run deficits without printing money. You just have to find lenders in the marketplace willing to buy your bonds.
Yes, the Federal Reserve is buying vast quantities of US treasuries right now, effectively monetizing the debt, but the sequence of events you describe isn’t typically how things work.
Nobody has a clue when the next recession will be.
https://www.investopedia.com/ask/answers/12/inflation-intere...
In contrast, raising interest rates is a way to fight a hot economic market. While in theory having massive growth might be ideal, it would be the equivalent of a sprinter using all of his/her energy in the first 100m while running a marathon...it needs to be a balancing act.
Lowering interest rates has been one of the major tools in fighting recessions, and one of the main concerns has been that lowering interest rates isn't possible(or effective) when they are already at such a low level.
Risky investments aren't necessarily bad investments. Low interest rates give businesses more runway to operate investments that might take a while to show returns. A million dollar loan at 10% for an investment means that it needs to return into ~$80k a month to break even. At 2%, that same investment only needs a ~$16k monthly return. That's a huge difference in runway needed to start generating cash flow.
See Antoinette Schoar's (MIT) work: https://www.nber.org/papers/w20848
It makes for a good news story that regular Americans understand and frankly want to hear (the banks were bad). But if you really dig into the reports, e.g. Financial Crisis Inquiry Report, almost the only fraud comes from misreporting of income which is essentially consumers lying. There could be other documentation issues, but underwriting almost entirely depends on credit score + income, so they're fairly trivial.
There are diminishing marginal returns to this, and when rates were already close to zero it is hard to imagine going to zero spurred much more than meme stocks and YOLO gambles.
the leverage for nonexistent (or overclaimed) mortgages were
leading to a crisis of confidence where credit dried up because banks didnt trust each other
got to watch for that. know the contents of your securities
The usual metaphor is that the interest rate is how hard you pull a rope. Pulling harder slows down the economy more.
But below 0%, you're trying to push the rope. And, as any rope expert will tell, you that doesn't do anything.
In other words, even through the overnight rate is 0%, you could still push down the interest rate down for bonds of a longer maturity, and that'll further stimulate the economy.
Now that inflation is rising and the economy is also at nearly full employment, its pretty straightforward for them to raise interest rates to rein in inflation.
It is claimed to be. The idea is that with lower interest rate, companies and people will be more likely to borrow money to spend and that will boost the economy.
I for one do not really believe this to be true. I suspect it's the act of lowering rates that gives a temporary boost until things rebalance. In other words, economic activity has some dependence on the derivative of interest rates. This is why things were so good from 198x through 2003 or so, rates were dropping the entire time (filtered of course).
If interest rates go down, it's easy to roll over old promises and make new ones besides. If interest rates go up, promises must be kept or the business will fold.
At the end of every business cycle, interest rates are low and there are lots of unprofitable "zombie companies" that operate by simply rolling over their promises. In order for the economy to grow, interest rates must be hiked to do a controlled burn and remove this underbrush. Zombie companies have to actually die. This is painful at the best of times.
Political will formation will be doubly hard this time around because A. there is more national debt (so we probably need to soft-default on it and inflate it down, first) and B. last time around Carter did the burn and Reagan got the growth and the credit, so the question is who wants to be Carter this time around.
Rates are at 0.25%. Last time it took 20.00% to stop inflation. We haven't even started. We haven't soft-defaulted on the national debt, so we can't even think about starting. The Ukraine conflict will be dusty history by the time actual rate hikes and an actual rate hike recession come around.
This is good context. Is anything different this time that would make one believe we won’t need much, much higher rates to tame inflation?
I'm much less certain that it will end the same way, but there are big problems with all the alternatives too (yuan, euro, crypto, gold) so who knows.
A major cause of inflation in the 70s was the 6x increase in the price of oil.
From 1980 to 1986 there was nearly a div by 5 drop.
https://www.minneapolisfed.org/about-us/monetary-policy/infl...
The first oil crisis didn't hit until October 1973. Look at the month-by-month numbers for 1973:
https://www.inflation.eu/en/inflation-rates/united-states/hi...
The biggest jump was 1.81% in August, 2 months before the oil shock. (Note that this is roughly double the monthly numbers we see now.) There was consistent monthly inflation 0.68%+ from January -> June.
The real reason for the 1970s inflation was Nixon monetizing the debt incurred by our Vietnam hangover, but in true Nixonian fashion, he found an external event to blame it on.
Another theory is that it was actually Regulation Q.
https://pages.stern.nyu.edu/~asavov/alexisavov/Alexi_Savov_f...
I also personally think that high inflation is treated as bad axiomatically. This needs some justification if the only proposed solution is to intentionally cause a recession.
Many modern tech companies come to mind....
You are only the second person to tell me this story. I'm not doubting it, the first guy said it to me over 15 years ago right before the bust as he was buying 6 percent treasuries.
Probably the right time to do it would have been around 2000, the last time the government ran a surplus (last years of Clinton, first year of Bush jr.) but instead we heard: There's a surplus, we don't know why, but we don't think it will go away, so here have some money, and lets spend like crazy and have a war.
The general model is that interest rates, lowering taxes, and increasing government spending are tools for shoring up the economy during a recession. During a growth period, interest rates should be raised, government spending lowered, and taxes raised, so we have room to adjust them for the next recession. This can, in theory, smooth out the boom-bust cycle which otherwise naturally results.
The problem is that we rarely raise interest rates, reduce spending, or raise taxes, since it's politically unpopular. Many of these tools are harmful; for example, outside a few domains like infrastructure and medicine, long-term high government spending tends to /harm/ the economy.
Not really true; there was a long period of near-zero rates not moving during and after the Great Recession, but that was a unique event; from 2015-2018 there was a fairly consistent notching up of rates typical of an expansion with inflationary signals, then an ease back from 2019 until COVID hit at rates were cut sharply.
Looking at history there's a long run up in 2003-2006 after the 2001 recession, a run up 1992-2001 through the dotcom boom after the short period of easing from 1989-1992, a runup from 1986-1989, etc.
well, yeah, a hot economy means that borrowing even at high interest is attractive, which is why you are trying to constrain lending (money creation) with higher interest in the first place to prevent inflation.
What would you expect to see?
No, they treat is as if the steady state economy will be larger at a given lower rate. For example GDP = X+Y+Z + K/rate. What I'm saying is that GDP = X+Y+Z + K/rate' which is not sustainable at all and means existing policy is not at all the right way to handle it. Actually there may be some degree of truth and both terms should be present in the equation, but nobody talks or acts like the derivative term exists.
It used to be that you could lower interest rates and run up deficits during bad times with the intent of going back to normal when things are better. We now have kept low interest rates and record deficits during good times. When things blow up (as they always do after a while) there is almost nothing left that can be done to counter a recession. In the past going to war helped....