Paradoxical Deflation coming?

[zdreg]

Quote from piezoe:

maybe they are not connected, but from my vantage point interest rates look pretty damn low. Are you suggesting had the Fed not done any QE that interest rates would have been this low from lack of demand for credit. If so I might be forced to agree (I hate that.) because we would likely be in a depression now. On the other hand what banks would have had any money to loan, had there been no QE and buying of or loaning against bad bank assets by the Fed? Well, Bank of Hawaii maybe.

it is always same nonsense from the left that governments can repeal business and economic cycles.when depressions come its purpose to rid the economy or markets of its excesses and to prepare for the next up cycle.governments, in order to get reelected t kick the can down the road the longer you kick the can the greater the bubble. when the bubble finally busts the greater the crash. of course, to fool the masses the gov't will create inflation. we will end up in an inflationary depressionwith a near worthless currency.

thank you lefties and crony(bailout) capitalists for ruining a great country.

 

[Swan Noir]

The point was to call attention to the fact that these type of general statements:

"the Fed has never, by their own admission, been able to increase credit if the demand for it isn't there."

are simply nonsense. I'm not a proponent of lower rates but to suggest that rate decreases have not at times caused people to increase their propensity to borrow is simply untrue. All other things being equal lower rates create additional demand at the margin and result in credit expansion. These blanket statements that are asserted here are simply nonsense. And there seems to be a belief that because they are asserted they are true.

Price matters.

 

[zdreg]

Quote from Swan Noir:

The point was to call attention to the fact that these type of general statements:

"the Fed has never, by their own admission, been able to increase credit if the demand for it isn't there."

are simply nonsense. I'm not a proponent of lower rates but to suggest that rate decreases have not at times caused people to increase their propensity to borrow is simply untrue. All other things being equal lower rates create additional demand at the margin and result in credit expansion. These blanket statements that are asserted here are simply nonsense. And there seems to be a belief that because they are asserted they are true.

Price matters.

repeat a lie often enough the masses will believe it. it worked in germany in the 30's and under juan peron in argentina etc.

 

[sledgeyum]

Low rates are surely keeping home prices up.

Else they would be lower by now, and we would be out of this mess.

Is it possible to go back to 7-10% home loan rates and higher prices?

That's what worries me. Supply might dry up, people will wait for higher prices to sell, and they'll be getting interest in the bank..

Quote from Swan Noir:

The point was to call attention to the fact that these type of general statements:

"the Fed has never, by their own admission, been able to increase credit if the demand for it isn't there."

are simply nonsense. I'm not a proponent of lower rates but to suggest that rate decreases have not at times caused people to increase their propensity to borrow is simply untrue. All other things being equal lower rates create additional demand at the margin and result in credit expansion. These blanket statements that are asserted here are simply nonsense. And there seems to be a belief that because they are asserted they are true.

Price matters.

 

[Ed Breen]

Swan, you missed the point of what I wrote here and you are guilty of the kind of generalization that you complain of. Your statement about a1% interest rate creating more demand than a 10% rate is hyperbole, and as I said, it has nothing to do with the current situation where rate on the 5 year treasury today is .62% and the rate on 10 year treasury is 1.47%. If the Fed has announced more QE yesterday instead of 'Twist' the rates would be higher, but in any case, do you really mean to suggest that the overnight drop in the 10yr from 1.64 to 1.47% is creating incentive for risk taking? It seems to me that the opposite is the case.

The part of my earlier commentary that you missed is my assertion that in the context of contracting private credit that interest rate reduction and increase in the base money supply on the Fed balance sheet has no transmission mechanism to effect the general price indexes. Seth Carpenters paper from the Fed that I linked provides strong evidence for that assertion.

I didn't say that it never would have an effect. Where credit is already expanding, where there is an existing demand for credit, then a reduction in interest rates will have an effect. The larger point was that existing and expected fiscal policy defines credit demand foring forward. Where credit demand has collapsed becasue the fiscal expectiations and uncertainties argue against risk taking, the reduction in the cost of risk cannot overcome the much larger uncertainty about being able to achieve and possess a material profit. The risk is just too high to mitigated by a .25 or even a .5% interest rate incentive. What interest rated discount does a risk taker need to compensate a change in tax on capital gains from 15% to 45% over the life of the contemplated investment? When 10 year interest rates are already less than 2%, is there any reduction that can change the entrepreneural risk analysis?

