Money for nothing: a new era of zero interest rates?
November 12, 2008 3:27 AM Subscribe
The Fed cut 100 bps. BOE cut 150 bps. ECB cut 50 bps. India, Vietnam, The Czech Republic, Switzerland, Denmark, South Korea and other nations have all cut interest rates in recent weeks, with many Central Banks cutting more than once. The G20 is now discussing the possibility of further, coordinated interest rate cuts.
As interest rates globally plummet, we are observing what some analysts are calling "The Race to Zero".
Today almost every nation in both the developed and developing worlds is deeply in the territory of negative real interest rates. In other words, savings kept dormant in the bank loses, rather than gains, value. As the long anticipated great unwinding continues Central Bankers seem to be hoping that low interest rates will force consumption, pushing economies forward at the same time monetary policy pulls.
Given this backdrop, a natural question would be how low can interest rates go? The answer may lie in an unpublished Federal Reserve research paper, "Monetary Policy when the Nominal Short-Term Interest Rate is Zero.” (Clouse, J., et al, 2000) [.pdf]
Bonus street cred: Two of the authors are architects of some of the unconventional mechanisms currently deployed by The Fed to fight this crisis (Clouse, J., Small, D., 2004) [.pdf]. No time for lengthy pdfs, no problem! The New York Fed published a single page, very accessible summary [.pdf] of unconventional tools currently in use.
Full citation of research papers cited:
Clouse, J., Henderson, D., Orphanides, A., Small, D., Tinsley, P., 2000, "Monetary Policy when the Nominal Short-Term Interest Rate is Zero”, unpublished, Federal Reserve Board, Finance and Economics Discussion Series, 2000-51 FEDS Papers, Board of Governors of the Federal Reserve System
Clouse, J., Small, D., 2004, "The Scope of Monetary Policy Actions Authorised Under The Federal Reserve Act", Federal Reserve Board, Finance and Economics Discussion Series, 2004 FEDS Papers, Board of Governors of the Federal Reserve System
Today almost every nation in both the developed and developing worlds is deeply in the territory of negative real interest rates. In other words, savings kept dormant in the bank loses, rather than gains, value. As the long anticipated great unwinding continues Central Bankers seem to be hoping that low interest rates will force consumption, pushing economies forward at the same time monetary policy pulls.
Given this backdrop, a natural question would be how low can interest rates go? The answer may lie in an unpublished Federal Reserve research paper, "Monetary Policy when the Nominal Short-Term Interest Rate is Zero.” (Clouse, J., et al, 2000) [.pdf]
Bonus street cred: Two of the authors are architects of some of the unconventional mechanisms currently deployed by The Fed to fight this crisis (Clouse, J., Small, D., 2004) [.pdf]. No time for lengthy pdfs, no problem! The New York Fed published a single page, very accessible summary [.pdf] of unconventional tools currently in use.
Full citation of research papers cited:
Clouse, J., Henderson, D., Orphanides, A., Small, D., Tinsley, P., 2000, "Monetary Policy when the Nominal Short-Term Interest Rate is Zero”, unpublished, Federal Reserve Board, Finance and Economics Discussion Series, 2000-51 FEDS Papers, Board of Governors of the Federal Reserve System
Clouse, J., Small, D., 2004, "The Scope of Monetary Policy Actions Authorised Under The Federal Reserve Act", Federal Reserve Board, Finance and Economics Discussion Series, 2004 FEDS Papers, Board of Governors of the Federal Reserve System
And yet credit card is interest is at what? 15 to 18%? My gas bills are still adjusted to the prices set when oil was at its peak price.
I'll spend more when I finally have more. At the rate the world governments are moving cash into my pocket that will be oh two thousand and never. I'd like to do my bit and buy a plasma TV, a PVR, some new clothes and shoes and maybe a nice bike.
posted by srboisvert at 3:55 AM on November 12, 2008 [1 favorite]
I'll spend more when I finally have more. At the rate the world governments are moving cash into my pocket that will be oh two thousand and never. I'd like to do my bit and buy a plasma TV, a PVR, some new clothes and shoes and maybe a nice bike.
posted by srboisvert at 3:55 AM on November 12, 2008 [1 favorite]
While obviously it would be nice if the (exceedingly) modest sums I have saved were to gain some money through compounding interest, in the short term I'm not all that bothered if interest rates drop precipitously, certainly not to the point where I'm going to withdraw it all and spend it on big screen TVs.
I save for specific goals in life (my hobbies, holidays, emergency fund, future return to education, retirement). At this point (I'm 27), the interest is a very small bonus.
If we're still stuck on close-to-zero interest in five or ten years, I might get worried. Until then, I'll go on saving for specific things and socking away money as before. Even if the interest rate is zero, my savings won't depreciate in principal value, unlike the consumer goods I could potentially buy instead.
posted by Happy Dave at 3:59 AM on November 12, 2008
I save for specific goals in life (my hobbies, holidays, emergency fund, future return to education, retirement). At this point (I'm 27), the interest is a very small bonus.
If we're still stuck on close-to-zero interest in five or ten years, I might get worried. Until then, I'll go on saving for specific things and socking away money as before. Even if the interest rate is zero, my savings won't depreciate in principal value, unlike the consumer goods I could potentially buy instead.
posted by Happy Dave at 3:59 AM on November 12, 2008
"Even if the interest rate is zero, my savings won't depreciate in principal value"
Yes they will, this is exactly what inflation is. Did you look at the unofficial M3 figures recently?
posted by jaduncan at 4:07 AM on November 12, 2008
Yes they will, this is exactly what inflation is. Did you look at the unofficial M3 figures recently?
posted by jaduncan at 4:07 AM on November 12, 2008
Even if the interest rate is zero, my savings won't depreciate in principal value, unlike the consumer goods I could potentially buy instead.
...presuming that prices remain static.
posted by pompomtom at 4:08 AM on November 12, 2008
...presuming that prices remain static.
posted by pompomtom at 4:08 AM on November 12, 2008
In other words, savings kept dormant in the bank loses, rather than gains, value ... Central Bankers seem to be hoping that low interest rates will force consumption
So if I don't take my money out of the Bailey Building & Loan Association and spend it (or hide it in my mattress), I will lose it?
posted by pracowity at 4:08 AM on November 12, 2008
So if I don't take my money out of the Bailey Building & Loan Association and spend it (or hide it in my mattress), I will lose it?
posted by pracowity at 4:08 AM on November 12, 2008
Yes they will, this is exactly what inflation is. Did you look at the unofficial M3 figures recently?
Scuse my ignorance, but I thought we were broadly in a period of deflation rather than inflation. If the interest rate is at zero or close to it, the value of the money in that account is the same whether it's in my bank or under my mattress, no?
I'm glad I got out of high-interest debt recently, so I don't have that to worry about as well.
posted by Happy Dave at 4:12 AM on November 12, 2008
This has been puzzling me for a while now. Interest rates have been falling, but the property and stock markets have failed to respond. The central banks are furiously pulling all the levers they have in front of them, but the economy seems to have disconnected from the control mechanisms I learned about in Econ 101.
I finally saw an explanation that makes sense in this presentation from Nomura (PDF) about the Japanese experience. They argue that we're not in a "textbook economy" anymore, because consumers and companies are concentrating on debt reduction rather than profit maximization. Low or even negative interest rates create investment opportunities, but no one is going to take advantage of them until they've paid down their excess debt. Tax cuts have the same problem -- people will just save the money or apply it to their credit card debt. So the only thing left to do to stimulate demand is ramp up government spending, which is going to face some heavy political opposition from the Republicans in the US and the German-minded ECB in Europe.
Another source of confusion for me has been the money supply. From my layman's viewpoint, the layers of CDSs and CDOs look like an uncontrolled mechanism for increasing the money supply. So how can policymakers know whether the money supply is increasing or decreasing, and by how much?
Practically, that question comes down to trying to figure out if we're headed for deflation or inflation. A year ago, I would have bet on a dollar collapse and hyperinflation, but today everything points to a long round of deflation. That should mean that cash is the place to be, but negative interest rates don't make that very attractive. If stocks, property, and now fixed income are all headed for stagnation, what other asset classes are there? Who does well in a world of negative interest rates?
posted by fuzz at 4:20 AM on November 12, 2008 [6 favorites]
I finally saw an explanation that makes sense in this presentation from Nomura (PDF) about the Japanese experience. They argue that we're not in a "textbook economy" anymore, because consumers and companies are concentrating on debt reduction rather than profit maximization. Low or even negative interest rates create investment opportunities, but no one is going to take advantage of them until they've paid down their excess debt. Tax cuts have the same problem -- people will just save the money or apply it to their credit card debt. So the only thing left to do to stimulate demand is ramp up government spending, which is going to face some heavy political opposition from the Republicans in the US and the German-minded ECB in Europe.
Another source of confusion for me has been the money supply. From my layman's viewpoint, the layers of CDSs and CDOs look like an uncontrolled mechanism for increasing the money supply. So how can policymakers know whether the money supply is increasing or decreasing, and by how much?
Practically, that question comes down to trying to figure out if we're headed for deflation or inflation. A year ago, I would have bet on a dollar collapse and hyperinflation, but today everything points to a long round of deflation. That should mean that cash is the place to be, but negative interest rates don't make that very attractive. If stocks, property, and now fixed income are all headed for stagnation, what other asset classes are there? Who does well in a world of negative interest rates?
posted by fuzz at 4:20 AM on November 12, 2008 [6 favorites]
So, does this mean that now is a good time to borrow for things like education? That might be a plus in the long term.
posted by miss tea at 4:21 AM on November 12, 2008
posted by miss tea at 4:21 AM on November 12, 2008
Interest rate <> Inflation rate.
