Interest Rates, Inflation, And Debt Matter

[AdvancingTime]

Reflecting back on how our economy arrived at this point is very important. Rewarding savers and placing a value on the allocation of financial assets is important. It should be noted that many Americans living today were not even born or too young to appreciate the historical ramifications of the events that took place starting in 1979.

That was when then Fed chairman Paul Volcker hiked interest rates to over 20%. The impact of higher interest rates had a massive positive impact on corralling the growth of both credit and debt acting as an crucial reset to the economy for decades to come. Below is an article delving into the importance of this event and how it relates to the skewed and distorted economic landscape of today.

http://brucewilds.blogspot.com/2015/04/interest-rates-inflation-and-debt-matter.html

 

[MisterBeale]

*****WHY DEFICITS STOPPED MATTERING*****
Deficits = Money Printing = INFLATION= HIGHER INTEREST RATES
Deficits = Money Printing

Deficits = INFLATION

INFLATION = HIGHER INTEREST RATES

AND THEN DEFICITS STOPPED MATTERING…

In 1981, the government declared that there was "no direct or indirect connection between deficits and inflation" and that deficits "don't matter".

With the threat of inflation declared dead, the US proceeded to run massive budget deficits…

…AND IT WORKED — MAGICALLY

After 1980, the old, common sense formula underwent a drastic change:

Deficits = Money Printing = NO INFLATION? = LOWER INTEREST RATES?
The link between deficits and inflation was broken. When the US ran massive deficits in the early 1980s, inflation fell.

Deficits = NO INFLATION?

What did change was that this printed money stopped producing inflation and pushing up interest, as seen below in the chart below.
Money Printing = FALLING INFLATION? = LOWER INTEREST RATES?

There is no official explanation to why deficits and money printing stopped causing inflation. The treasury's position on the matter is simply that "deficits don't matter." They used to cause inflation, and now they don't. Never mind that this defies all laws of economics and common sense. As the media continues to report, IT'S DISINFLATION. IT'S MAGIC.

HOW DO YOU PRINT MONEY WITHOUT CAUSING INFLATION?
It is possible to print billions without causing inflation if those billions never enter the country's domestic money supply. For example, if the government prints 1 billion dollars and then that 1 billion disappears overseas, there would be no inflation because the amount of dollars in America remains unchanged. This is exactly what happened in the 1980s.

The chart below shows how the domestic money supply stopped growing in 1980 because of the huge amount of dollars disappearing overseas. The yellow is cash outside the US, while the purple and blue are dollars in the US. (Currency in circulation = cash in wallets) (Reserve with F.R. Banks = cash held by US banks)

 

[HenryBHough]

Fondly do I recall those days of 20% interest!

They didn't last long, just long enough.

I sold a house and financed the buyer at 20% and, as was required in that state, allowed re-fi after two years at the (by then much lower) prevailing rate.

Dumb SOB never re-fied and paid me 20% for 20 years.

I wish I had another property he'd like!

 

[EdwardBaiamonte]

Reflecting back on how our economy arrived at this point is very important. Rewarding savers and placing a value on the allocation of financial assets is important. It should be noted that many Americans living today were not even born or too young to appreciate the historical ramifications of the events that took place starting in 1979.

That was when then Fed chairman Paul Volcker hiked interest rates to over 20%. The impact of higher interest rates had a massive positive impact on corralling the growth of both credit and debt acting as an crucial reset to the economy for decades to come. Below is an article delving into the importance of this event and how it relates to the skewed and distorted economic landscape of today.

http://brucewilds.blogspot.com/2015/04/interest-rates-inflation-and-debt-matter.html

do you have a policy recommendation?? or something??

 

[HenryBHough]

So there's this country where they're selling national bonds at a negative interest rate and buyers are lining up.

What's a negative interest you liberals ask?

It's one (by way of example) which you buy for $100, collect no interest, and at the end of the term you get $98 back.

So what country and why are these bonds selling at all?

 

[waltky]

We knew it was coming, now here it is...

