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Surveying the Damage of Low Interest Rates
Low Interest Rates Subsidize Wealthy Households
When the economy begins to sink into recession, politicians, mainstream economists, policy wonks, and the Federal Reserve begin beating the economic stimulus drum.
Politicians, however, disagree over the type of stimulus to implement. The center-left party proposes greater expenditures on public assistance programs. The center-right party supports permanent tax rate reductions. The center-left party opposes tax cuts because they say it benefits the rich. The center-right party opposes raising government expenditures because it increases government debt. This discord generally results in a temporary compromise where government expenditures are boosted and tax rates are cut. This compromise is called “discretionary fiscal stimulus.”
While the debate over discretionary fiscal stimulus has to overcome Senate filibusters and heated House debates, the central bankers at the Fed quickly implement monetary stimulus. Boosting aggregate demand is the intended purpose of it and discretionary fiscal stimulus. In mainstream economic theory, greater aggregate demand lowers unemployment and raises GDP. In spite of grave warnings from Austrian-school economists, the Fed pursues these goals by lowering interest rates via an expansion credit.
Although the political parties disagree over the type of fiscal stimulus to implement, both support the Fed’s monetary stimulus. Perhaps they do so because lower interest rates lower the cost of the budget deficits their discretionary fiscal stimulus produces. The lower interest rates also reduce the interest Americans pay on their debts. The total of this debt is unevenly distributed across the richest 1 percent, the next 9 percent, and the bottom 90 percent of Americans (as ranked by wealth), according to the following table.
Total household debt averaged $11.295 trillion dollars over the four quarters in 2013, according to the Federal Reserve Bank of New York. Multiplying this value by the percentages in the above table indicates that the richest 1 percent, the next 9 percent, and the bottom 90 percent have aggregate debts of $610 billion, $2.383 trillion, and $8.302 trillion, respectively. These values are listed in the Total Debt column below.
…click on the above link to read the rest of the article…
Low Interest Rates Subsidize Wealthy Households
Low Interest Rates Subsidize Wealthy Households
When the economy begins to sink into recession, politicians, mainstream economists, policy wonks, and the Federal Reserve begin beating the economic stimulus drum.
Politicians, however, disagree over the type of stimulus to implement. The center-left party proposes greater expenditures on public assistance programs. The center-right party supports permanent tax rate reductions. The center-left party opposes tax cuts because they say it benefits the rich. The center-right party opposes raising government expenditures because it increases government debt. This discord generally results in a temporary compromise where government expenditures are boosted and tax rates are cut. This compromise is called “discretionary fiscal stimulus.”
While the debate over discretionary fiscal stimulus has to overcome Senate filibusters and heated House debates, the central bankers at the Fed quickly implement monetary stimulus. Boosting aggregate demand is the intended purpose of it and discretionary fiscal stimulus. In mainstream economic theory, greater aggregate demand lowers unemployment and raises GDP. In spite of grave warnings from Austrian-school economists, the Fed pursues these goals by lowering interest rates via an expansion credit.
Although the political parties disagree over the type of fiscal stimulus to implement, both support the Fed’s monetary stimulus. Perhaps they do so because lower interest rates lower the cost of the budget deficits their discretionary fiscal stimulus produces. The lower interest rates also reduce the interest Americans pay on their debts. The total of this debt is unevenly distributed across the richest 1 percent, the next 9 percent, and the bottom 90 percent of Americans (as ranked by wealth), according to the following table.
Total household debt averaged $11.295 trillion dollars over the four quarters in 2013, according to the Federal Reserve Bank of New York. Multiplying this value by the percentages in the above table indicates that the richest 1 percent, the next 9 percent, and the bottom 90 percent have aggregate debts of $610 billion, $2.383 trillion, and $8.302 trillion, respectively. These values are listed in the Total Debt column below.
…click on the above link to read the rest of the article…
Neither Bull nor Bear
Neither Bull nor Bear
“Good Economic Management” vs. Larceny
“Will you shut up?!”
That is what we wanted to say this morning, here in Zurich, Switzerland. At the table next to us, a hedge fund promoter is working hard…
“The value proposition… outside of the box… we’re only talking two points… we can dialogue about it… Goldman… our business model… prioritize our priorities… get the balance right…”
New Canadian prime minister Justin Trudeau – who actually has more than just one bad idea.
