I'm not a complete layman but I have a srs question: Why is the economy even seen as a "problem" or "challenge"? Why not set interest rates at medium-low and fiscal policy at a safe level and then call it a day and let the chips fall where they may?
What is the element that causes governments / people to be constantly on the verge of being screwed? Shareholder pressure? Pensions? Inflation (affecting people)? The markets screwing any country that doesn't pressure itself?
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Negative growth is really, really bad.
Low interest rates lead to high wealth inequality in the long run. Once interest rates are set low it is hard to rise them due to slowing down the economy. But you will have to rise them because low interest rates push asset prices through the roof, which only leads to a market bubble.So interest rates have to fluctuate to control the economy.
the economy is always under pressure of being screwed because the government is full of retards trying to control the markets.
The people in government aren't really that smart, they just rubbed the right shoulders with people to get in the position they are in and then they fuck up everyones economy by regulating the wrong things and deregulating the wrong things.
Government is what fucks up economys, not people.
Robert Mugabe probably thought that at some point.
He is probably still thinking that actually.
There is no safe level for fiscal policy; what's good for the economy depends on where we are in the economic cycle. At the moment private sector demand is weak so it makes sense for the government to put more money into the economy than it takes out (aka run a deficit) because that hastens economic recovery. In fact trying to balance the budget is destructive and futile because it puts more people out of work, the nation becomes far less productive, and taxation revenue declines. Nobody wins.
But in the boom times, the situation is completely different. The government and private sector are strongly competing with each other (and with themselves) for workers and commodities. So to avoid excessive inflation the government must cut spending (employing fewer people) or raise interest rates (to reduce private sector demand) or raise taxes.
The current policy of using interest rates to control inflation is far from ideal, but it's much better than nothing. A much better alternative is to keep interest rates at medium-low and use fiscal policy to control inflation. But they're reluctant to do it that way because people are spooked by the size of the debt. Neither the public not the politicians nor even most economists understand that a country that issues its own currency has no danger of running out of money, and no generation - not the current generation, nor their children or grandchildren or any of their descendants - have an obligation to pay off the country's debt.
High interest rates are even worse: they exacerbate the short term bias of the markets, while ensuring that the already rich get paid a lot for doing nothing.
I don't think he ever thought that. He never tried to control fiscal policy. He didn't even float the currency (which would have removed the risk of hyperinflation). Instead he just printed more money while effectively declaring war on his country's main export industry.
>Low interest rates lead to high wealth inequality in the long run.
Wow, you really pulled that one out of your ass. Hear that at an Occupy Wall Street rally?
>The current policy of using interest rates to control inflation is far from ideal, but it's much better than nothing.
There absolutely nothing wrong with using interest rates to control inflation. The only reason its being discussed is (a) you're all young and never experienced periods of high inflation, and (b) the policy has gone on so long. The real issue is the fragility of the labor market. Stop putting blame on basic monetary policy.
>High interest rates are even worse
Naw, you're wrong too. Interest rates don;t really affect wealth growth because wealth is relative. Interest rates affect everyone equally, in proportion to their wealth.
You want to make the rich richer? Deregulate the markets and lower taxes. Or start a war. Basically, the Republican platform.
You want to make the poor more equal? Increase government spending and entitlements..
There are a few problems.
Governments spend more than they receive in tax (deficit spending). They do this because they don't want to give up power. They are able to do this because we (just about every country on earth) have fiat currency, meaning new money can be created out of thin air.
Banks engage in fractional reserve lending. This means for they only need a fraction of what they lend out (eg. If the reserve were 10%, then if they have $10, they lend out $100. But the actual reserve is less than 10%). If they need money temporarily to pay depositors or to loan out money, they get it from the central bank. The result of fractional reserve lending is that banks are actually insolvent (they do not have the reserves to pay back all their depositors).
Fractional reserve lending means the money supply (amount of money in the system) will continually increase (up to a point) because when $100 is lent with $10 reserve, that $100 is deposited into a bank and becomes the reserve for a $1000 loan. This keeps increasing the money supply until a certain mathematical limit is reached which I don't have off the top of my head.