 

[Ed Breen]

Quote from piezoe:

maybe they are not connected, but from my vantage point interest rates look pretty damn low. Are you suggesting had the Fed not done any QE that interest rates would have been this low from lack of demand for credit. If so I might be forced to agree (I hate that.) because we would likely be in a depression now. On the other hand what banks would have had any money to loan, had there been no QE and buying of or loaning against bad bank assets by the Fed? Well, Bank of Hawaii maybe.

My clear meaning was that Fed QE action did not lower interest rates. If you just look at what happened you will see that interest rates rose and did not decline during Fed announcement and operation of QE; they went down when QE ended. I did not say why they went down; that was not the point of my comment and I didn't think I needed to.

When I suggest that there is a 'lack of demand for credit' I am referring to private credit. Obviously there is ample supply and demand for U.S. public credit. I would not ever expect interest rates to decline due to a lack of demand for public credit (we are talking about public debt yeilds, the 10 year Treasury), in fact I would expect the opposite. German Bunds are low becuase of a demand for the Bund; Spanish Bonds are high becuase of a lack of demand for Spanish Bonds.

You can impute from what I wrote that if the Fed did not engage in QE that equities would be lower. That in fact is what has happened as QE actions expire; money flows out of equities and into Treasuries...demand for Treasuries goes up as QE expires; and interest rates go down.

Clearly some banks would have failed without Fed assistence back in 2008, not all banks, and there would have been a worse world financial crises if liquidity had not been added at that time. However, here and now we are talking about QE policy actions in 2010, 2011 and 2012...when liquidity is not at issue in the U.S.

 

[trefoil]

Quote from piezoe:

Perhaps a factor. Because of the very concern you mention, Truman and his advisers decided not to completely demobilize following the War, but instead to continue to maintain a fairly large standing army, according to Patrick Moynihan and Richard Powers. An exaggerated communist threat provided a convenient excuse for doing so; thus the cold war took root and was nurtured by both sides.

Consequently, the slack you speak of may not have been as great as you suppose.

Currently we should have lots of slack, as real unemployment is probably closer to 20% than the governments 8% figure. But we have headline inflation. Demand down, but inflation still.

There was remobilization as a result of the Korean war. That was AFTER, well after, the demobilization that came about as a result of WWII.
After Korea, there was never again a mass demobilization, because the alleged lesson of Korea was that if we demobilized, it was a sore temptation to our Red enemies.
However, in the immediate half decade following WWII, there was in fact an almost complete demobilization. Mass unemployment didn't result, as the US economy actually managed to absorb those no longer marching millions.
Neither did inflation, of course.
There was a spike in strikes though. I've never bothered to research why, but it's an interesting little thing to note.

 

[trefoil]

Quote from Swan Noir:

The point was ...All other things being equal lower rates create additional demand at the margin and result in credit expansion.

The point I was making - I knew if I sat here long enough you'd make it for me - all other things are NEVER equal, except in theory.
In real life, well, reality matters. That includes, but is not exclusive to, price.
Yes price matters when it comes to credit, BUT ONLY TO A SOLVENT CUSTOMER, like myself for instance.
But if you're insolvent because your business went tits up, or because you lost your job, price doesn't matter at all.

 

[Swan Noir]

It is always solvent customers that take down the money in bad times. And part of what induces them to do that is the rate. I ran a business in Switzerland in the late 70's and early eighties. Interest rates went negative in the local currency and, as a foreign controlled entity we were debited 2% on an annualized basis for demand deposits by our banks. The rate mattered and we figured out real fast how to run our business with lower cash balances.

BTW ... I love the in real life reality matters argument but all things are never equal ... lol. The phrase has an accepted meaning that people have used for centuries to allow real debate to happen. This one is now not worth the candle.

Quote from trefoil:

The point I was making - I knew if I sat here long enough you'd make it for me - all other things are NEVER equal, except in theory.
In real life, well, reality matters. That includes, but is not exclusive to, price.
Yes price matters when it comes to credit, BUT ONLY TO A SOLVENT CUSTOMER, like myself for instance.
But if you're insolvent because your business went tits up, or because you lost your job, price doesn't matter at all.

 

[Swan Noir]

Does anyone believe capital gains rates will from from 15% to 45%? I certainly do not.

Quote from Ed Breen:

What interest rated discount does a risk taker need to compensate a change in tax on capital gains from 15% to 45% over the life of the contemplated investment? [/B]