This comment isn't helpful. Please explain for those of us without a degree in economics.
Not to mention the US debt is _high_ as hell and bond yields mean that's more expensive.
And the country is run by a broken fool who has no interest or ability to fix any of that.
Both sides are to blame - neither will fix the problem. Obama could've made that his goal - he was competent, had a lot of political good will, and many people were frustrated at the bailout policy Bush did, but instead it was inflationary printing (quantitative easing), Obamacare and Cash 4 Clunkers (which the used car market still hasn't recovered from).
I never voted for him - I didn't view him as honest, nor did he seem to indicate that he liked America, but was rather just a good talker - but I think he could've been a great president given a less radicalizing agenda.
He was probably the best situated president in terms of timing to fix the debt problem, but instead it was a good time for divisive politics. By the time Obama finished, it became clear neither party actually cared about the fiscally conservative Ron Paul supporting voting block.
— the one side after they fsck the country sideways, every goddamn time.
I happen to think the policy was a good idea, and voting to keep it in play was the best vote of John McCain's career ... but it was definitely both radical and divisive.
Now, much of the "mandate" has been stripped away, health care remains a mess, and access is far from affordable, but you can't really blame that one on Obama.
It seems quite ironic, given the frequent complaints about the inability of Congress to either govern effectively or fix health insurance (for many and various definitions of "fix"), that the ACA was so divisive. At least it got passed! Yet given the opportunity twice (2017-2019, 2025-2027), a politically viable alternative hasn't been offered up by opponents of the ACA, let alone being able to fully repeal it.
The thing is, the divisiveness comes from one side - conservatives who were and are determine to oppose literally everything.
It's hard to accept the 'everyone is the same' in light of Trump's antics. Remind me again which presidents started wars of choice at the behest of Israel even when they were explicitly warned of the consequences?
The problem is the debt purchased by the Fed during QE had extremely low yields (COVID era) the reserves held by banks created by the Fed during QE now cost more to service by the Fed.
Technically it was Besset, but Trump gave him the reigns.
The purpose seems to be to radically debase the dollar and setup a crises that requires an entitlement cut (Social Security) for "the good of the economy" while also expanding military spending at the same time.
The next few years would be fun.
- I absolutely agree that inflation has nothing at all to do with QE, people who claimed that are just idiots who have a gold fetish.
- the problem I'm talking about is the fact that central banks didn't use QE as an opportunity to erase the public debt it bought. At the time it wouldn't have been an issue in any way. But now because inflation is back (due to oil) central banks cannot buy government bonds when they reach maturity and have to raise rates. Then the government bonds have become very expensive, and it has to be paid to the private sector on the market, so whenever a US govt security reaches maturity, the budget constraint increases. Sterilization of the debt would have alleviated this issue a lot at no cost.
Also, we should have taken the lessons of the era and raise the inflation target to 4%[1] at that time (it was definitely politically achievable then, now not so much).
[1]: https://www.imf.org/en/publications/wp/issues/2016/12/31/the...
At a minimum, doing so would have created doubts about the future of the dollar. (Because countries that start having the central bank create money to fund the government often wind up in runaway inflation, with the currency becoming worthless.)
As to a 4% target: Given that they were stuck at 0% for the next decade (and tried, and failed, to get up to 2%), why would they move the target to 4%? They already couldn't do what they said, why double their failure?
That's a good point, but it's not as clear cut. The Fed is supposed to achieve the double goal of full employment and price stability and it's not forbidden to make money out of thin air for that purpose, that's the reason why QE is a thing at all. The exact legality of canceling US debt on its balance sheet isn't clear, but:
1. Before 2014 the Obama admin had the power to pass a law making that explicitly legal.
2. There are examples of theoretically valid instruments to achieve the same goal which have been discussed in the period (see the “1 trillion dollar coin”).
> At a minimum, doing so would have created doubts about the future of the dollar. (Because countries that start having the central bank create money to fund the government often wind up in runaway inflation, with the currency becoming worthless.)
Context matters: doing it now would send a disastrous signal, but back in the early 2010s the challenge was to drive inflation up, which is why the Fed used QE in the first place. If anything such a move could have made QE more efficient to achieve its goal (in addition to helping today's public finances, which I argue would have had a stabilizing effect over the long run).