Sure, I get that, but what I'm saying is that:
1. Money in a bank account with zero interest is exactly the same as
2. Money under my mattress
in that they will both buy the same quantity of commodity X, whose price is influenced by the rate of
3. Inflation/Deflation
Or did I just fail microeconomics 101?
Anyhoo, my broader point is that I'll keep saving, spread my money around between different banks to minimise the consequences of a bank failure, and trust in the Financial Services Compensation Scheme (roughly, the UK FDIC, I believe) to safeguard things.
One thing I know for sure is that a big screen telly won't keep me warm and well fed in my old age, but pension payments, savings and investments very well may do.
posted by Happy Dave at 4:23 AM on November 12, 2008
Sure, I get that, but what I'm saying is that:
1. Money in a bank account with zero interest is exactly the same as
2. Money under my mattress
in that they will both buy the same quantity of commodity X, whose price is influenced by the rate of
3. Inflation/Deflation
Or did I just fail microeconomics 101?
Anyhoo, my broader point is that I'll keep saving, spread my money around between different banks to minimise the consequences of a bank failure, and trust in the Financial Services Compensation Scheme (roughly, the UK FDIC, I believe) to safeguard things.
One thing I know for sure is that a big screen telly won't keep me warm and well fed in my old age, but pension payments, savings and investments very well may do.
posted by Happy Dave at 4:23 AM on November 12, 2008
"Scuse my ignorance, but I thought we were broadly in a period of deflation rather than inflation. If the interest rate is at zero or close to it, the value of the money in that account is the same whether it's in my bank or under my mattress, no?
I'm glad I got out of high-interest debt recently, so I don't have that to worry about as well."
It's currently 4.9% on an annual basis (CPI, Sep 08), so it's something to consider. But yes, being out of high interest debt is always good. I tip my hat to your good planning, my good sir.
posted by jaduncan at 4:29 AM on November 12, 2008
I'm glad I got out of high-interest debt recently, so I don't have that to worry about as well."
It's currently 4.9% on an annual basis (CPI, Sep 08), so it's something to consider. But yes, being out of high interest debt is always good. I tip my hat to your good planning, my good sir.
posted by jaduncan at 4:29 AM on November 12, 2008
Ah, you're in the UK (like me)...inflation is 5.2% as of September.
posted by jaduncan at 4:31 AM on November 12, 2008
posted by jaduncan at 4:31 AM on November 12, 2008
It's currently 4.9% on an annual basis (CPI, Sep 08), so it's something to consider. But yes, being out of high interest debt is always good. I tip my hat to your good planning, my good sir.
No real planning about it, just a horrifying moment of calculation with a spreadsheet, a lot of time spent on personal finance blogs (hat-tip to Metafilter's own JD Roth for one) and a rough semblance of a plan, helped out by a legacy from my grandmother who essentially let me press 'reset' on ten years of shitty financial decisions.
Getting out of debt felt great. Spending my grandmother's legacy to do so felt awful. The combination of those two feelings at a relatively young age has hopefully set me on the right path, and, it would seem, at exactly the right time.
posted by Happy Dave at 4:33 AM on November 12, 2008
No real planning about it, just a horrifying moment of calculation with a spreadsheet, a lot of time spent on personal finance blogs (hat-tip to Metafilter's own JD Roth for one) and a rough semblance of a plan, helped out by a legacy from my grandmother who essentially let me press 'reset' on ten years of shitty financial decisions.
Getting out of debt felt great. Spending my grandmother's legacy to do so felt awful. The combination of those two feelings at a relatively young age has hopefully set me on the right path, and, it would seem, at exactly the right time.
posted by Happy Dave at 4:33 AM on November 12, 2008
Inflation in South Africa is about 13%, well out of bounds of the govt's stated 3%-6% target band. We've also just had our sovereign credit rating cut by S&P so I don't think we'll see interest rate drops here unless the government really wants to destroy the Rand further.
posted by PenDevil at 4:36 AM on November 12, 2008
posted by PenDevil at 4:36 AM on November 12, 2008
gman thanks for bringing Japan up; I'd wanted to include it in the FPP but struggled keep things concise.
Yeh, Japan's problems are interesting.
For roughly a decade the Yen was used as a funding currency for The Carry Trade. While nobody knows precisely the size of the structured positions funded by cheap Yen, some analysts looking at CME Yen futures put the total at close to one trillion US Dollars.
Now that The Great Unwinding has started (more precisely there are several unwindings going on simultaneously, but lets focus on currencies here) demand for Yen is spiking as these cheap loans must be paid back. The Yen has already appreciated 14% YTD against The Dollar, some 34% against The Euro with further increases inevitable.
At the same time their currency is strengthening, the Japanese economy is slowing, drastically. With interest rates at 30 bps they clearly don't have far to go before the zero barrier is hit. Still as they continue to slash interest rates to stimulate their economy, Yen strengthening makes Japanese exports more expensive even as global economic activity and hence demand plummets.
To say this is a condundrum is to understate the problem faced by BOJ. The closer Japanese rates get to zero, the less control they have.
So what next for Japan? It seems like there are three schools of thought on the topic. First of all, conventional economics, the tried and true. Not sure if it worked for Japan before, but that is a possibility. Second would be unconventional tactics such as those architected by Clouse, et al and currently deployed by The Fed (indeed, by much of the G7, ex-Japan it would seem). Ok, that's a possibility.
But maybe Japan need something more extreme. Some ideas I've seen kicked about in academic papers include
For those discussing the inflation / interest rate payback issue - October 2008 US CPI is running at about 4.9%, with US benchmark interest rates at least 80 bps lower. Negative real interest rates, by definition.
A simple relationship between nominal or stated interest rates and real, or inflation adjusted interest rates can be expressed as
BOE has just announced they may cut rates again if necessary to stimulate the economy.
Another curiosity on the Global Economic Scene - Russia. Largely due to the decline in oil prices the Ruble is collapsing against other G8 currencies and the CDS markets price in an increased risk of a sovereign default.
The Russian Central Bank has widened the Ruble's trading band, allowing it to weaken against other G8 currencies even as foreign currency reserves are being used to prop up parts of the economy.
Ten years ago Russia let the Ruble slide over 70% and inflation hit 84% at one point. Now with oil prices off some 60% YTD, this will be a very compelling story to watch.
posted by Mutant at 4:57 AM on November 12, 2008 [21 favorites]
Yeh, Japan's problems are interesting.
For roughly a decade the Yen was used as a funding currency for The Carry Trade. While nobody knows precisely the size of the structured positions funded by cheap Yen, some analysts looking at CME Yen futures put the total at close to one trillion US Dollars.
Now that The Great Unwinding has started (more precisely there are several unwindings going on simultaneously, but lets focus on currencies here) demand for Yen is spiking as these cheap loans must be paid back. The Yen has already appreciated 14% YTD against The Dollar, some 34% against The Euro with further increases inevitable.
At the same time their currency is strengthening, the Japanese economy is slowing, drastically. With interest rates at 30 bps they clearly don't have far to go before the zero barrier is hit. Still as they continue to slash interest rates to stimulate their economy, Yen strengthening makes Japanese exports more expensive even as global economic activity and hence demand plummets.
To say this is a condundrum is to understate the problem faced by BOJ. The closer Japanese rates get to zero, the less control they have.
So what next for Japan? It seems like there are three schools of thought on the topic. First of all, conventional economics, the tried and true. Not sure if it worked for Japan before, but that is a possibility. Second would be unconventional tactics such as those architected by Clouse, et al and currently deployed by The Fed (indeed, by much of the G7, ex-Japan it would seem). Ok, that's a possibility.
But maybe Japan need something more extreme. Some ideas I've seen kicked about in academic papers include
- Gesell Money, or currency that effectively carries a "sell by" date. Pros - get's the cash in circulation. Cons - Like many, I'm frugal and enjoy the security of having money in the bank.
- Remilitarisation - I've long held the opinion that war is inflationary, peace deflationary. Build a large standing army, engage in R&D, perhaps send some troops to a few hot zones. Pro - lots of arms dealing gets money in circulation, Cons - A standing army is more likely to be used for war than a non existent army.
- Engineer inflation - Krugman previously recommended BOJ print money until a specific inflation target was reached. Pros - again, folks will spend money quickly. As the money supply expands the Yen's ascent should slow. Cons - Japan is a nation of savers who would be squeezed, big time by such tactics.
For those discussing the inflation / interest rate payback issue - October 2008 US CPI is running at about 4.9%, with US benchmark interest rates at least 80 bps lower. Negative real interest rates, by definition.
A simple relationship between nominal or stated interest rates and real, or inflation adjusted interest rates can be expressed as
Real Interest Rate = Nominal Interest Rate - Rate of InflationThis approximation is accurate enough for casual discussion.
BOE has just announced they may cut rates again if necessary to stimulate the economy.
Another curiosity on the Global Economic Scene - Russia. Largely due to the decline in oil prices the Ruble is collapsing against other G8 currencies and the CDS markets price in an increased risk of a sovereign default.
