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Why are low interest rates considered GOOD for the labor market and inflationary?
Here's the general argument: Low interest rates reduce the cost of capital, making it easier for businesses to borrow and hire more.
Low Interest Rates Harm Small Business:
But the problem is, what about small businesses? Small business owner are effectively getting 0% on their bank accounts. A "millionaire next door" type, with $1m in the bank is getting almost nothing. Years ago, that million would be yielding 4%, or 40K "risk free" per year. That's enough to hire 1 - 2 employees, just on interest alone. Small businesses very marginally benefit from reduced capital costs (they don't issue bonds, and cannot easily access loans), and are the main employers in this country. Finally, small business clients are getting poorer because they aren't getting yield on their savings.
Commodity and Goods Price Collapse:
Worse yet, low interest rates have made it very cheap and easy for companies to expand capital intensive enterprises. This has a deflationary effect, when low demand for goods and commodities combine with an increase of production.
Retirement:
The last, but not insignificant effect of low interest rates is retirement. Low interest rates have made it difficult for those not invested in stocks the last 5 or so years to ever retire. Most people don't save anywhere near enough to retire. So if an individual accumulates 250K, the yield is effectively zero. With 4% interest rates, a yield of 10K would be achievable on that savings. This "broad based" effect of putting money in the pockets of pensioners likely to spend it, has an inflationary effect. The lack of retirement has hurt the labor market for younger folks.
Why are low interest rates considered GOOD for the labor market and inflationary?
Here's the general argument: Low interest rates reduce the cost of capital, making it easier for businesses to borrow and hire more.
Low Interest Rates Harm Small Business:
But the problem is, what about small businesses? Small business owner are effectively getting 0% on their bank accounts. A "millionaire next door" type, with $1m in the bank is getting almost nothing. Years ago, that million would be yielding 4%, or 40K "risk free" per year. That's enough to hire 1 - 2 employees, just on interest alone. Small businesses very marginally benefit from reduced capital costs (they don't issue bonds, and cannot easily access loans), and are the main employers in this country. Finally, small business clients are getting poorer because they aren't getting yield on their savings.
Commodity and Goods Price Collapse:
Worse yet, low interest rates have made it very cheap and easy for companies to expand capital intensive enterprises. This has a deflationary effect, when low demand for goods and commodities combine with an increase of production.
Retirement:
The last, but not insignificant effect of low interest rates is retirement. Low interest rates have made it difficult for those not invested in stocks the last 5 or so years to ever retire. Most people don't save anywhere near enough to retire. So if an individual accumulates 250K, the yield is effectively zero. With 4% interest rates, a yield of 10K would be achievable on that savings. This "broad based" effect of putting money in the pockets of pensioners likely to spend it, has an inflationary effect. The lack of retirement has hurt the labor market for younger folks.
Discuss.
Excellent post.
Low rates are not necessarily a bad thing. The problem we have is that the Fed artificially keeps them low. What that means is that the Fed is potentially stealing from people that rely on higher rates for income, like insurance companies and people on fixed income.
So stock, real estate investors benefit at the expense of insurance companies and people on fixed incomes. Eventually this blows sky high.
Why are low interest rates considered GOOD for the labor market and inflationary?
Here's the general argument: Low interest rates reduce the cost of capital, making it easier for businesses to borrow and hire more.
Low Interest Rates Harm Small Business:
But the problem is, what about small businesses? Small business owner are effectively getting 0% on their bank accounts. A "millionaire next door" type, with $1m in the bank is getting almost nothing. Years ago, that million would be yielding 4%, or 40K "risk free" per year. That's enough to hire 1 - 2 employees, just on interest alone. Small businesses very marginally benefit from reduced capital costs (they don't issue bonds, and cannot easily access loans), and are the main employers in this country. Finally, small business clients are getting poorer because they aren't getting yield on their savings.
If the best usage a business has for its money is to leave it in the bank, it isn't a business at all.
If your only source of income for hiring employees is interest on your deposits, why are you hiring?
The point of a business is to earn more by selling goods and services than it costs to produce them, after all. Not to simply collect interest and pay people to do something that does not produce more revenue than it costs to hire them!
If you are getting 40k in interest and spending 40k on wages, I'd hope your employees are making something you can sell for 100k or 200k per year. Otherwise you are an incompetent "business" manager who doesn't deserve to get more money.
Quote:
Originally Posted by concept_fusion
Commodity and Goods Price Collapse:
Worse yet, low interest rates have made it very cheap and easy for companies to expand capital intensive enterprises. This has a deflationary effect, when low demand for goods and commodities combine with an increase of production.
I'll have to ask for evidence. I'm not seeing any signs of consumer price deflation, excluding the notorious volatiles such as food and energy.
Quote:
Originally Posted by concept_fusion
Retirement:
The last, but not insignificant effect of low interest rates is retirement. Low interest rates have made it difficult for those not invested in stocks the last 5 or so years to ever retire. Most people don't save anywhere near enough to retire. So if an individual accumulates 250K, the yield is effectively zero. With 4% interest rates, a yield of 10K would be achievable on that savings. This "broad based" effect of putting money in the pockets of pensioners likely to spend it, has an inflationary effect. The lack of retirement has hurt the labor market for younger folks.