> As to a 4% target: Given that they were stuck at 0% for the next decade (and tried, and failed, to get up to 2%), why would they move the target to 4%? They already couldn't do what they said, why double their failure?
The IMF paper I linked above is pretty clear about the goal of such a measure, but the idea is to have more leeway in case of crisis, because if your inflation is around 2%, your Fed target rate is around 2% as well and you can only lower it by 2% as a stimulus measure, whereas with a 4% baseline inflation rate you have twice the leverage in terms of target rate.
Re the "1 trillion dollar coin": I like your wording: "Theoretically valid". I don't like YOLOing theoretically valid moves in a crisis, only to find out a month later that the courts rule them invalid and you have to unwind them.
I agree, which is why I put “go through the legislative process to make that legal” above. Especially since there was no real emergency. (“in a crisis” though going YOLO may still be worth it though, because it may be enough to earn the time you need to go through the bottom of the crisis. And also if it's very unclear how legal/illegal this is, the fait accompli may be enough to convince the judges to side with your decision in order to put the country in too much of a trouble).
Trump will be gone in three years, but you'll still have an electorate that wants more free stuff while also getting tax cuts. There is zero appetite for fiscal reform in the U.S. The geometric growth rate of U.S. debt has been consistent since 2010 and will remain so when AOC is President: https://usafacts.org/answers/how-much-debt-does-the-us-have/...
The problem is that the top 25% isn’t an “out group” in either coalition. You have Facebook PMs who vote blue and guys who own a small plumbing company who vote red both making $1 million+ annually and neither wanting their own taxes to go up. Then there are the guys below them looking up. Over 10% of the country will be in the top 1% of earners at some point in their life. So the guys pulling in a few hundred K as a senior engineer or construction manager don’t want their taxes to go up either.
Okay. Then let’s also reduce what’s spent welfare/benefits by a similar amount, at least we’re not taking money they worked for.
The Peak Year (1944): The 94% rate applied to taxable income over $200,000 (which included a 3% regular tax and a 91% surtax). That $200,000 would be incomes over $3.8 Million today.
The High-Tax Era: Top marginal rates remained above 90% for two decades, spanning from 1944 through 1963.
This is supposedly the era that made America "great".
Aside from a brief blip during WWII, federal tax receipts as a percentage of GDP have been stable at around 17% of GDP, going back to 1950: https://fred.stlouisfed.org/series/FYFRGDA188S. Those high marginal rates never actually raised very much revenue. To close the deficit, we have to get that 17% number up to 23%.
To raise revenue, you need to lower the threshold at which high marginal rates kick in so that you actually capture the fat part of the tax base. About half of all income is earned by people making $100k-800k. That’s around where the heavy tax burden falls in every western european country.
Though most of them only for one year due to temporary revenue, so it's not that rational.
Government interest payments, which are already high, will become higher after future bond sales. This will compound future budgetary problems and could eventually lead to cuts in entitlements. If so, expect crime and political instability (already a problem) to rise in the future. This will take a while, though.
Normally rates are increased to lower inflation by reducing the supply of money. Given the multiple concurrent problems with energy (Hormuz, Red Sea/Yanbu, Russia/Ukraine, possibly Libya as problems are starting there, China is buying aggressively) then higher rates may not be enough to stop inflation. This would create a situation where both borrowing is harder and inflation continues to rage. This is very bad and will lead to demand destruction (nobody’s buying anything because it’s too expensive and they can’t finance it anyway). This results in a severe recession at the minimum.
Edit: wow, I really set off a discussion with this. See replies below for clarification on mortgage rates, which is the least important part anyways. Also, I should note that a lot of the above is a worst case scenario, if energy isn’t solved soon and especially if bonds don’t respond to the hike, leading to further hikes.
This is highly inaccurate. The 10 year US treasury is a better metric for predicting mortgage rates. We saw this during the past interest rate cuts, interest for loans and mortgages still went up, remember? I do, because I was borrowing at the time. And why was that? Because the 10-year treasury continued going up, and that matters more than short term interest rates. The 10-year treasury is about expectations about the future, so we need to look at how the market responds before screaming mortgage rates will go up, they could actually go down.