The Russian Central Bank has widened the Ruble's trading band, allowing it to weaken against other G8 currencies even as foreign currency reserves are being used to prop up parts of the economy.
Ten years ago Russia let the Ruble slide over 70% and inflation hit 84% at one point. Now with oil prices off some 60% YTD, this will be a very compelling story to watch.
posted by Mutant at 4:57 AM on November 12, 2008 [21 favorites]
Jesus Christ, you are a wealth of information, Mutant.
posted by gman at 5:25 AM on November 12, 2008
posted by gman at 5:25 AM on November 12, 2008
In fact, a wealth of information on wealth information.
posted by gman at 5:27 AM on November 12, 2008 [9 favorites]
posted by gman at 5:27 AM on November 12, 2008 [9 favorites]
Mutant, you got the crazy knowledge. (dap)
Any thoughts on the upcoming GM bailout? That might be more of an entrepreneurial question than an economic one. But it seems like GM going belly-up might have huge repercussions in our economy on both an employment level (massive layoffs) and on a psychological level (holy shit, GM went under!). So with that in mind it would be good to bail them out, while at the same time GM will presumably remain a shitty company that will go belly-up at a later date.
I've heard some good ideas on how to move that money around that wouldn't just be throwing good money after bad, like throwing some cash at companies like Tesla, or having the government purchase huge fleets of 60mpg cars (if GM could manage to make some), or just letting GM implode and rebuilding the company from scrap with new players.
Anyway, great post, Mutant. Your knowledge is for real.
posted by billysumday at 5:39 AM on November 12, 2008
Any thoughts on the upcoming GM bailout? That might be more of an entrepreneurial question than an economic one. But it seems like GM going belly-up might have huge repercussions in our economy on both an employment level (massive layoffs) and on a psychological level (holy shit, GM went under!). So with that in mind it would be good to bail them out, while at the same time GM will presumably remain a shitty company that will go belly-up at a later date.
I've heard some good ideas on how to move that money around that wouldn't just be throwing good money after bad, like throwing some cash at companies like Tesla, or having the government purchase huge fleets of 60mpg cars (if GM could manage to make some), or just letting GM implode and rebuilding the company from scrap with new players.
Anyway, great post, Mutant. Your knowledge is for real.
posted by billysumday at 5:39 AM on November 12, 2008
Teacher, I've got one... Is it impossible for a citizen of country 'a' to borrow off country 'b'? i.e. someone from say Iceland to borrow money from Japan?
posted by gman at 5:52 AM on November 12, 2008
posted by gman at 5:52 AM on November 12, 2008
Society's all "every man for himself" to the point of trashing out McMansions and people living in cardboard boxes until that "man" has a net worth of a few billion. And then suddenly it's not Someone Else's Problem anymore, it's Everyone's Problem and They Must Be Saved.
Fuck y'all socialists. Let them fail. Let them fucking fail.
posted by seanmpuckett at 5:56 AM on November 12, 2008 [2 favorites]
Fuck y'all socialists. Let them fail. Let them fucking fail.
posted by seanmpuckett at 5:56 AM on November 12, 2008 [2 favorites]
seanmpuckett - Adding 'Yo!' at the end of each of your sentences makes your comment much more amusing.
posted by gman at 5:59 AM on November 12, 2008
posted by gman at 5:59 AM on November 12, 2008
Mutant, you rule. Of course, you are now expected to write a book on all of this so we can buy it/promote it to our friends, so being good has its burdens. ;)
You know what really troubles me in all of this? Gold. Given everything that's going on, gold should be astronomically high. To me, the fact that it isn't argues for deflation and that the unwinding of the carry trade is already having widespread impact.
And as someone who supported the financial bailout. I am completely against bailing out GM and Ford, unless it involves firing absolutely every single person from the Chairman and the CEO down to the middle management level. At that point, the President should call some silicon valley visionary (paging Steve Jobs) and ask them to take up the challenge of turning the auto industry into a high tech industry.
Because regardless of whether GM and Ford survive now, when this recession/mess is over, those firms will never survive the mass importation of Chinese cars that is 5-7 years down the road.
posted by Pastabagel at 6:01 AM on November 12, 2008 [4 favorites]
You know what really troubles me in all of this? Gold. Given everything that's going on, gold should be astronomically high. To me, the fact that it isn't argues for deflation and that the unwinding of the carry trade is already having widespread impact.
And as someone who supported the financial bailout. I am completely against bailing out GM and Ford, unless it involves firing absolutely every single person from the Chairman and the CEO down to the middle management level. At that point, the President should call some silicon valley visionary (paging Steve Jobs) and ask them to take up the challenge of turning the auto industry into a high tech industry.
Because regardless of whether GM and Ford survive now, when this recession/mess is over, those firms will never survive the mass importation of Chinese cars that is 5-7 years down the road.
posted by Pastabagel at 6:01 AM on November 12, 2008 [4 favorites]
Is it impossible for a citizen of country 'a' to borrow off country 'b'? i.e. someone from say Iceland to borrow money from Japan?
No it's not impossible. In fact there's a rather large crisis in Iceland at the moment because the citizens did exactly that (borrowing in Euros at 4.5% instead of Icelandic krona at 12.5%) and now their currency has crashed and the loans are twice or three times as much as before.
Whether a foreign bank is going to lend you money is another story entirely and right now no bank is going to be touching anything Icelandic with a 40 foot barge pole.
That's pretty much their entire foreign currency crisis in a nutshell. Iceland has nowhere near enough exports in terms of their economy size and they depend on imports for almost everything. Their current account deficit is probably over a billion US dollars by now and there's only 320,000 people in the country.
At this point it appears that the only way they're going to get hard currency flowing into the country at this point is either through begging or by pulling some decent exports out of their collective asses.
posted by Talez at 6:03 AM on November 12, 2008 [1 favorite]
No it's not impossible. In fact there's a rather large crisis in Iceland at the moment because the citizens did exactly that (borrowing in Euros at 4.5% instead of Icelandic krona at 12.5%) and now their currency has crashed and the loans are twice or three times as much as before.
Whether a foreign bank is going to lend you money is another story entirely and right now no bank is going to be touching anything Icelandic with a 40 foot barge pole.
That's pretty much their entire foreign currency crisis in a nutshell. Iceland has nowhere near enough exports in terms of their economy size and they depend on imports for almost everything. Their current account deficit is probably over a billion US dollars by now and there's only 320,000 people in the country.
At this point it appears that the only way they're going to get hard currency flowing into the country at this point is either through begging or by pulling some decent exports out of their collective asses.
posted by Talez at 6:03 AM on November 12, 2008 [1 favorite]
Talez - K, but can someone from country 'a' take a house mortgage from a bank in country 'b'?
posted by gman at 6:06 AM on November 12, 2008
posted by gman at 6:06 AM on November 12, 2008
Just what we need. More unconventional financial tools.
posted by nax at 6:12 AM on November 12, 2008
posted by nax at 6:12 AM on November 12, 2008
Just what we need. More unconventional financial tools.
As if we don't already have enough.
posted by gman at 6:17 AM on November 12, 2008
As if we don't already have enough.
posted by gman at 6:17 AM on November 12, 2008
K, but can someone from country 'a' take a house mortgage from a bank in country 'b'?
Yes. You can borrow from anyone willing to lend you money. There's nothing stopping you. People in Iceland were already doing it to get around the stupidly high interest rates there.
You just gotta keep in mind you'll be exposing yourself to risks in currency fluctuations.
posted by Talez at 6:25 AM on November 12, 2008
Yes. You can borrow from anyone willing to lend you money. There's nothing stopping you. People in Iceland were already doing it to get around the stupidly high interest rates there.
You just gotta keep in mind you'll be exposing yourself to risks in currency fluctuations.
posted by Talez at 6:25 AM on November 12, 2008
Teacher, I've got one... Is it impossible for a citizen of country 'a' to borrow off country 'b'? i.e. someone from say Iceland to borrow money from Japan?
posted by gman at 8:52 AM on November 12
Citizen A can do this if he converts his currency A to currency B first, then he can buy country B bonds, stocks, whatever. This is the essence of the carry trade, where you borrow money in yen at a low Japanese interest rate, convert it to dollars, lend it to the US govt (i.e. you buy a bond) at a higher US rate. As long as the yen doesn't appreciate by an amount equal to the difference between the high US interest rate and the low Japanese interest rate, the trade works. Except there is no free lunch.
There are a number of models for determining real exchange rates (as opposed to the nominal exchange rates posted inthe paper) but at the heart of all of them is that you have to take into account relative interest rates, inflation rates, balance of trade, etc. between the two countries. In theory, all those things should balance out.
In practice, they don't, and it enables all kinds of wackiness, in Iceland, Japan, and elsewhere. But things eventually revert to the mean, find equilibrium, restore the balance, whatever phrase you want, but nothing good and easy lasts forever.
Think of it this way. Go to the electronics store and look at how many product come from Japan. Go to Japan and try to find American products. It would make sense given the reality that they make and sell stuff we want and we don't that the Japanese Yen would appreciate against the dollar, wouldn't it? But it didn't. Japan loved a low yen because it kept us buying their crap. We loved a high dollar because it meant that our lazy American asses could afford TV's that come out of multibillion $ asian fabs.
Now that we stopped buying everything, including their stuff, what does it benefit them to maintain a low yen? Japan is a nation of savers, and this is going to make the Japanese people much wealthier.