Ok, so what's wrong. The problem is that the money supply continually increases (inflation). This causes the price of assets to increase, for example house prices. Once inflation is built into the system, it can't be cut off without causing asset prices to crash and banks to go bust. Furthermore, governments need to keep the interest rates low because of their very high debt.
However, the bad thing about all this inflation is it discourages savings. Investment is sucked up by assets, as people speculate on rising asset prices, and less investment is placed into improving productivity. With productivity not improving, the quality of living cannot increase. So the nominal wealth keeps going up (the numbers of bank account balances keep increasing due to inflation) but the buying power is falling.
>Neither the public not the politicians nor even most economists understand that a country that issues its own currency has no danger of running out of money,
True, but that value of that money is another thing entirely. See: Confederate dollars, Wiemar Germany, Zimbabwe, etc etc.
Simply shitting out paper money to pay for public works regardless of anything is going to end badly.
Ultimately a country's currency is valued by it's importance in international trade or it's ability of that country to use force to foist said currency on others.
Creditor nations are the ones that have power, not debtor nations. And if debtor nations don't want to play ball, those with enough wealth you can craft a military machine from nothing within a few years.
Wealth is absolute. Nobody automatically gets any wealthier when their neighbour loses money.
I'm older than you assume, but that's irrelevant because I'm not saying we should just put up with high inflation; I'm saying we should use fiscal policy to keep inflation down.
Interest rates control inflation by reducing private sector investment, but raising them reduces the chance that investments that have already been made will be profitable, and that's bad for the economy.
But that's of very little relevance to the current economic woes, which are mainly due to fiscal policy decisions as it's well known monetary policy can't fix the problem (because interest rates are so low that there's very little benefit in cutting them).
The amount banks can lend is totally unrelated to the amount of reserves they have. The main limiting factor is what they can lend profitably. A second limiting factor is the Basel capital requirements.
Inflation and money supply increase are different things. Inflation does depend on the supply of money, but also the demand for it. Inflation can also be counteracted by improving productivity, so technology has a strong deflationary effect.
And interest rates (not how much money is going into something else) are whst control the amount of investment in improving productivity. The lower they are, the more investment there is.
capital requirements are essentially reserves
according to austrian economics, expansion of money supply is itself inflation. Typically inflation is called CPI, but that doesn't measure asset prices.
Interest rates influence investment, but there is productive investment and nonproductive investment, also called by Austrians malinvestment. When you have an interest rate lower than the rate of inflation you get malinvestment, which means capital is wasted. Capital must be re-accumulated. Or you could just lower the interest rate even more... but that leads to more wasted capital you see.
Capital requirements are not the reserves that fractional reserve bankng is based on. Money borrowed and deposited into a bank account does not help meet the capital requirements.
Austrian economics is evil. It uses a bunch of non sequiters to advocate policies that keep the poor poor, and are catastrophic for the economy at large. They try to have it both ways - they claim inflation to be money supply increase rather than price increase, but if you ask them why inflation's bad they cite the effects of price increase.
The "malinvestment" hypothesis is utter crap. No matter what interest rates are, there will always be some investments that are productive and some that aren't. And there will be some investments that are profitable and some that aren't. But lower interest rates will make more investments profitable.
Printing more money normally leads to competitive devaluation. Hyperinflation is usually the result of the country trying to hold the currency sbove market value then losing the ability to.
But the Confederacy couldn't competitively devalue because it was blockaded. Wiemar Germany didn't have an effective tax system, so when their currency initially devalued, the benefits went overseas. As soon as they fixed their tax system, the currency stabilized.
Zimbabwe had a fixed value currency right up until it collapsed, though its real selling price was nowhere near its official value. Though their economic management was atrocious, it is unlikely thier dollar would've completely collapsed if they'd floated it first.
As long as nations only borrow in the currency they print, their creditors don't have power over them.
>Wow, you really pulled that one out of your ass. Hear that at an Occupy Wall Street rally?
It pushes middle and upper class families up and really low income families down into poverty. So yes it does cause problems because if the bottom 30% of people can't afford basic necessitates they don't work and we lose output... So no I didn't pull it out of my ass it's true.
Why does it hurt low income people more than it hurts rich people?