The 10 year and fed rates are usually correlated. Occasionally rates spike or dip without moving the 10 year, but these events are brief. This could be a short spike, but only time will tell.
This could be the catalyst to lower prices if sellers get spooked, especially if gas prices keep going up.
That's not to say that rising rates aren't a sign of bad things, the definitely are, it's just not going to make much of an impact with this magnitude of change.
It all depends on how long buyers (in aggregate) are willing to hold out, or if they are simply unable to buy at these prices. And nobody really knows that.
This rate hike is aimed to stabilize the bond yields which in turn will lower the mortgage rates.
If interest rates go up, bonds get sold (for better yield bearing products), pushing the yields of those bonds higher. And it finds some equilibrium. The fact it isn't immediate has to do with short term vs long term bonds. When they mature and the pace of arbitrage.
I don't see how a rate hike is meant to lower mortgage rate. And just looking at the figures shows it's the opposite effect.
Logically, if borrowing money becomes more expensive, how could borrowing specifically for the purpose of buying houses become cheaper.
The fed rate provides a floor for mortgage rates, but the 10 year yield and mortgage demand decide the ceiling. Currently the demand is pretty low, and therefore the yield mostly controls the mortgage rates.
This is logical and empirically observed.
But you are right on the longer term effect. Zooming out: Fed hikes → inflation cools → inflation expectations fall → yields fall → mortgage rates fall.
But the latter is not guaranteed, and it takes time.
I'm unsure to understand how the ceiling and floor mechanisms work. But will dig into that. Thanks.
This part isn’t true. It can happen, but not always, especially right now.
As a buyer you rather want to take out a loan in a high interest rate environment than a low interest rate environment, given that the monthly payment is the same.
1000 usd extra paid towards your mortgage actually makes a difference when the rate is 15% compared to when it is 1.5%
But a lot of people bought in 2024 expecting that to happen.
If you expect rates to come down soon, you can plan to refinance in the future, but that’s a gamble. Rates may not go down, or the value of the house could go down before you refinance, which may make refinancing more expensive depending on how much you owe.
Paying down a high interest mortgage will always have bigger impact on the dollar than paying down a low interest mortgage.
I’m comparing a mortgage with a high rate and lower principal to one with a lower rate and high principal, where the minimum monthly payments are the same and the owner pays the minimum.
A high interest mortgage just means that you pay more total interest over the life of the mortgage. In any case traditional mortgages are front-loaded, so you pay more towards interest up front than you do principal.
An optional extra payment is worth more when interest rates are higher.
Ie. An optional extra payment of 1000$ will pay your 150$ a year in saved interest when the rate is 15% and only 15$ when the rate is 1.5%.
Everything else being equal, optional payments has a higher value, which represent value to the buyer.
Note that the US mostly does fixed rate for life of the loan. Many countries only have ARM (adjustable rates), and those exist in the US as well. If you have an ARM that changes things greatly.
Higher interest rates mean the monthly payment is higher. You need to pay back the principal + the interest.
House prices tend to be "sticky", so that assumption is probably wrong. People who own a house often cannot afford to sell for the current value since it won't pay off their loan and leave enough money left over for a replacement house so they avoid moving. Eventually things get bad enough that they "sell short", but that takes a credit hit so you don't want to do that until the loss is large (and in turn you gain more).
But if you have a 25 year term on a loan for a $500,000
Approx numbers:
5%: $2922 monthly, total paid: $876,885
10%: $4543 monthly, total paid: $1,353,000.
Given a $1500 monthly payment and a 30 year loan (30 year is most common in the US), at 5% loan is $279,400; at 10% the loan is for 170,900.
You may notice a few key similarities now with oil embargoes, reduced hiring, an extremely expensive war, and rapidly expanding government debt as a result of that war. If you want a qualitative feeling about people's moods in the 70s, you can watch such movies as:
Taxi Driver The Deer Hunter The Warriors Americathon Network
Those cash reserves are held by banks which the Fed funds rate pays interest on (what was hiked).
Meanwhile the fixed rate debt from QE remains the same.