It will, of course, make you poorer, but you already knew that was coming, right?
posted by Pastabagel at 6:26 AM on November 12, 2008 [3 favorites]
posted by gman at 8:52 AM on November 12
Citizen A can do this if he converts his currency A to currency B first, then he can buy country B bonds, stocks, whatever. This is the essence of the carry trade, where you borrow money in yen at a low Japanese interest rate, convert it to dollars, lend it to the US govt (i.e. you buy a bond) at a higher US rate. As long as the yen doesn't appreciate by an amount equal to the difference between the high US interest rate and the low Japanese interest rate, the trade works. Except there is no free lunch.
There are a number of models for determining real exchange rates (as opposed to the nominal exchange rates posted inthe paper) but at the heart of all of them is that you have to take into account relative interest rates, inflation rates, balance of trade, etc. between the two countries. In theory, all those things should balance out.
In practice, they don't, and it enables all kinds of wackiness, in Iceland, Japan, and elsewhere. But things eventually revert to the mean, find equilibrium, restore the balance, whatever phrase you want, but nothing good and easy lasts forever.
Think of it this way. Go to the electronics store and look at how many product come from Japan. Go to Japan and try to find American products. It would make sense given the reality that they make and sell stuff we want and we don't that the Japanese Yen would appreciate against the dollar, wouldn't it? But it didn't. Japan loved a low yen because it kept us buying their crap. We loved a high dollar because it meant that our lazy American asses could afford TV's that come out of multibillion $ asian fabs.
Now that we stopped buying everything, including their stuff, what does it benefit them to maintain a low yen? Japan is a nation of savers, and this is going to make the Japanese people much wealthier.
It will, of course, make you poorer, but you already knew that was coming, right?
posted by Pastabagel at 6:26 AM on November 12, 2008 [3 favorites]
You know what really troubles me in all of this? Gold. Given everything that's going on, gold should be astronomically high.
Gold is a commodity and commodities crashed in late October (for logical reasons I forget, but talked about in the Soros FPP a few days back).
posted by stbalbach at 6:29 AM on November 12, 2008
Gold is a commodity and commodities crashed in late October (for logical reasons I forget, but talked about in the Soros FPP a few days back).
posted by stbalbach at 6:29 AM on November 12, 2008
And yet credit card is interest is at what? 15 to 18%?
1) The federal fund rate is a target not an absolute thing. Banks don't automatically pay that rate to obtain money.
2) Your credit card is a highly liquid source of funds and you pay for that privilege. If you want to pay 6% on borrowed money then go grab $500,000 over 30 years.
posted by Talez at 6:36 AM on November 12, 2008
1) The federal fund rate is a target not an absolute thing. Banks don't automatically pay that rate to obtain money.
2) Your credit card is a highly liquid source of funds and you pay for that privilege. If you want to pay 6% on borrowed money then go grab $500,000 over 30 years.
posted by Talez at 6:36 AM on November 12, 2008
2) Your credit card is a highly liquid source of funds and you pay for that privilege. If you want to pay 6% on borrowed money then go grab $500,000 over 30 years.
Or a line of credit.
posted by gman at 6:38 AM on November 12, 2008
Or a line of credit.
posted by gman at 6:38 AM on November 12, 2008
Sorry. One more question - if and when we do get to the point of money for nothing, will the chicks be free?
posted by gman at 6:48 AM on November 12, 2008 [12 favorites]
posted by gman at 6:48 AM on November 12, 2008 [12 favorites]
No, but we may find it hard to move these refrigerators. And these microwave ovens, custom kitchen deliveries and colour teevees.
posted by Happy Dave at 6:50 AM on November 12, 2008 [3 favorites]
posted by Happy Dave at 6:50 AM on November 12, 2008 [3 favorites]
wealth could also be created by purchasing assets at above market prices or by extending loans at subsidized interest rates. Because these policies deliberately create budget deficits, they would seem to be more the province of fiscal authorities. (Clouse, J., et al, 2000)
The US Fed and the Treasury seem to be such very good friends lately.
With the Fed now paying interest on bank deposits, there's probably a lower bound on the effective Fed Funds rate somewhere above zero.
It's currently 4.9% on an annual basis (CPI, Sep 08)
I suspect that the CPI understated inflation during the housing boom due to not really counting much of house price appreciation, and that it's now over-estimating inflation for the same reason. Sure, probably not by so much as to make real interest rates positive or anything. Even so, it's next move is pretty certain to be down, in the next few months, despite the massive efforts to get inflation going. After that, it's another story. It will depend how the "real economy" copes with the various other problems still in the background once the immediate crisis is made to go away.
posted by sfenders at 6:58 AM on November 12, 2008
The US Fed and the Treasury seem to be such very good friends lately.
With the Fed now paying interest on bank deposits, there's probably a lower bound on the effective Fed Funds rate somewhere above zero.
It's currently 4.9% on an annual basis (CPI, Sep 08)
I suspect that the CPI understated inflation during the housing boom due to not really counting much of house price appreciation, and that it's now over-estimating inflation for the same reason. Sure, probably not by so much as to make real interest rates positive or anything. Even so, it's next move is pretty certain to be down, in the next few months, despite the massive efforts to get inflation going. After that, it's another story. It will depend how the "real economy" copes with the various other problems still in the background once the immediate crisis is made to go away.
posted by sfenders at 6:58 AM on November 12, 2008
What a depressing exercise: figuring out where to put savings such that they lose the least money.
posted by a robot made out of meat at 7:10 AM on November 12, 2008 [2 favorites]
posted by a robot made out of meat at 7:10 AM on November 12, 2008 [2 favorites]
Russia lifts rates to 12pc to save rouble as crisis deepens.
posted by 445supermag at 7:14 AM on November 12, 2008
posted by 445supermag at 7:14 AM on November 12, 2008
gman: K, but can someone from country 'a' take a house mortgage from a bank in country 'b'?
Absolutely, and this very practice is causing major headaches in Eastern Europe at the moment. Hungarians, Bulgarians and Romanians (amongst others) have been taking out mortgages (and business loans) in Swiss Francs and Euros at a growing rate over the last years in order to escape the higher interest rates in their home countries.
Now their currencies are falling (compared to the Franc and Euro) and many of the debtors are having trouble paying the loans back.
posted by syzygy at 7:16 AM on November 12, 2008
Absolutely, and this very practice is causing major headaches in Eastern Europe at the moment. Hungarians, Bulgarians and Romanians (amongst others) have been taking out mortgages (and business loans) in Swiss Francs and Euros at a growing rate over the last years in order to escape the higher interest rates in their home countries.
Now their currencies are falling (compared to the Franc and Euro) and many of the debtors are having trouble paying the loans back.
posted by syzygy at 7:16 AM on November 12, 2008
and they wonder why the US has a negative savings rate.
posted by Afroblanco at 7:17 AM on November 12, 2008
posted by Afroblanco at 7:17 AM on November 12, 2008
In other news, American Express is granted full bank status just in time to get in line for the bailouts.
I wanna become a bank, too.
posted by Balisong at 7:23 AM on November 12, 2008
I wanna become a bank, too.
posted by Balisong at 7:23 AM on November 12, 2008
Follow-up on the "can a person from country A take out a loan from a bank in country B" question from here:
Eastern Europe is probably one of the hardest hit regions in Europe with respect to the crisis. Countries such as Hungary, Romania, Poland and Ukraine are unique as many citizens have become accustomed to borrowing in foreign currencies such as the euro or the Swiss franc. The central bank of Hungary reported that nearly 90 percent of consumer borrowing is denominated in Swiss francs or euros, as opposed to the Hungarian currency, the forint. The onset of the crisis in Europe has caused banks and companies to sell local currencies to pay for these foreign loans, leading to sharp drops in the value of these currencies.
posted by syzygy at 7:25 AM on November 12, 2008
Eastern Europe is probably one of the hardest hit regions in Europe with respect to the crisis. Countries such as Hungary, Romania, Poland and Ukraine are unique as many citizens have become accustomed to borrowing in foreign currencies such as the euro or the Swiss franc. The central bank of Hungary reported that nearly 90 percent of consumer borrowing is denominated in Swiss francs or euros, as opposed to the Hungarian currency, the forint. The onset of the crisis in Europe has caused banks and companies to sell local currencies to pay for these foreign loans, leading to sharp drops in the value of these currencies.
posted by syzygy at 7:25 AM on November 12, 2008
I wanna become a bank, too.
I wanna become a failed bank, too.
posted by gman at 7:25 AM on November 12, 2008 [1 favorite]
I wanna become a failed bank, too.
posted by gman at 7:25 AM on November 12, 2008 [1 favorite]
You know how the $700 billion dollar bailout was designed to buy troubled mortgage assets? Well, they changed their mind.
I'm sure the new plan will work much better.
posted by diogenes at 7:58 AM on November 12, 2008
I'm sure the new plan will work much better.
posted by diogenes at 7:58 AM on November 12, 2008
stalbach: Gold is a commodity and commodities crashed in late October (for logical reasons I forget, but talked about in the Soros FPP a few days back).
