The US economy
Jan 22nd 2008, 8:41 am
#47
Bloody Yank
Joined: Oct 2005
Location: USA! USA!
Posts: 4,186
Re: The US economy
Anyway, if you follow the economic models the behavior follows what each government organization is doing. It may not be a strict observance of the theories but it comes pretty close in what they want to achieve. One won't cut rates while the other will. That's where I based my reply.
Assuming that the Fed operates as monetarists, inflation is the main worry. So the rate cuts are fairly ominous, in that the Fed is signaling with such a steep cut that inflation is not only not a worry, but recession is. (Under ordinary circumstances, such a steep cut would be inherently inflationary.)
Again, this could backfire. If the rate cuts actually work, that means that the US just lowered its investment returns to those with the capital to invest, which makes the US even less attractive to investors than it was before the rate cuts. There is no shortage of borrowers at the old rates, the problem has been with the lack of lenders and investors, and I don't see them encouraged to put more into the market if their returns were just cut.
Personally, though, I think that investors will just increase their spreads (as they have been already), and net interest rates for most borrowing won't change all that much. But it will put a damper on the interest earned by your bank account.
Jan 22nd 2008, 8:48 am
#48
And YOU'RE paying for it!
Joined: May 2007
Location: kipper tie?
Posts: 2,328
Re: The US economy
But paying off credit card debt won't stimulate the economy - it's your duty as an American (consumer) to go out and buy some more crap you don't need and put it on your flexible friend!
Jan 22nd 2008, 8:54 am
#49
Riding on silver wings
Joined: Oct 2007
Posts: 10,543
Re: The US economy
I've been predicting this since 2004, it just took longer than I expected. (I tend to do well with predicting trends, but not so well with timing...)
The Fed still prioritizes managing inflation above all else, which is where monetarist theory comes in. I see your point about rate cuts, as they are associated with Keynesian economics, but I don't see the Fed operating under Keynesian principles on the whole.
Assuming that the Fed operates as monetarists, inflation is the main worry. So the rate cuts are fairly ominous, in that the Fed is signaling with such a steep cut that inflation is not only not a worry, but recession is. (Under ordinary circumstances, such a steep cut would be inherently inflationary.)
Again, this could backfire. If the rate cuts actually work, that means that the US just lowered its investment returns to those with the capital to invest, which makes the US even less attractive to investors than it was before the rate cuts. There is no shortage of borrowers at the old rates, the problem has been with the lack of lenders and investors, and I don't see them encouraged to put more into the market if their returns were just cut.
Personally, though, I think that investors will just increase their spreads (as they have been already), and net interest rates for most borrowing won't change all that much. But it will put a damper on the interest earned by your bank account.
The Fed still prioritizes managing inflation above all else, which is where monetarist theory comes in. I see your point about rate cuts, as they are associated with Keynesian economics, but I don't see the Fed operating under Keynesian principles on the whole.
Assuming that the Fed operates as monetarists, inflation is the main worry. So the rate cuts are fairly ominous, in that the Fed is signaling with such a steep cut that inflation is not only not a worry, but recession is. (Under ordinary circumstances, such a steep cut would be inherently inflationary.)
Again, this could backfire. If the rate cuts actually work, that means that the US just lowered its investment returns to those with the capital to invest, which makes the US even less attractive to investors than it was before the rate cuts. There is no shortage of borrowers at the old rates, the problem has been with the lack of lenders and investors, and I don't see them encouraged to put more into the market if their returns were just cut.
Personally, though, I think that investors will just increase their spreads (as they have been already), and net interest rates for most borrowing won't change all that much. But it will put a damper on the interest earned by your bank account.
* a reduction in interest rates.
* Government investment in infrastructure - the injection of income results in more spending in the general economy, which in turn stimulates more production and investment involving still more income and spending and so forth. The initial stimulation starts a cascade of events, whose total increase in economic activity is a multiple of the original investment.
Source - Wikipedia
The Monetarist theory is as follows...
Monetarism is an economic theory which focuses on the macroeconomic effects of the supply of money and central banking. Formulated by Milton Friedman, it argues that excessive expansion of the money supply is inherently inflationary, and that monetary authorities should focus solely on maintaining price stability.
So in effect lowering interest rates puts more money in the supply because banks are now being charged less for purchasing money from the Federal Reserve. That contradicts the belief of Monetarists.
Source - Wikipedia.
That's where I'm basing my opinion.
Jan 22nd 2008, 8:57 am
#50
Riding on silver wings
Joined: Oct 2007
Posts: 10,543
Re: The US economy
Jan 22nd 2008, 9:08 am
#51
Ping-ponger
Joined: Jul 2002
Location: Dreich Alba
Posts: 12,025
Re: The US economy
I've been predicting this since 2004, it just took longer than I expected. (I tend to do well with predicting trends, but not so well with timing...)
The Fed still prioritizes managing inflation above all else, which is where monetarist theory comes in. I see your point about rate cuts, as they are associated with Keynesian economics, but I don't see the Fed operating under Keynesian principles on the whole.
Assuming that the Fed operates as monetarists, inflation is the main worry. So the rate cuts are fairly ominous, in that the Fed is signaling with such a steep cut that inflation is not only not a worry, but recession is. (Under ordinary circumstances, such a steep cut would be inherently inflationary.)