Fed raises interest rates, citing ongoing U.S. recovery
16 Dec.`15 | WASHINGTON (Reuters) - The Federal Reserve hiked interest rates for the first time in nearly a decade on Wednesday, signaling faith that the U.S. economy had largely overcome the wounds of the 2007-2009 financial crisis.

The U.S. central bank's policy-setting committee raised the range of its benchmark interest rate by a quarter of a percentage point to between 0.25 percent and 0.50 percent, ending a lengthy debate about whether the economy was strong enough to withstand higher borrowing costs. "With the economy performing well and expected to continue to do so, the committee judges that a modest increase in the federal funds rate is appropriate," Fed Chair Janet Yellen said in a press conference after the rate decision was announced. "The economic recovery has clearly come a long way." The Fed's policy statement noted the "considerable improvement" in the U.S. labor market, where the unemployment rate has fallen to 5 percent, and said policymakers are "reasonably confident" inflation will rise over the medium term to the Fed's 2 percent objective.

The central bank made clear the rate hike was a tentative beginning to a "gradual" tightening cycle, and that in deciding its next move it would put a premium on monitoring inflation, which remains mired below target. "The process is likely to proceed gradually," Yellen said, a hint that further hikes will be slow in coming. She added that policymakers were hoping for a slow rise in rates but one that will keep the Fed ahead of the curve as the economic recovery continues. "To keep the economy moving along the growth path it is on ... we would like to avoid a situation where we have left so much (monetary) accommodation in place for so long we have to tighten abruptly."

New economic projections from Fed policymakers were largely unchanged from September, with unemployment anticipated to fall to 4.7 percent next year and economic growth hitting 2.4 percent. The Fed statement and its promise of a gradual path represented a compromise between policymakers who have been ready to raise rates for months and those who feel the economy is still at risk from weak inflation and slow global growth. "The Fed is going out of its way to assure markets that, by embarking on a 'gradual' path, this will not be your traditional interest rate cycle," said Mohamed El-Erian, chief economic advisor at Allianz.

MORE

See also:

Fed raises its key interest rate from record low near zero
December 16, 2015 | WASHINGTON (AP) — The Federal Reserve is raising interest rates from record lows set at the depths of the 2008 financial crisis, a shift that heralds modestly higher rates on some loans.

The Fed coupled its first rate hike in nine years with a signal that further increases will likely be made slowly as the economy strengthens further and inflation rises from undesirably low levels. Wednesday's action signaled the central bank's belief that the economy has finally regained enough strength 6½ years after the Great Recession ended to withstand modestly higher borrowing rates. "The Fed's decision today reflects our confidence in the U.S. economy," Chair Janet Yellen said at a news conference.

The Fed said in a statement after its latest meeting that it was lifting its key rate by a quarter-point to a range of 0.25 percent to 0.5 percent. Its move ends an extraordinary seven-year period of near-zero borrowing rates. But the Fed's statement suggested that rates would remain historically low well into the future, saying it expects "only gradual increases." "The Fed reaffirmed that the pace of rate hikes would be slow," James Marple, senior economist at TD Economics wrote in a research note. "The Fed's expectations for rate hikes next year are set alongside a relatively cautious and entirely achievable economic outlook."

Stocks closed up sharply higher. The Dow Jones industrial average, which had been up modestly before the announcement, gained 224 points, or 1.3 percent, for the day. The bond market didn't react much. The yield on the 10-year Treasury note rose slightly to 2.29 percent. Rates on mortgages and car loans aren't expected to rise much soon. The Fed's benchmark rate doesn't directly affect them. Long-term mortgages, for example, tend to track 10-year U.S. Treasury yields, which will likely stay low as long as inflation does and investors keep buying Treasurys. But rates on some other loans, like credit cards and home equity credit lines, will likely rise, though probably only slightly as long as the Fed's rate hikes remain modest.

more

 

[EdwardBaiamonte]

We knew it was coming, now here it is...

Fed raises interest rates, citing ongoing U.S. recovery
16 Dec.`15 | WASHINGTON (Reuters) - The Federal Reserve hiked interest rates for the first time in nearly a decade on Wednesday, signaling faith that the U.S. economy had largely overcome the wounds of the 2007-2009 financial crisis.