Yes, gold is a commodity. But there is a solid argument that unlike most other commodities, gold is money. (That site has a wealth of information about the economy.)
posted by A dead Quaker at 8:25 AM on November 12, 2008
Yes, gold is a commodity. But there is a solid argument that unlike most other commodities, gold is money. (That site has a wealth of information about the economy.)
posted by A dead Quaker at 8:25 AM on November 12, 2008
More on the "Can a person from country A take out a loan from a bank in country B" questionWhat Happens when Countries Go Bankrupt?
posted by A-Train at 8:53 AM on November 12, 2008
The Hungarians have always been considered shopaholics. Hundreds of thousands bought themselves big cars and went on shopping sprees in the chic boutiques on Váci Utca in Budapest -- all on credit. The real estate market boomed, turning close to 90 percent of Hungarian apartments are privately owned. Most mortgage loans were denominated in euros and Swiss francs. But that practice has taken its toll. As the Hungarian forint plunges in value, mortgage holders are suddenly paying astronomical interest rates. It was primarily this dependency on other countries that has fueled the crisis in Hungary. Ironically, Budapest was once seen as a role model for other countries seeking EU membership. But instead of following in the footsteps of the Czech Republic and Slovakia, and introducing structural reforms after the collapse of communism, the Hungarians kept growing their national debt. A few days before the runoff vote in the 2002 parliamentary election, the conservative government of then Prime Minister Viktor Orban increased pensions by a substantial amount. Orban's successor, Peter Medgyessy, a socialist, introduced a 50 percent salary hike for teachers and healthcare workers.It is not explicit that the loans were from foreign banks, but the effect was the same: they were denominated in foreign currency.
posted by A-Train at 8:53 AM on November 12, 2008
Pastabagel writes "I am completely against bailing out GM and Ford, unless it involves firing absolutely every single person from the Chairman and the CEO down to the middle management level. At that point, the President should call some silicon valley visionary (paging Steve Jobs) and ask them to take up the challenge of turning the auto industry into a high tech industry."
Holy hand grenade that would be the worst thing for the auto industry. Their history is rife with example of outsiders to the industry turning mediocre companies into failures.
posted by Mitheral at 9:02 AM on November 12, 2008
Holy hand grenade that would be the worst thing for the auto industry. Their history is rife with example of outsiders to the industry turning mediocre companies into failures.
posted by Mitheral at 9:02 AM on November 12, 2008
Holy hand grenade that would be the worst thing for the auto industry. Their history is rife with example of outsiders to the industry turning mediocre companies into failures.
posted by Mitheral at 12:02 PM on November 12
The companies have already failed. Have you seen their stock prices lately?
Also, ha ha ha ha ha ha ha ha ha ha ha ha ha ha!
posted by Pastabagel at 9:12 AM on November 12, 2008
posted by Mitheral at 12:02 PM on November 12
The companies have already failed. Have you seen their stock prices lately?
Also, ha ha ha ha ha ha ha ha ha ha ha ha ha ha!
posted by Pastabagel at 9:12 AM on November 12, 2008
miss t: Yes, I think this is a great time to borrow for your education!
Frankly, it's always a good investment - they can't repossess it. In the current market, there's some reasonable chance that when you go to pay it back, it'll be worth a fraction of its original value... or that conversely it'll be so out of your ability to pay that they won't even try to get it back from you.
But if you're going to borrow money to study, I'd suggest something practical - that means no philosophy degrees, no MBAs (there will be a zillion experienced MBAs pounding the pavement in about six months). If you have any head for numbers at all, almost anything involving numbers seems to be good in the long run, you simply can't fake it and they always need people to make their sums come out right.
(Actually, you should study what you want to study. You could learn an awful lot from a philosophy degree. But really, skip the MBA...)
posted by lupus_yonderboy at 9:18 AM on November 12, 2008
Frankly, it's always a good investment - they can't repossess it. In the current market, there's some reasonable chance that when you go to pay it back, it'll be worth a fraction of its original value... or that conversely it'll be so out of your ability to pay that they won't even try to get it back from you.
But if you're going to borrow money to study, I'd suggest something practical - that means no philosophy degrees, no MBAs (there will be a zillion experienced MBAs pounding the pavement in about six months). If you have any head for numbers at all, almost anything involving numbers seems to be good in the long run, you simply can't fake it and they always need people to make their sums come out right.
(Actually, you should study what you want to study. You could learn an awful lot from a philosophy degree. But really, skip the MBA...)
posted by lupus_yonderboy at 9:18 AM on November 12, 2008
In 2008, failure is the new success.
posted by gman at 9:23 AM on November 12, 2008 [1 favorite]
posted by gman at 9:23 AM on November 12, 2008 [1 favorite]
Well if rate goes towards zero, this will absolutely cause hyperinflation.
An example: If i need 6% to borrow 1 million, then the price of a home is going to be low - because you cannot make the payment otherwyse. If I need only 1%, then what happens is that the home is more and more expensive - because the payment will be lower. Is not the the home price stays the same and I pay less every month.
So remember we are in the house crisis: prices are falling. Imagine now free money - 1% 30 years loans or the like. The home prices will suddenly reverse (togheter with anything else - plasma tv monthly rate now 20 $ no more 120 $ - so the tvs will become "expensive" again).
It is a bit different from Japan: there you have a "saving" culture with is quite different from the "living on the pump" from the US.
And Hyperinflation has also its advantages - get rid of all this nasty treasury bonds hold by China & co.
Also cutting from 6% to 4% is NOT the same as going from 2% to 1%. Here in Switzerland home prices are booming again - variable loans are around 2.5 / 3% now and falling.
My forecast: another 25-30 % down on the sharemarket, then almost-zero interest rates as a "desperate measure" and -boom- hyperinflation.
posted by elcapitano at 9:32 AM on November 12, 2008
An example: If i need 6% to borrow 1 million, then the price of a home is going to be low - because you cannot make the payment otherwyse. If I need only 1%, then what happens is that the home is more and more expensive - because the payment will be lower. Is not the the home price stays the same and I pay less every month.
So remember we are in the house crisis: prices are falling. Imagine now free money - 1% 30 years loans or the like. The home prices will suddenly reverse (togheter with anything else - plasma tv monthly rate now 20 $ no more 120 $ - so the tvs will become "expensive" again).
It is a bit different from Japan: there you have a "saving" culture with is quite different from the "living on the pump" from the US.
And Hyperinflation has also its advantages - get rid of all this nasty treasury bonds hold by China & co.
Also cutting from 6% to 4% is NOT the same as going from 2% to 1%. Here in Switzerland home prices are booming again - variable loans are around 2.5 / 3% now and falling.
My forecast: another 25-30 % down on the sharemarket, then almost-zero interest rates as a "desperate measure" and -boom- hyperinflation.
posted by elcapitano at 9:32 AM on November 12, 2008
Before she died, my grandmother told me a bit about life during the Depression. I was curious as to how they did as well as they did, basically. They weren't rich, and never got rich, but unlike many, they did okay during the Depression, even bought their first (and only) house during that time. From what I gathered listening to her, they survived by having multiple sources of income. My grandfather had a full-time job and a reasonably profitable hobby (carpentry). My grandmother had a part-time job and another semi-profitable hobby (growing, canning, selling homegrown food, which also lowered their food costs). Each of the four income streams was nothing great by itself, but the combination of all of them kept their heads above the water, and as houses reached their price nadir, my grandfather bought a house with $2500 in cash.
Without really realizing it, my significant other and I have somewhat duplicated that income diversification that saw my grandparents through the Depression. She has a part-time job and a fixed-benefit retirement check (guaranteed by the gubment). I have a part-time job, a profitable hobby, and I grow a fair bit of our plant-type food. (They won't let us have chickens or edible animals in the city here, and my significant other nixed my rabbit idea.) So we too have four different income streams, just like my grandparents did. We only really need the retirement check to survive, but the other streams should allow us to keep our heads above water no matter what happens. Even if we lose one stream, or even two, we'll be okay until we can replace it/them.
As far as socking away wealth/assets/value/money, well, in this financial climate I've been purchasing rarities and collectibles, especially signed stuff where the signer is getting on in age and that has a limitation, like only 500 signed copies or whatever. That kind of thing, it seems to me, should not only retain value over the long-term, but should even grow in value at a reasonable rate. One example from a couple of weeks ago: I bought a signed Easton Press 'Andromeda Strain', then last week Crichton died, and now that very same book is going for more than double what I paid for it just two weeks ago. Of course, that was just good timing for me (bad for Crichton, obviously), but still, that's generally how it works with rarities and collectibles, just over longer periods of time. It also helps to have a specialty you're passionate about and in which you have some reasonable degree of knowledge (mine is collectible books).
posted by jamstigator at 9:52 AM on November 12, 2008
Without really realizing it, my significant other and I have somewhat duplicated that income diversification that saw my grandparents through the Depression. She has a part-time job and a fixed-benefit retirement check (guaranteed by the gubment). I have a part-time job, a profitable hobby, and I grow a fair bit of our plant-type food. (They won't let us have chickens or edible animals in the city here, and my significant other nixed my rabbit idea.) So we too have four different income streams, just like my grandparents did. We only really need the retirement check to survive, but the other streams should allow us to keep our heads above water no matter what happens. Even if we lose one stream, or even two, we'll be okay until we can replace it/them.