My naive assumption was that it would have the opposite effect: High interest rates punish poor people more because they have to rely on their ability to carry debt, i.e. mortgage, credit card. Conversely, if you already have a huge savings, you gain more wealth over time relative to poor people.
Anyway, the reason government keeps meddling with the economy is because everyone fancies themselves as an armchair economist, and in a democracy everyone gets to contribute. As goofy as the system is, the US is still centuries ahead of most other countries, which rely even more heavily on centralized control.
There's nothing wrong with a monetary policy that promotes consumption over investment. Consumption is not a dirty word. The economy stall and dies without it.
>Wealth is absolute. Nobody automatically gets any wealthier when their neighbour loses money.
You're 100% wrong on this, and until you realize it, you're going to continue misunderstanding the economy and the world.
>the current economic woes
Now I know you're an idiot or a troll. There are no current "economic woes." The economy is doing quite well. You're just stupid.
>It pushes middle and upper class families up and really low income families down into poverty.
Care to explain the non-existent mechanism that accomplishes this result?
>There are no current "economic woes." The economy is doing quite well.
Not if you are some paranoid, conspiracy theorist dipshit that spends his days on /pol/. To such a person the economy is on the verge of collapse because like Jews, and niggers, and libruls, and shit. That's why they invest in guaranteed shit like gold, silver, shitcoins, Hulk Hogan commemorative plates, etc. They know that any day now the economy and therefore civilization is going to collapse and people who've foolishly saved and invested fiat currency are going to be poor, while anyone with their investification skillz is going to be living like kings. Plus Jesus will be returning at that time to smite the fuck out of all the people they, and therefore he hates, hallelujah and YEEHAW!
>There's nothing wrong with a monetary policy that promotes consumption over investment
That's debatable, as consumption doesn't normally need to be promoted. However the real issue isn't consumption v investment; it's spending v saving (or depending on how you look at it, borrowing v saving). Before the GFC there was too little saving; now there's too much.
>You're 100% wrong on this, and until you realize it, you're going to continue misunderstanding the economy and the world.
No, you're 99% wrong on this. The power that wealth gives people over others is relative, but the actual wealth is absolute, and if others are wealthier there are usually more opportunities to increase your own wealth. Stop treating economics like a zero sum game!
> There are no current "economic woes." The economy is doing quite well. You're just stupid.
"Quite well" is not good enough! Of course there are current economic woes, and there will be until the employment rate returns to what it was before the GFC.
Milton friedman basically proposed this very thing, tying the money supplytorel to what he propsed was the max growth that humans could potentially grow at. Look up more monetarist theory
Low income families, can't afford to invest in housing and other assets. So they must rent housing buy cheap cars etc. When there are low interest rates other people in higher pay grades can can keep tkaing out loans and keep investing there money toi make more money. Mean while asset prices are getting pushed up because of the economic growth, then the lower income family can't take out loans because they are not credit worthy 'they don't earn enough money to be credit worthy' there for making a divided between middle and poor income families. Also I should note, this only happens in societies that have prolonged low interest rates, which is what OP refereed to 'why can't we just have a flat interest rate?' and it is for this exact reason so you can have a balance of and control the speed of the economy.
Im making referencing to low incoem families who can't afford to make any investments. And yes high interest rates can do the exact same thing as said. But high interest rates are not prolonged because it slows economic growth, so the central banks will drop it back down to increase economic activity. then you get stuck in a rock and hard place with low interest rates. Because you have to rise them, if low interest rates were so good the fed never would rise them, there is a reason.
>That's debatable, as consumption doesn't normally need to be promoted.
Says who? No economist in the history of the world would agree with you. Promoting consumption is a core function of not only the people making monetary policy, but the government itself.
>isn't consumption v investment; it's spending v saving
You do realize you just posted the most retarded contradiction I've seen on Veeky Forums in the month of November. Consumption = spending. Investment = saving.
Jesus, its like kiddie hour in here.
>"Quite well" is not good enough!
Just shut up already. "Quite well" is the natural state of the economy. The last thing we want is out-of-control growth.
I'm done with you. You're not worth my time.
Enabling consumption may be a core function of the government and the monetary policy makers, but promoting consumption is not. What counts is total spending, whether for investment or consumption. And promoting consumption is usually left to the private sector.