Again, this could backfire. If the rate cuts actually work, that means that the US just lowered its investment returns to those with the capital to invest, which makes the US even less attractive to investors than it was before the rate cuts. There is no shortage of borrowers at the old rates, the problem has been with the lack of lenders and investors, and I don't see them encouraged to put more into the market if their returns were just cut.
Personally, though, I think that investors will just increase their spreads (as they have been already), and net interest rates for most borrowing won't change all that much. But it will put a damper on the interest earned by your bank account.
The Fed still prioritizes managing inflation above all else, which is where monetarist theory comes in. I see your point about rate cuts, as they are associated with Keynesian economics, but I don't see the Fed operating under Keynesian principles on the whole.
Assuming that the Fed operates as monetarists, inflation is the main worry. So the rate cuts are fairly ominous, in that the Fed is signaling with such a steep cut that inflation is not only not a worry, but recession is. (Under ordinary circumstances, such a steep cut would be inherently inflationary.)
Again, this could backfire. If the rate cuts actually work, that means that the US just lowered its investment returns to those with the capital to invest, which makes the US even less attractive to investors than it was before the rate cuts. There is no shortage of borrowers at the old rates, the problem has been with the lack of lenders and investors, and I don't see them encouraged to put more into the market if their returns were just cut.
Personally, though, I think that investors will just increase their spreads (as they have been already), and net interest rates for most borrowing won't change all that much. But it will put a damper on the interest earned by your bank account.
Jan 22nd 2008, 9:14 am
#53
Ping-ponger
Joined: Jul 2002
Location: Dreich Alba
Posts: 12,025
Re: The US economy
Half my savings is still sitting in USD in two accounts, because I can't bring myself to convert to GBP with the stinking rate it's been at since I came back to the UK ... and I can't get a decent interest rate on it so it's just sitting there ever-decreasing in value ...
Jan 22nd 2008, 9:14 am
#54
Lost in BE Cyberspace
Joined: Jan 2006
Location: San Francisco
Posts: 12,893
Re: The US economy
Jan 22nd 2008, 9:18 am
#55
Riding on silver wings
Joined: Oct 2007
Posts: 10,543
Re: The US economy
Think about it. Less money towards interest means more in my pocket for spending. THAT will stimulate the economy while leaving me fiscally healthier situation that will benefit the economy more in the long run.
Jan 22nd 2008, 9:29 am
#56
Lost in BE Cyberspace
Joined: Jan 2006
Location: San Francisco
Posts: 12,893
Re: The US economy
Well, my point was somewhat in jest, but a lot of the motivation for these rate cuts is to attempt to increase the bank's lending margins and rescue their balance sheets from the current morass. What will stimulate the economy most is banks lending again, and that's not going to happen until they're in better shape than their current writedowns have left them.
Jan 22nd 2008, 9:30 am
#57
Mr. Grumpy
Joined: Jun 2003
Location: Nashville, TN
Posts: 3,100
Re: The US economy
i just prefer not to buy anything. the missus likes to ruin that for me though...
Jan 22nd 2008, 9:48 am
#58
Bloody Yank
Joined: Oct 2005
Location: USA! USA!
Posts: 4,186
Re: The US economy
These are somewhat independent. The falling dollar is, IMO, largely the result of the budget deficit and concerns for US stability, which in turn leads me to believe that the weak dollar is largely a byproduct of investor perception of US policy in Iraq.
My guess is that the dollar will rebound when it becomes clear that the US is reducing its presence or withdrawing from Iraq, as it is a drain on US resources, financially and otherwise. If I'm right, that means that things will remain largely as they are until at least the November elections and into 2009 or so, depending upon who wins.
Yes, monetarists focus on maintaining low inflation. But that doesn't mean that monetarists never cut interest rates, it just means that managing for low inflation takes priority over managing for growth.
In this case, the Fed is signaling that inflation is not a concern, and that a rate cut can be initiated without spiking inflation. A monetarist would believe that rates should be as low as possible without sparking inflationary conditions.
My guess is that the dollar will rebound when it becomes clear that the US is reducing its presence or withdrawing from Iraq, as it is a drain on US resources, financially and otherwise. If I'm right, that means that things will remain largely as they are until at least the November elections and into 2009 or so, depending upon who wins.
Monetarism is an economic theory which focuses on the macroeconomic effects of the supply of money and central banking. Formulated by Milton Friedman, it argues that excessive expansion of the money supply is inherently inflationary, and that monetary authorities should focus solely on maintaining price stability.
So in effect lowering interest rates puts more money in the supply because banks are now being charged less for purchasing money from the Federal Reserve. That contradicts the belief of Monetarists.
Source - Wikipedia.
That's where I'm basing my opinion.
So in effect lowering interest rates puts more money in the supply because banks are now being charged less for purchasing money from the Federal Reserve. That contradicts the belief of Monetarists.
Source - Wikipedia.
That's where I'm basing my opinion.
In this case, the Fed is signaling that inflation is not a concern, and that a rate cut can be initiated without spiking inflation. A monetarist would believe that rates should be as low as possible without sparking inflationary conditions.
Jan 22nd 2008, 11:20 am
#59
Not dead yet
Joined: Apr 2004
Location: In a world of my own where I know everyone
Posts: 15,042
Re: The US economy
OMG my head is spinning like I was back in class at college in 1983