As far as socking away wealth/assets/value/money, well, in this financial climate I've been purchasing rarities and collectibles, especially signed stuff where the signer is getting on in age and that has a limitation, like only 500 signed copies or whatever. That kind of thing, it seems to me, should not only retain value over the long-term, but should even grow in value at a reasonable rate. One example from a couple of weeks ago: I bought a signed Easton Press 'Andromeda Strain', then last week Crichton died, and now that very same book is going for more than double what I paid for it just two weeks ago. Of course, that was just good timing for me (bad for Crichton, obviously), but still, that's generally how it works with rarities and collectibles, just over longer periods of time. It also helps to have a specialty you're passionate about and in which you have some reasonable degree of knowledge (mine is collectible books).
posted by jamstigator at 9:52 AM on November 12, 2008
So everyone that thought the $700 Billion came with any sort of oversight from congress can go pound sand, because Paulson is gonna do whatever the fuck he wants to with it, despite how it was sold to the legislature.
posted by butterstick at 9:57 AM on November 12, 2008
posted by butterstick at 9:57 AM on November 12, 2008
Saved by ZERO!
posted by joecacti at 10:06 AM on November 12, 2008 [1 favorite]
posted by joecacti at 10:06 AM on November 12, 2008 [1 favorite]
call some silicon valley visionary (paging Steve Jobs)
Barf.
posted by adamdschneider at 10:07 AM on November 12, 2008
Barf.
posted by adamdschneider at 10:07 AM on November 12, 2008
Pastabagel writes "And as someone who supported the financial bailout. I am completely against bailing out GM and Ford, unless it involves firing absolutely every single person from the Chairman and the CEO down to the middle management level. At that point, the President should call some silicon valley visionary (paging Steve Jobs) and ask them to take up the challenge of turning the auto industry into a high tech industry."
LOL. Remember the last bubble? Besides, Apple can do great in a bubble economy, but they aren't exactly appealing to the consumer with very little expendable income.
Anyway, it's always nice to think of eating the rich and stupid, but I'm more concerned with the effects on the rest of us if we do it. It sounds satisfying to let them fail, but the reality is that it will probably be very, very bad for all of us if it happens, not just the rich and stupid.
posted by krinklyfig at 10:17 AM on November 12, 2008
LOL. Remember the last bubble? Besides, Apple can do great in a bubble economy, but they aren't exactly appealing to the consumer with very little expendable income.
Anyway, it's always nice to think of eating the rich and stupid, but I'm more concerned with the effects on the rest of us if we do it. It sounds satisfying to let them fail, but the reality is that it will probably be very, very bad for all of us if it happens, not just the rich and stupid.
posted by krinklyfig at 10:17 AM on November 12, 2008
LOL. Remember the last bubble? Besides, Apple can do great in a bubble economy, but they aren't exactly appealing to the consumer with very little expendable income.
GM and Ford haven't been doing well over the last 7-8 years. A Consumer with little expendable income isn't going to buy a car anyway. If these companies are going to survive, it isn't going to be by competing against Honda or Toyota. They simply can't do it. They cannot produce cars where the primary design constraints are low price and high quality. What they need is someone to set a vision for the company around a new kind of vehicle, and build the company from the ground up around that.
Otherwise, we might as well throw in the towel, admit that we cannot now and will never be able to compete with asia, and socialize every industry in the whole country. That's the wrong thing to do, because it is an admission that we cannot innovate beyond incremetal improvements to what we see in front of us.
The U.S. auto companies have failed. Past tense. What's the harm in throwing one last hail mary pass?
posted by Pastabagel at 10:56 AM on November 12, 2008 [1 favorite]
GM and Ford haven't been doing well over the last 7-8 years. A Consumer with little expendable income isn't going to buy a car anyway. If these companies are going to survive, it isn't going to be by competing against Honda or Toyota. They simply can't do it. They cannot produce cars where the primary design constraints are low price and high quality. What they need is someone to set a vision for the company around a new kind of vehicle, and build the company from the ground up around that.
Otherwise, we might as well throw in the towel, admit that we cannot now and will never be able to compete with asia, and socialize every industry in the whole country. That's the wrong thing to do, because it is an admission that we cannot innovate beyond incremetal improvements to what we see in front of us.
The U.S. auto companies have failed. Past tense. What's the harm in throwing one last hail mary pass?
posted by Pastabagel at 10:56 AM on November 12, 2008 [1 favorite]
The Bank of England released their inflation forecast report today. Their projection for inflation shows it falling to 2% in around mid 2009 and continuing to 1% or lower in 2010.
posted by JonB at 10:59 AM on November 12, 2008
posted by JonB at 10:59 AM on November 12, 2008
Well...way to punish those of us who actually followed traditional savings methodology. I mean, economists scratch their heads and wonder why people don't sock away more money in the bank. Really? A while back I decided that interest rate differences between what I earned and what I paid were so drastically removed from one another that I paid off my house and my car rather than keeping cash in accounts. Sure, my house is worth less than my purchase price, but I don't care. I love my house and now nobody can ever take it. Maybe the value will return, maybe it won't. The way I look at it, if I had rented a nice place, big enough for all our stuff and critters and people, I would have paid more in rent in ten years than I've paid on this place to own it outright. Now all I have to pay are taxes and upkeep. (Still, it sucks to have "lost" 100k in value...but what can you do?)
The only reason I keep my money in the bank at all is because it's more physically protected there than in a safe in my house. And it's insured. But it's insulting to me that I am, for all intents and purposes, loaning the bank a large sum of money and getting almost zero return for it. They certainly wouldn't lend me the same amount of money for no interest.
I think the bank should have to pay in interest 1% less than they charge to loan that same money out.
posted by dejah420 at 11:18 AM on November 12, 2008
The only reason I keep my money in the bank at all is because it's more physically protected there than in a safe in my house. And it's insured. But it's insulting to me that I am, for all intents and purposes, loaning the bank a large sum of money and getting almost zero return for it. They certainly wouldn't lend me the same amount of money for no interest.
I think the bank should have to pay in interest 1% less than they charge to loan that same money out.
posted by dejah420 at 11:18 AM on November 12, 2008
What's the harm in throwing one last hail mary pass?
The harm is that the ball is made out of billions in taxpayer dollars and an incomplete pass will burst into flames.
posted by JaredSeth at 11:19 AM on November 12, 2008 [1 favorite]
The harm is that the ball is made out of billions in taxpayer dollars and an incomplete pass will burst into flames.
posted by JaredSeth at 11:19 AM on November 12, 2008 [1 favorite]
At that point, the President should call some silicon valley visionary (paging Steve Jobs) and ask them to take up the challenge of turning the auto industry into a high tech industry.
Channeling Friedman?
posted by Durn Bronzefist at 11:35 AM on November 12, 2008
Channeling Friedman?
posted by Durn Bronzefist at 11:35 AM on November 12, 2008
call some silicon valley visionary (paging Steve Jobs)Barf. LOL.
Well, maybe Jobs isn't a perfect fit in a number of ways. But he does have significant experience engineering the takeover of a company that was on the ropes, that has to deal with the costs of a labor force that's skilled AND pretty mobile to boot, that has to deal with real manufacturing issues, and has to make products that have sizzle as well as steak. There's at least some things in common with the auto industry there.
Besides, Apple can do great in a bubble economy, but they aren't exactly appealing to the consumer with very little expendable income.
2000-2003 wasn't exactly boom times in my memory, and not only did they continue to be more or less successful in their core business, they started their bid for dominance in digital entertainment.
But whether or not Apple is Teh Same as the automotive industry or Jobs is the right person, it's hard to deny that he works as an example of a person who can exhibit vision and leadership.
And it seems to me that Pastabagel's right on when it comes to this criticism of the Big 3. I recognize that the automotive industry is capital, resource, and labor intensive, and maybe relatively difficult to manage. But seriously, it's not as if the rise in fuel costs just started in the last year, and it's not as if it's not predictable that easy credit and boom times don't last forever.
If we were to let market discipline prevail, it is pretty certain that new investors or owners would replace existing leadership. When the investor putting up financing is the public, I don't see why some of the same actions shouldn't follow.
posted by weston at 11:39 AM on November 12, 2008 [1 favorite]
It will, of course, make you poorer, but you already knew that was coming, right?
Well now, if I know something in particular is coming, shouldn't I be able to use that to make myself a bit richer?
Any hints appreciated.
posted by weston at 11:58 AM on November 12, 2008
Well now, if I know something in particular is coming, shouldn't I be able to use that to make myself a bit richer?
Any hints appreciated.
posted by weston at 11:58 AM on November 12, 2008
Mutant strikes again! Here's a question for you: The Fed also announced that it would be paying the interest rate that it charges on reserves to 1 percent, the target Fed Funds rate itself.
So why would any bank lend to another bank at a rate less than 1 percent when it can just park money in the Fed and earn 1 percent interest doing nothing? Wouldn't banks then have to charge more than the Fed? Why hasn't this brought bank lending to a standstill? What in tarnation is going on?
Help me Obi-wan you're my only hope.
posted by up in the old hotel at 12:33 PM on November 12, 2008
So why would any bank lend to another bank at a rate less than 1 percent when it can just park money in the Fed and earn 1 percent interest doing nothing? Wouldn't banks then have to charge more than the Fed? Why hasn't this brought bank lending to a standstill? What in tarnation is going on?
Help me Obi-wan you're my only hope.
posted by up in the old hotel at 12:33 PM on November 12, 2008
er, that should say the Fed is raising the interest rate it pays on reserves to 1 percent. Sorry for the confusion.
posted by up in the old hotel at 12:34 PM on November 12, 2008
posted by up in the old hotel at 12:34 PM on November 12, 2008
American Express is granted full bank status just in time to get in line for the bailouts.