> Consumption = spending. Investment = saving.
I'm surprised to see someone say that on Veeky Forums!
Most business spending is investment spending; the money is spent with the intention of making a profit. Whereas most household spending is consumption spending (for non financial purposes).
Savings are money in the bank, not spent on consumption nor investment.
And if you intend to point out that if they've got money in the bank then the bank will invest their money, I suggest you find out a bit more about how banks work. The amount they invest or loan out does not depend on the amount deposited.
And there is no natural state of the economy. Growth can always be controlled by a combination of fiscal and monetary policy, but it's something we'd all be better off with a lot more of. Right now inflation is very low, so there's no need to keep so many people idle!
>"enabling" consumption =//= promoting consumption
>investment = spending
>lending bears no relation to reserves
Son, you really may be clinically retarded.
I violated my promise not to respond to your because its actually quite important that people realize how wrong you are. If anyone wants to consider themselves an educated person and doesn't realize you're a brain-damaged monkey, they need to some self-reflection. I've done my job, and for my own sanity, you're filtered.
I stand by my comments.
> enabling" consumption =//= promoting consumption
I don't know what you think "promoting" means, but I understand it to be the active encouragement of something rather than merely making it possible. If your dictionary says otherwise, perhaps you'd care to quote it here.
>investment = spending
Technically investment ⊂ spending.
For example, when you buy shares, you no longer have the money; you've spent it on shares.
>lending bears no relation to reserves
That's just a statement of fact, despite many people believing otherwise. As I said further up this thread, the two things that determine whether a bank will lend the money are whether they think they can do so profitably, and the Basel capital requirements. Reserves are irrelevant; banks can always get more if they don't have enough.
For you and anyone else who's fallen for the Fractional Reserve Banking myth, this document from the Bank of England explains the truth:
bankofengland.co.uk
Interest rates need to go up to 5% level at least. Sure, some people who overborrowed will lose their homes but the government can step in and provide them with social housing. And I can live off the interest on my hardly-earned cash without having to invest in risky shit like the stock markets.
You do realize that if you get your wish and rate go up to 5%, your costs of living, food, rent, etc. are all going up too?
You'll never live off savings account interest, ever. Never.
Also, you Millennials needs to move past the "risky markets" meme. You're the worst saving generation in over a hundred years. That's going to catch up with you sooner rather than later.
>your costs of living, food, rent, etc. are all going up too?
Prove it
>Prove it
Seriously? Interest rates and inflation have always been correlated, and always will be. This is Econ 101, kid.
I guess you aren't american
5% looks fine to me. Also inflation depends on what they include as inflationary.
If your income and your expense go up 5%, then you're stuck at square one.
f your income and your expense go up 10%, then you're stuck at square one.
If your income and your expense go up 0%, then you're stuck at square one.
The percentage doesn't matter. Please educate yourself.
Well obviously you're as dense as a slab of concrete so it's no use trying to get you out of all your pretty little indices. Shame. It would have been interesting to see people really talk inflation.
>indices
Interesting. I haven't discussed my holdings or index investing even once in this thread.
I guess you're just a massive faggot.
You haven't discussed inflation either
Um, I pretty much rekt your shit in . It's clear you don't know anything. So what's to discuss?
well google 101 tells me that energy prices and food prices are no longer used to calculate inflation. it also tells me that house prices are used in terms of their rental value rather than their actual market value so basically the graph you showed me is just a fantasy football chart and not reprsentative of the real inflation I'm likely to be up against at all
>are no longer used to calculate inflatio
There's more than one inflation metric. Your Google search was poorly executed, retard.
so which part of that which makes up inflation with interest rates at 5% is the one that is gonna suck all the wealth out of me?
>Veeky Forums is an English language message board
So you haven't got an answer. Maybe when you get to economics 102.
No more (You)s for you, son. Hope you enjoyed the playtime, but your Mommy needs the computer now.
enjoy your phytoplankton
>caring about the economy when ww3 is about to start
ok
I don't care about the economy. I'm trying to envision the best economic conditions for me to sit on my butt doing nothing all day but without being poorer at the end of the year.