Photo credit: Andrew Vaughan / Canadian Press
Meanwhile, on the front page of the Financial Times is a good-looking guy with a bad idea. Pierre Trudeau’s son, Justin, is Canada’s new prime minister. (Another political dynasty!) He will “take advantage of low interest rates” to embark on a C$60 billion infrastructure program.
Just for the record, the Canuck feds are not taking advantage of low interest rates. They’re cheating savers… retirees… and responsible citizens whose expenses are lower than their incomes.
In much of the developed world, central banks have pushed interest rates to their lowest level in 5,000 years. This is not “good economic management.” It’s larceny. They’re taking money from savers and giving it to borrowers – especially in the financial sector and in government. But on to other things….
This is not just larceny, it is insanity (not unique to Canada to be sure, as it has gone global) – click to enlarge.
12% a Year in Stocks
“We don’t pay any attention to the stock market. We buy good companies at good prices,” an old friend explained about how his private fund operates. (In the interest of full disclosure, we are one of his investors.)
“We aim for 12% a year,” he continued. “And that’s what we get, more or less.”
…click on the above link to read the rest of the article…
Low interest rates prompt savers to borrow to invest
Kevin Stone plans to borrow $20K this year to invest in various stocks
Kevin Stone is 28 years old and already has over half a million dollars of debt, including a mortgage and a loan to purchase farmland. But he’s not concerned, because that apparent burden is actually helping fuel his roughly $400,000 net worth.
He’s one of a number of Canadians taking a gamble and borrowing money at historically low rates not to fuel an excessive lifestyle, but to invest in the stock market. It’s a strategy one financial planner warns isn’t for everyone, and even seasoned investors can see things go wrong.
The Bank of Canada recently lowered its benchmark lending rate by 25 basis points for the second time this year. Canada’s major banks partially followed suit and lowered their prime lending rates to 2.7 per cent.
These changes caused the rates for already low variable-rate mortgages, as well as home equity and personal lines of credit, to fall.
The low rates prompted Harry, an Albertan in his 40s who requested his last name not be used for privacy reasons, to look at his $100,000 home equity line of credit, or HELOC, a different way.
He plans to use that money over the next several years to maximize his unused RRSP contribution room. He’s withdrawn funds from his HELOCbefore to pay for a few vacations, but this will be his first time borrowing the money for investments.
Harry plans to use his annual tax returns as large, lump-sum payments against the loan, while paying down the remaining balance at a low 2.2 per cent interest rate.
“I think the bigger risk is not using other people’s money to invest,” says Stone, who blogs about his money maneuvers at Freedom Thirty Five, where he doesn’t shy away from aiming to join Canada’s one per cent. “By taking on these debts today, I can have a longer time to build up my assets.”
…click on the above link to read the rest of the article…
WASHINGTON, DC – For years after the 2008 financial crisis, policymakers congratulated themselves for having averted a second Great Depression. They had responded to the global recession with the kind of Keynesian fiscal and monetary stimulus that the moment required.
But nine years have passed, and official interest rates are still hovering around zero, while growth has been mediocre. Since 2008, the European Union has grown at a dismal average annual rate of just 0.9%.
The broad Keynesian consensus that emerged immediately after the crisis has become today’s prevailing economic dogma: as long as growth remains substandard and annual inflation remains below 2%, more stimulus is deemed not just appropriate, but necessary.
The arguments underlying this dogma do not hold water. For starters, measures of inflation are so poor as to be arbitrary. As Harvard’s Martin Feldstein notes, governments have no good way to measure price inflation for services and new technologies, which account for an ever greater share of advanced economies’ GDP, because quality in these sectors varies substantially over time. Moreover, real estate and other assets are not even included in the accounting.
The dictate that inflation must rise at an annual rate of 2% is also arbitrary. Swedish economist Knut Wicksell’s century-old concept of a “natural” interest rate – at which real (inflation-adjusted) GDP growth follows a long-term average while inflation remains stable – makes sense. But why should the inflation rate always be 2%? And why aren’t services, new technologies, or, say, Chinese manufactured goods excluded from the measure of core inflation, alongside energy and food?
…click on the above link to read the rest of the article…