Motherfuckers.
Yes, I think this is a great time to borrow for your education!
Yeah, except that bankruptcy protection doesn't cover student loans. So it's fine-and-dandy for a corporation to increase their profits by, say, buying up smaller companies, but if an individual wants to make themselves more marketable by getting a degree... fuck 'em.
posted by Civil_Disobedient at 12:40 PM on November 12, 2008
Motherfuckers.
Yes, I think this is a great time to borrow for your education!
Yeah, except that bankruptcy protection doesn't cover student loans. So it's fine-and-dandy for a corporation to increase their profits by, say, buying up smaller companies, but if an individual wants to make themselves more marketable by getting a degree... fuck 'em.
posted by Civil_Disobedient at 12:40 PM on November 12, 2008
weston writes "2000-2003 wasn't exactly boom times in my memory, and not only did they continue to be more or less successful in their core business, they started their bid for dominance in digital entertainment."
2003 was dead in the middle of the housing bubble. People were borrowing on their housing equity and spending it on all sorts of desires, but not strictly necessities. Steve Jobs is good at creating computing products people desire and innovating in that industry. I have yet to see if that translates to rescuing the auto industry (which is tied up in financial products right now, including worthless mortgage-backed securities) in the midst of a triple whammy hitting a collapsing economy.
posted by krinklyfig at 1:51 PM on November 12, 2008
2003 was dead in the middle of the housing bubble. People were borrowing on their housing equity and spending it on all sorts of desires, but not strictly necessities. Steve Jobs is good at creating computing products people desire and innovating in that industry. I have yet to see if that translates to rescuing the auto industry (which is tied up in financial products right now, including worthless mortgage-backed securities) in the midst of a triple whammy hitting a collapsing economy.
posted by krinklyfig at 1:51 PM on November 12, 2008
Mutant writes "But maybe Japan need something more extreme. Some ideas I've seen kicked about in academic papers include[...]Remilitarisation "
Words fail me, but I'm able to clumsily blurt out .
Seriously, now is the time for everyone to step back and realize how worthless and stupid military spending is. The world as a whole would be swimming in wealth if we abandoned institutionalized killing and spent our money on infrastructure instead.
posted by mullingitover at 2:34 PM on November 12, 2008
Words fail me, but I'm able to clumsily blurt out .
Seriously, now is the time for everyone to step back and realize how worthless and stupid military spending is. The world as a whole would be swimming in wealth if we abandoned institutionalized killing and spent our money on infrastructure instead.
posted by mullingitover at 2:34 PM on November 12, 2008
jonb: Have you seen the error bars on that prediction? The BoE is in fact saying "We don't have a clue what's going to happen to inflation. It could be anywhere between -1% and 5% in a year or so".
Right now, the pound is getting absolutely hammered. While it was probably too high thanks to the pointless over-investment in the FIRE industries, resulting in under-investment in manufacturing which was unable to compete thanks to the high pound, a collapse the other way really isn't going to help anyone. Personally I think cutting interest rates to the bone is going to come back and bite us hard, but the BoE clearly felt that the alternative was worse.
posted by pharm at 2:36 PM on November 12, 2008
Right now, the pound is getting absolutely hammered. While it was probably too high thanks to the pointless over-investment in the FIRE industries, resulting in under-investment in manufacturing which was unable to compete thanks to the high pound, a collapse the other way really isn't going to help anyone. Personally I think cutting interest rates to the bone is going to come back and bite us hard, but the BoE clearly felt that the alternative was worse.
posted by pharm at 2:36 PM on November 12, 2008
Seriously, now is the time for everyone to step back and realize how worthless and stupid military spending is. The world as a whole would be swimming in wealth if we abandoned institutionalized killing and spent our money on infrastructure instead.
This only works if everyone not only agrees, but also abides by their agreements. I'd like to think we could do this. I think it's possible we could feel that we've moved past war, but there is no permanence to these conditions, so I'm not sure it would ever exist longer than it would take someone to realize what an advantage a few big weapons would be over a world without any such weapons.
posted by krinklyfig at 4:33 PM on November 12, 2008
This only works if everyone not only agrees, but also abides by their agreements. I'd like to think we could do this. I think it's possible we could feel that we've moved past war, but there is no permanence to these conditions, so I'm not sure it would ever exist longer than it would take someone to realize what an advantage a few big weapons would be over a world without any such weapons.
posted by krinklyfig at 4:33 PM on November 12, 2008
In other news, Donald Trump is suing a bunch of banks because he can't get a loan.
posted by krinklyfig at 4:37 PM on November 12, 2008
posted by krinklyfig at 4:37 PM on November 12, 2008
He needs to just apply for it like everyone else. There's even a link (PDF) where you can apply for your own money.
posted by Balisong at 4:51 PM on November 12, 2008
posted by Balisong at 4:51 PM on November 12, 2008
So why would any bank lend to another bank at a rate less than 1 percent when it can just park money in the Fed and earn 1 percent interest doing nothing? Wouldn't banks then have to charge more than the Fed? Why hasn't this brought bank lending to a standstill? What in tarnation is going on?
Well I'm not a student of the markets so someone is bound to correct me.
When the fed sets the funds rate it's not a decree. It's a target rate that the fed wants banks to lend at. Now your interbank loans of federal reserves are overnight loans that last only one day. Since you typically won't be lending that money out straight away you need a place to stick it that might give you a bit of interest but you know you'll get it back the next day when you do need to do something with it.
Now my guess is as follows:
Recently the effective rate (the actual rates have been lending to each other at) has dropped to stupidly low levels, probably because banks are now flush with cash and hoarding it between themselves. Typically the fed will take cash out of the system temporarily if they want to raise interbank interest rates. But why the fuck would the fed take cash out of the system during a liquidity crisis? That would be stupid.
So the only way to raise the rate that banks lend at without taking cash out of the system would be to make deposits at the reserves pay more than what banks are lending to each other at. If a bank is going to make 1% on their fed deposits they'll need to pay a few basis points higher to stay competitive.
Or at least that's my reckoning of the situation.
posted by Talez at 5:18 PM on November 12, 2008
Well I'm not a student of the markets so someone is bound to correct me.
When the fed sets the funds rate it's not a decree. It's a target rate that the fed wants banks to lend at. Now your interbank loans of federal reserves are overnight loans that last only one day. Since you typically won't be lending that money out straight away you need a place to stick it that might give you a bit of interest but you know you'll get it back the next day when you do need to do something with it.
Now my guess is as follows:
Recently the effective rate (the actual rates have been lending to each other at) has dropped to stupidly low levels, probably because banks are now flush with cash and hoarding it between themselves. Typically the fed will take cash out of the system temporarily if they want to raise interbank interest rates. But why the fuck would the fed take cash out of the system during a liquidity crisis? That would be stupid.
So the only way to raise the rate that banks lend at without taking cash out of the system would be to make deposits at the reserves pay more than what banks are lending to each other at. If a bank is going to make 1% on their fed deposits they'll need to pay a few basis points higher to stay competitive.
Or at least that's my reckoning of the situation.
posted by Talez at 5:18 PM on November 12, 2008
so it's been said, like in physics, the closer you get to absolute zero the weirder things become; anyway as lex sez...
posted by kliuless at 7:10 PM on November 12, 2008
On the edge of the known financial universe lies the planet Zirp, where money appears to be free. Zirpeans explain...but, really:
The economy was so weak that deflation reigned. Nervous banks, firms and households – quite rationally – clung to cash rather than spend or lend it. Deflation meant it was worth more each day. The same, unfortunately, was true of debts. As a result, everyone scrambled to pay off their mortgages, credit card balances and the like. Credit demand collapsed. Not even zero interest rates could get the economy moving. Nobody wanted to borrow.
Everyone naturally wants to avoid this scary state of affairs. Yet Zirp, in itself, is nothing to be afraid of. What is scary is deflation. Falling prices meant Japan’s zero interest rate was actually positive in real terms. Rates only appeared to be zero because of what economists call the “money illusion”. Money, in fact, was not free. That was the problem.
That is why central bankers have cut rates so fast this past month. They want to pre-empt the need to go to Zirp by flooding the world with money. US and UK rates are negative in real terms... So is the global economy headed towards zero interest rates? The answer is that, in real terms, it has already arrived.
"...the target itself has become largely irrelevant as an instrument of monetary policy, and discussions of 'will the Fed cut further' and the 'zero interest rate lower bound' are off the mark. There's surely no benefit whatever to trying to achieve an even lower value for the effective fed funds rate."What is a Depression?
Policy traction comes from the balance sheet at this point. Balance sheet related actions have focused on ungluing the financial markets – actions that have been critical in preventing the system from collapsing by replacing lost liquidity, but have so far be insufficient in preventing recession. The Fed is simply cushioning the deleveraging underway. Hamilton suggests moving to the next stage in the game:
"...I would urge the Fed to be buying outstanding long-term U.S. Treasuries and short-term foreign securities outright in unsterilized purchases, with the goal of achieving an expansion of currency held by the public, depreciation of the currency, and arresting the commodity price declines."
One only has to read a few of Fed Chairman Ben Bernanke’s past speeches to known that some variation of this option is on his mind. Still, I think the Fed will opt to pass the baton to fiscal authorities before shifting to a policy of unsterilized asset purchases.