The U.S. central bank's policy-setting committee raised the range of its benchmark interest rate by a quarter of a percentage point to between 0.25 percent and 0.50 percent, ending a lengthy debate about whether the economy was strong enough to withstand higher borrowing costs. "With the economy performing well and expected to continue to do so, the committee judges that a modest increase in the federal funds rate is appropriate," Fed Chair Janet Yellen said in a press conference after the rate decision was announced. "The economic recovery has clearly come a long way." The Fed's policy statement noted the "considerable improvement" in the U.S. labor market, where the unemployment rate has fallen to 5 percent, and said policymakers are "reasonably confident" inflation will rise over the medium term to the Fed's 2 percent objective.

The central bank made clear the rate hike was a tentative beginning to a "gradual" tightening cycle, and that in deciding its next move it would put a premium on monitoring inflation, which remains mired below target. "The process is likely to proceed gradually," Yellen said, a hint that further hikes will be slow in coming. She added that policymakers were hoping for a slow rise in rates but one that will keep the Fed ahead of the curve as the economic recovery continues. "To keep the economy moving along the growth path it is on ... we would like to avoid a situation where we have left so much (monetary) accommodation in place for so long we have to tighten abruptly."

New economic projections from Fed policymakers were largely unchanged from September, with unemployment anticipated to fall to 4.7 percent next year and economic growth hitting 2.4 percent. The Fed statement and its promise of a gradual path represented a compromise between policymakers who have been ready to raise rates for months and those who feel the economy is still at risk from weak inflation and slow global growth. "The Fed is going out of its way to assure markets that, by embarking on a 'gradual' path, this will not be your traditional interest rate cycle," said Mohamed El-Erian, chief economic advisor at Allianz.

MORE

See also:

Fed raises its key interest rate from record low near zero
December 16, 2015 | WASHINGTON (AP) — The Federal Reserve is raising interest rates from record lows set at the depths of the 2008 financial crisis, a shift that heralds modestly higher rates on some loans.

The Fed coupled its first rate hike in nine years with a signal that further increases will likely be made slowly as the economy strengthens further and inflation rises from undesirably low levels. Wednesday's action signaled the central bank's belief that the economy has finally regained enough strength 6½ years after the Great Recession ended to withstand modestly higher borrowing rates. "The Fed's decision today reflects our confidence in the U.S. economy," Chair Janet Yellen said at a news conference.

The Fed said in a statement after its latest meeting that it was lifting its key rate by a quarter-point to a range of 0.25 percent to 0.5 percent. Its move ends an extraordinary seven-year period of near-zero borrowing rates. But the Fed's statement suggested that rates would remain historically low well into the future, saying it expects "only gradual increases." "The Fed reaffirmed that the pace of rate hikes would be slow," James Marple, senior economist at TD Economics wrote in a research note. "The Fed's expectations for rate hikes next year are set alongside a relatively cautious and entirely achievable economic outlook."

Stocks closed up sharply higher. The Dow Jones industrial average, which had been up modestly before the announcement, gained 224 points, or 1.3 percent, for the day. The bond market didn't react much. The yield on the 10-year Treasury note rose slightly to 2.29 percent. Rates on mortgages and car loans aren't expected to rise much soon. The Fed's benchmark rate doesn't directly affect them. Long-term mortgages, for example, tend to track 10-year U.S. Treasury yields, which will likely stay low as long as inflation does and investors keep buying Treasurys. But rates on some other loans, like credit cards and home equity credit lines, will likely rise, though probably only slightly as long as the Fed's rate hikes remain modest.

more

dear, we can all read newspapers on our own. we don't need you to reprint here. Why not think about if you are liberal or conservative and why. Thats is the issue that shapes the world. Do you understand?????????

 

[AdvancingTime]

Low interest rates and easy lending standards have exploded debt and much of it will turn bad. Writing off bad debt will be a painful process and I don't mean for the debtor, but for the creditor the person, business, or institution that holds the paper. It generally constitutes an unplanned and involuntary financial adjustment.