If the best usage a business has for its money is to leave it in the bank, it isn't a business at all.
If your only source of income for hiring employees is interest on your deposits, why are you hiring?
The point of a business is to earn more by selling goods and services than it costs to produce them, after all. Not to simply collect interest and pay people to do something that does not produce more revenue than it costs to hire them!
If you are getting 40k in interest and spending 40k on wages, I'd hope your employees are making something you can sell for 100k or 200k per year. Otherwise you are an incompetent "business" manager who doesn't deserve to get more money.
I'll have to ask for evidence. I'm not seeing any signs of consumer price deflation, excluding the notorious volatiles such as food and energy.
To a degree, sure.
I tend to agree with most of your arguments. But let me ask you, who are you to dictate what a business does with its profits?
What do you think insurance companies do with the premiums we pay?
I tend to agree with most of your arguments. But let me ask you, who are you to dictate what a business does with its profits?
I'm not dictating, I am simply discussing how business works and how to successfully do business.
Quote:
Originally Posted by SarasotaBound1
What do you think insurance companies do with the premiums we pay?
Well some goes out to claims, some to overhead such as paying for the buildings, the computers, heating and cooling, and employees wages, salaries, and benefits. Some goes out to business cell phone and automobile costs as well. Some also goes out to legal expenses.
In the case of a non-mutual company (i.e. where there are shareholders separate from the policyholders), there is normally some money in excess of expenses for the company to have a profit margin.
I'm not dictating, I am simply discussing how business works and how to successfully do business.
Well some goes out to claims, some to overhead such as paying for the buildings, the computers, heating and cooling, and employees wages, salaries, and benefits. Some goes out to business cell phone and automobile costs as well. Some also goes out to legal expenses.
In the case of a non-mutual company (i.e. where there are shareholders separate from the policyholders), there is normally some money in excess of expenses for the company to have a profit margin.
And what do you think they do with these profits?
They put it at a bank, that's what. See, they shouldn't be taking risk on it. Of course, when the Fed pushes rates to zero, they end up doing just that.
I really wish people would go to college. Your post is riddled with economic fallacy.
Low Interest Rates Harm Small Business:
But the problem is, what about small businesses? Small business owner are effectively getting 0% on their bank accounts. A "millionaire next door" type, with $1m in the bank is getting almost nothing. Years ago, that million would be yielding 4%, or 40K "risk free" per year. That's enough to hire 1 - 2 employees, just on interest alone. Small businesses very marginally benefit from reduced capital costs (they don't issue bonds, and cannot easily access loans), and are the main employers in this country. Finally, small business clients are getting poorer because they aren't getting yield on their savings.
Low interest rates are, in fact, a small business' optimal borrowing scenario. Level of investment is determined by expected return, which is largely determined by the cost of borrowing. When interest rates are low, the cost of borrowing decreases, which in turn leads to higher expected return on existing investment. This leads to more investment, which in turn leads to higher output and more jobs (i.e. expansion and hiring). The only question mark is access to credit. One of the biggest problems of the recent economic recovery, in the face of lower interest rates, has been a "credit freeze" in the market of loan-able funds for cash-weak borrowers, particularly among small to medium sized firms. Banks, afraid of over leveraging, have become increasingly conservative in their lending practices. This had led to a disequilibrium between the want and demand for funds and the access or supply of credit.
Commodity and Goods Price Collapse:
Worse yet, low interest rates have made it very cheap and easy for companies to expand capital intensive enterprises. This has a deflationary effect, when low demand for goods and commodities combine with an increase of production.
NO. It is the exact opposite. Low interest rates have an inflationary effect. It's a simple component of demand theory. The theory is simple, but I'll let you figure it out on your own.
Retirement:
The last, but not insignificant effect of low interest rates is retirement. Low interest rates have made it difficult for those not invested in stocks the last 5 or so years to ever retire. Most people don't save anywhere near enough to retire. So if an individual accumulates 250K, the yield is effectively zero. With 4% interest rates, a yield of 10K would be achievable on that savings. This "broad based" effect of putting money in the pockets of pensioners likely to spend it, has an inflationary effect. The lack of retirement has hurt the labor market for younger folks.
This is the closest you get to making any logical sense. But wait, now you're saying lower interest rates have an inflationary effect?! A paragraph ago you indicated the opposite (lol).
Low rates are not necessarily a bad thing. The problem we have is that the Fed artificially keeps them low. What that means is that the Fed is potentially stealing from people that rely on higher rates for income, like insurance companies and people on fixed income.
So stock, real estate investors benefit at the expense of insurance companies and people on fixed incomes. Eventually this blows sky high.
Manipulation of rates is theft at gunpoint.
The Fed has set rates all along. And low rates have typically been good for the stock markets and housing. Going back to the early '80's I have benefited with low rates with housing, business and investment. More lately this effect has been on the order of $80B in potential lost interest income per year in the US. One reason QE has not been inflationary. But for me the effect has been way positive net gain, so I don't complain.
They put it at a bank, that's what. See, they shouldn't be taking risk on it. Of course, when the Fed pushes rates to zero, they end up doing just that.
It is uncommon for businesses to sit on huge piles of cash for long periods. Normally they either distribute it to shareholders in the form of dividends, or they re-invest it in the business.
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