The push for a rapid fiscal response is building, including an effort to pass at least one measure during the upcoming lame duck session of Congress. The main event, however, will not be until next year, and the resulting package will be significant. A final price tag of $500 billion would not surprise me (can’t let ourselves be outdone by the Chinese), and will hopefully include a wide array of elements currently on the table; for example, extending unemployment benefits, aid to state and local governments, some tax cuts, and infrastructure spending.
How much bad policy will be included? There will always be some bad policy, even in a more enlightened administration. For a change, the good should vastly outweigh the bad. Still, how many more blank checks will be handed out, such as the one to AIG? How many more industries will come begging at the government’s door? Automakers are almost certainly going to get their piece of the pie. And, most importantly, will the focus of policy be supporting and cushioning the transition from a consumer/debt supportive growth dynamic, or preventing/reversing the adjustment already under way?
The US economy is restructuring; I suspect the process will be lengthy, and that patterns of growth on the other side will be very different... The US has spent the better part of 20 year favoring nontradable sectors over tradable sectors, ultimately pushing the nation to focus on the production of overpriced housing and financial services (the latter arguably tradable, but no longer in demand). Reversing these patterns will not happen overnight – a period of structural unemployment is almost certain. Preventing this process (by, for example, pretending that we can fix the economy by fixing housing prices) would be misguided. But...
...the “bust phase” may involve the Central bank loosening rates to aid the economy as a whole. As I have explained before, the Fed loosening monetary policy only stimulates parts of the economy that can absorb more debt. Those parts with high yield spreads because of the bust do not get any benefit.i think it's going to involve some sort of central planning and volunteerism (non-market & decentralised - srsly!) + rethinking what money itself ought to be :P
But what if there are few or no areas of the economy that can absorb more debt, including the financial sector? That is a depression... We face a challenge as great, or greater than that at the Great Depression, because the level of debt is higher... We are in uncharted waters, held together only because the US Dollar is the global reserve currency, and there is nothing that can replace it for now... But eventually this will pass, and foreign creditors will find something that is a better store of value than US Dollars. The proper investment actions here depend on what Government policy will be. Will they inflate away the problem? Raise taxes dramatically? Default internally? Externally? Both?
posted by kliuless at 7:10 PM on November 12, 2008
I don't think that's entirely accurate, talez The 1% interest on reserves is to push up the yield on treasuries a little bit, not on interbank loans, which are still trading at Libor (around 3%) even though there has been very little actual trading.
I don't know how anyone can really be worried about inflation when asset prices are collapsing all over the place. As long as people/institutions want money to hoard it, the Fed can hand out as much cash as it likes and it won't be inflationary.
posted by OldReliable at 8:02 PM on November 12, 2008
I don't know how anyone can really be worried about inflation when asset prices are collapsing all over the place. As long as people/institutions want money to hoard it, the Fed can hand out as much cash as it likes and it won't be inflationary.
posted by OldReliable at 8:02 PM on November 12, 2008
LIBOR is up around 3% but the fed effective rate is wayyyyyyyyyyyyy below the 1% target rate
But yes, I do agree that pushing up treasury yields will probably be one of the objectives as well.
I worry about the point when people realise the storm is over and start spending again. All this built up cash and collapsed asset prices...
posted by Talez at 8:39 PM on November 12, 2008
But yes, I do agree that pushing up treasury yields will probably be one of the objectives as well.
I worry about the point when people realise the storm is over and start spending again. All this built up cash and collapsed asset prices...
posted by Talez at 8:39 PM on November 12, 2008
But he does have significant experience engineering the takeover of a company that was on the ropes, that has to deal with the costs of a labor force that's skilled AND pretty mobile to boot, that has to deal with real manufacturing issues, and has to make products that have sizzle as well as steak.
He did it by shutting down every American manufacturing plant and moving production to Asia. Probably exactly the same thing is needed for the car giants, but any CEO would see that and come up against the same political barriers, and I can't see how Jobs would be any better at getting past them.
posted by cillit bang at 8:54 PM on November 12, 2008
He did it by shutting down every American manufacturing plant and moving production to Asia. Probably exactly the same thing is needed for the car giants, but any CEO would see that and come up against the same political barriers, and I can't see how Jobs would be any better at getting past them.
posted by cillit bang at 8:54 PM on November 12, 2008
The UK Bank of England rate is 3% - but inflation is at 5%. They're likely to cut the rate even further in 2009 in order to stimulate the housing market (in complete freefall for almost a year now) and try to stem the job losses as business output contracts due to falling demand across a wide range of sectors.
Yet inflation is now predicted to plummet to 1%. Inflation here was largely caused by the massive spike in commoditity prices, including the price of oil, gas and foodstuffs. Now we're in a recession, and commodity places are falling almost as quickly as they rose - though the retail prices of gas and electricity have yet to fall, and fuel has fallen much less far than it rose.
posted by ArkhanJG at 12:44 AM on November 13, 2008
Yet inflation is now predicted to plummet to 1%. Inflation here was largely caused by the massive spike in commoditity prices, including the price of oil, gas and foodstuffs. Now we're in a recession, and commodity places are falling almost as quickly as they rose - though the retail prices of gas and electricity have yet to fall, and fuel has fallen much less far than it rose.
posted by ArkhanJG at 12:44 AM on November 13, 2008
I worry about the point when people realise the storm is over and start spending again. All this built up cash and collapsed asset prices...
and lo, the great moderation gives way: "Eventually, we will hit a tipping point, a point where prices have gotten so cheap, banks will have rebuilt their balance sheets and the wheels of economic activity start to grind, even slowly, that we will find ourselves in the middle of a commodity and energy price inflation cycle the likes of which we've never witnessed."
posted by kliuless at 4:27 AM on November 13, 2008
and lo, the great moderation gives way: "Eventually, we will hit a tipping point, a point where prices have gotten so cheap, banks will have rebuilt their balance sheets and the wheels of economic activity start to grind, even slowly, that we will find ourselves in the middle of a commodity and energy price inflation cycle the likes of which we've never witnessed."
posted by kliuless at 4:27 AM on November 13, 2008
So why would any bank lend to another bank at a rate less than 1 percent when it can just park money in the Fed and earn 1 percent interest doing nothing?
I linked above to the best discussion of this situation that I'd seen. David Altig of the Atlanta Fed now offers some comments at macroblog, and promises to explain more soon. I wonder whether the motivation for the Fed paying interest on reserves might have something to do with a desire to see their target rate resume some kind of more predictable relationship with the effective fed funds rate.
posted by sfenders at 5:43 AM on November 13, 2008
I linked above to the best discussion of this situation that I'd seen. David Altig of the Atlanta Fed now offers some comments at macroblog, and promises to explain more soon. I wonder whether the motivation for the Fed paying interest on reserves might have something to do with a desire to see their target rate resume some kind of more predictable relationship with the effective fed funds rate.
posted by sfenders at 5:43 AM on November 13, 2008
Barron's, on what the US Treasury yield curve may be beginning to suggest: Uncle Sam's Credit Line Running Out?
Based on a simplistic reading of that history [of the T-bond 2-10 spread] and the Cliff Notes version of theory, one economist whose main area of expertise is to get quoted by reporters even less knowledgeable than he, asserts such a steep yield curve typically reflects investors' anticipation of economic recovery. Never mind that the yield curve has steepened as the economy has worsened and prospects for recovery have diminished. Like the Bourbons, the French royal family up to the Revolution, he learns nothing and forgets nothing.
posted by sfenders at 8:00 AM on November 13, 2008
Based on a simplistic reading of that history [of the T-bond 2-10 spread] and the Cliff Notes version of theory, one economist whose main area of expertise is to get quoted by reporters even less knowledgeable than he, asserts such a steep yield curve typically reflects investors' anticipation of economic recovery. Never mind that the yield curve has steepened as the economy has worsened and prospects for recovery have diminished. Like the Bourbons, the French royal family up to the Revolution, he learns nothing and forgets nothing.
posted by sfenders at 8:00 AM on November 13, 2008
# Remilitarisation - I've long held the opinion that war is inflationary, peace deflationary. Build a large standing army, engage in R&D, perhaps send some troops to a few hot zones. Pro - lots of arms dealing gets money in circulation, Cons - A standing army is more likely to be used for war than a non existent army.
Bad craziness.
posted by telstar at 8:22 PM on November 13, 2008
Bad craziness.
posted by telstar at 8:22 PM on November 13, 2008
I confess I'm a little lost, but I'll bring up here what I've wondered elsewhere, which is why propping up banks and armies is considered as strengthening economies, but propping up education, local food production, public transportation, science etc. is considered wasteful pork barrel spending. I suppose military infrastructure brings jobs to places that need them, but wouldn't building schools and encouraging local commerce do the same thing? I get that economies try to "create wealth" (at least I think I get that), but I have never understood how artificially expanding the money supply through printing currency or extending credit so both people and governments can buy stuff they don't need accomplishes this.
Or, I could be missing something really basic (a distinct possibility).
posted by nax at 7:12 AM on November 14, 2008
Or, I could be missing something really basic (a distinct possibility).
posted by nax at 7:12 AM on November 14, 2008
a little background, sorry for the double post. I'm seething right now because the Gary Indiana public school system is about to fail; they're planning to layoff a big portion of teaching and admin staff while those fucking assholes in Washington are planning to bail out the automakers and banks AGAIN. My outrage meter is off the scale.
posted by nax at 7:16 AM on November 14, 2008
posted by nax at 7:16 AM on November 14, 2008
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