Low rates have driven increased speculation that propels the creation of leverage or carry trades that multiply risk. Growing debt also tends to move demand forward and cause an increase in the improper allocation of capital, both of these action have a way of causing problems that linger for years. The article below looks at how this massive debt hangs above our heads as a Hindenburg in search of a spark.

http://brucewilds.blogspot.com/2015/12/writing-off-rising-amount-of-bad-dept.html

 

[EdwardBaiamonte]

Low interest rates and easy lending standards have exploded debt and much of it will turn bad.

of course that's stupid speculation. Debt is maturing all the time and is not turning bad at all! The idea that much of it will is really really stupid which is why you present no evidence.

 

[AdvancingTime]

Behold, below is a chart of how debt continues to grow. We have seen a growth in sub-prime auto loans and a rise in student loan defaults, need I say more.

 

[EdwardBaiamonte]

how it relates to the skewed and distorted economic landscape of today.

I gather you're too stupid to tell us what your point is??

 

[DGS49]

Regardless of anything else, the current ultra low interest rates cannot last forever. When they inevitably rise to a historical norm (4% or so), debt service will dwarf everything else in the public sector. Today's politicians only want to defer this inevitability until they retire.

Fuck us, very much!

 

[EdwardBaiamonte]

Regardless of anything else, the current ultra low interest rates cannot last forever. When they inevitably rise to a historical norm (4% or so), debt service will dwarf everything else in the public sector. Today's politicians only want to defer this inevitability until they retire.

Fuck us, very much!

don't blame Republicans. They have tried 30 times since Jefferson's first attempt to make federal debt illegal in America. Each attempt was killed by Democrats.

 

[AdvancingTime]

*****WHY DEFICITS STOPPED MATTERING*****
Deficits = Money Printing = INFLATION= HIGHER INTEREST RATES
Deficits = Money Printing

Deficits = INFLATION

INFLATION = HIGHER INTEREST RATES

AND THEN DEFICITS STOPPED MATTERING…

In 1981, the government declared that there was "no direct or indirect connection between deficits and inflation" and that deficits "don't matter".

With the threat of inflation declared dead, the US proceeded to run massive budget deficits…

…AND IT WORKED — MAGICALLY

After 1980, the old, common sense formula underwent a drastic change:

Deficits = Money Printing = NO INFLATION? = LOWER INTEREST RATES?
The link between deficits and inflation was broken. When the US ran massive deficits in the early 1980s, inflation fell.

Deficits = NO INFLATION?

What did change was that this printed money stopped producing inflation and pushing up interest, as seen below in the chart below.
Money Printing = FALLING INFLATION? = LOWER INTEREST RATES?

There is no official explanation to why deficits and money printing stopped causing inflation. The treasury's position on the matter is simply that "deficits don't matter." They used to cause inflation, and now they don't. Never mind that this defies all laws of economics and common sense. As the media continues to report, IT'S DISINFLATION. IT'S MAGIC.

HOW DO YOU PRINT MONEY WITHOUT CAUSING INFLATION?
It is possible to print billions without causing inflation if those billions never enter the country's domestic money supply. For example, if the government prints 1 billion dollars and then that 1 billion disappears overseas, there would be no inflation because the amount of dollars in America remains unchanged. This is exactly what happened in the 1980s.

The chart below shows how the domestic money supply stopped growing in 1980 because of the huge amount of dollars disappearing overseas. The yellow is cash outside the US, while the purple and blue are dollars in the US. (Currency in circulation = cash in wallets) (Reserve with F.R. Banks = cash held by US banks)

As problems increase across the world much of the money and wealth that has flowed out of America may soon return. Nothing can be more disruptive to an economy than cross border money flows and the carry trade which affect the value of currencies. Both these practices have dramatically increased over the years as the central banks of the world have been engaged in the mass printing of money and keeping interest rates artificially low. Such an economic environment screams for gamblers to come forth and enter these games in search of quick gains and easy money. In reality much of this is totally out of the control of central banks, or that of any regulatory agency, but because of their actions it goeson everyday unregulated and indirectly cheered on by central banks throughout the world.

 

[MisterBeale]

*****WHY DEFICITS STOPPED MATTERING*****
Deficits = Money Printing = INFLATION= HIGHER INTEREST RATES
Deficits = Money Printing

Deficits = INFLATION

INFLATION = HIGHER INTEREST RATES

AND THEN DEFICITS STOPPED MATTERING…

In 1981, the government declared that there was "no direct or indirect connection between deficits and inflation" and that deficits "don't matter".

With the threat of inflation declared dead, the US proceeded to run massive budget deficits…

…AND IT WORKED — MAGICALLY

After 1980, the old, common sense formula underwent a drastic change:

Deficits = Money Printing = NO INFLATION? = LOWER INTEREST RATES?
The link between deficits and inflation was broken. When the US ran massive deficits in the early 1980s, inflation fell.

Deficits = NO INFLATION?

What did change was that this printed money stopped producing inflation and pushing up interest, as seen below in the chart below.
Money Printing = FALLING INFLATION? = LOWER INTEREST RATES?

There is no official explanation to why deficits and money printing stopped causing inflation. The treasury's position on the matter is simply that "deficits don't matter." They used to cause inflation, and now they don't. Never mind that this defies all laws of economics and common sense. As the media continues to report, IT'S DISINFLATION. IT'S MAGIC.

HOW DO YOU PRINT MONEY WITHOUT CAUSING INFLATION?
It is possible to print billions without causing inflation if those billions never enter the country's domestic money supply. For example, if the government prints 1 billion dollars and then that 1 billion disappears overseas, there would be no inflation because the amount of dollars in America remains unchanged. This is exactly what happened in the 1980s.

The chart below shows how the domestic money supply stopped growing in 1980 because of the huge amount of dollars disappearing overseas. The yellow is cash outside the US, while the purple and blue are dollars in the US. (Currency in circulation = cash in wallets) (Reserve with F.R. Banks = cash held by US banks)

As problems increase across the world much of the money and wealth that has flowed out of America may soon return. Nothing can be more disruptive to an economy than cross border money flows and the carry trade which affect the value of currencies. Both these practices have dramatically increased over the years as the central banks of the world have been engaged in the mass printing of money and keeping interest rates artificially low. Such an economic environment screams for gamblers to come forth and enter these games in search of quick gains and easy money. In reality much of this is totally out of the control of central banks, or that of any regulatory agency, but because of their actions it goeson everyday unregulated and indirectly cheered on by central banks throughout the world.

The gamblers can come forth and look for quick gains and easy money.

It will be interesting when all the currencies fail, what they do with the score cards. Will they convert them, or just wipe them all out?

At that point, will only things of hard value be of any worth?

Or will they find a new currency and convert all this wealth?


If you are right, and much of it is out of control of the banks and regulatory agencies, then you would probably feel more secure in holding physical gold and silver, antiques, works of art, and land at this point in history.


Soon, the music is going to stop, and I would want to be one of the people sitting in a chair or a life boat, rather than having a piece of paper saying I have a reservation or that I am owed a chair or a lifeboat.

When the music stops, paper, and the attendant digits on a screen, are always going to be worthless. You can't eat numbers, and paper doesn't keep you warm and cozy at night.

 

[MisterBeale]

Regardless of anything else, the current ultra low interest rates cannot last forever. When they inevitably rise to a historical norm (4% or so), debt service will dwarf everything else in the public sector. Today's politicians only want to defer this inevitability until they retire.

Fuck us, very much!

Not necessarily. Some of this new crop of politicians are quite young. They see the writing on the wall.

It will be an international currency. They have already given up on the U.S.


Their allegiance is already with the global world order, you can smell it on them. I'm sure they have shovels in their closets, already to bury the Constitution and roll out the new international currency.


Just like the patriot act was written before 9/11, it wouldn't surprise me in the least to find out that the global legislation for the global currency, it's rules, regulations, etc. have already been ironed out. It is just a matter of time I'm willing to bet. Just the right crises. Maybe another market disruption right before the next presidential election? That's when they time these things. . .

I wouldn't surprise me that a lot of these politicians pursue, or are willing to pursue financial policies that will hasten the end of the dollar b/c they are already on board with the new financial world order.

 

[EdwardBaiamonte]

Regardless of anything else, the current ultra low interest rates cannot last forever.!

it might be the new normal like it is in Japan much of Europe and even here.