NationStates Jolt Archive

I will post a link as soon as I can came via my pop up news and no articles written about it yet.

Seriously people this is madness. more banks will fail the currency will plummet and the price of oil will climb like never before.



this is a historic low. if cutting from 5.0% to 2.0% didn't fix it what is going to 1.5%. This is a liquidity problem not loans are too expensive problem you cant solve this by cutting the interest rate.


Anyways opinions. and feel free to link articles as they are written.

trying to encourage consumption to prop up the economy?

lowering the interest rate provides liquidity by making money, and thereby credit, easier to get.

This rate cut, like several recent ones, will likely not make it to the consumer. At least not for a while. Banks will be able to use this to increase their profits.

lowering the interest rate provides liquidity by making money, and thereby credit, easier to get.

This rate cut, like several recent ones, will likely not make it to the consumer. At least not for a while. Banks will be able to use this to increase their profits.

the banks have been failing because of lack of capital. when interest rates are low inflation is high. people pull money out of their savings account and spend it because it will lose more value then the interest rates given. it is not wise to cut intrest rates when banks are failing. besides cutting interest rates for the last 7 years seems to be what has gotten us into this mess.

the banks have been failing because of lack of capital. when interest rates are low inflation is high. people pull money out of their savings account and spend it because it will lose more value then the interest rates given. it is not wise to cut intrest rates when banks are failing. besides cutting interest rates for the last 7 years seems to be what has gotten us into this mess.

Generally, yes, low interest rates do lead to higher inflation. Not always, however. Particularly when interest rates are lowered as the credit markets shrink, as we see now.

However, deposits in savings accounts are not the key source of capital for banks (actually, banks pay people for these deposits). Capital comes from stocks (which benefit from lower interest rates because there is an increase in credit and cash) and loans (which, if banks don't pass the savings on to consumers, become more profitable with lower interest rates, improving the banks standing).

Not cutting interest rates is exactly what the fed did wrong in the early days of the great depression: by tightening fiscal policy, the feds cut liquidity rather than increasing it. Bernanke knows this quite well, and has avoided that same mistake. He's made his share of other mistakes, but lowering interest rates is not one of them.

Cutting interest rates in 2001 following the tech bubble burst and 9/11 (along with a series of deregulations in the late 90's) set up the crisis, but propped up the economy at the time. Cutting interest rates in the early days of this crisis would have helped most of the banks, had they not then used the money to fund other problematic investments (moves into the commodity market, raising the prices of things like oil temporarily, then dropping them, crushing banks like Bear and Lehman)

Now that many of the weaker banks are gone and their names have been examples, some of the better CEOs and stronger banks will be able to survive due to their better ability to get money


Edit: better article. http://www.forbes.com/opinions/2008/10/06/dow-bailout-economy-oped-cx_bw_bs_1006wesburystein.html

people pull money out of their savings account and spend it because it will lose more value then the interest rates given. it is not wise to cut intrest rates when banks are failing.
Hehe, that is precisely the argument they made back in the early 30s. Turned out starving the economy of cash wasn't a good idea, and we learned about monetary policy as a result.

At any rate, this was long, long overdue. It sends a nice signal, but half a percent is hardly enough to have any real effect - and the US in particular doesn't have very far to go now. And the crash we've seen in equities is in big part just the realisation that a recession is going to happen, and it will last for 3 or 4 years. And right now, even scarier is the fact that the Fed is directly lending normal companies money.

Maybe the next thing would be the announcement of some massive fiscal packages to try and manage the recessions. Pity then that the US is in the middle of an election campaign and burdened with idiots in Congress, not to mention all that debt.

Interesting to see what sort of President Obama will be, given that his entire term might well be all about the recession.

Here's the truth, that although cutting interest rates might be the best among some fairly shit options, inflation will go up, it simply has to.

Perhaps not drastically but here's the thing, interest rates have dropped and so the money in your bank is losing value in two ways, inflation decreases the value of every note and interest rates hurt the growth of your savings.

So, basically, those who have been sensible enough to have proper cash savings are being punished for those who bet beyond their means on the market.

I understand the conservative mindset where those who save, who work hard, who contribute are thus punished by those who, in their eyes, don't seem to give a shit. When people wonder why anyone would vote Republican, that's the mindset, and the truly sad aspect is that those very people are the most betrayed by their party, unless they're seriously rich.

People should be a lot angrier than they are, I suspect they're not because it hasn't affected them yet, it will.

Here's the truth, that although cutting interest rates might be the best among some fairly shit options, inflation will go up, it simply has to.

Perhaps not drastically but here's the thing, interest rates have dropped and so the money in your bank is losing value in two ways, inflation decreases the value of every note and interest rates hurt the growth of your savings.

So, basically, those who have been sensible enough to have proper cash savings are being punished for those who bet beyond their means on the market.

I understand the conservative mindset where those who save, who work hard, who contribute are thus punished by those who, in their eyes, don't seem to give a shit. When people wonder why anyone would vote Republican, that's the mindset, and the truly sad aspect is that those very people are the most betrayed by their party, unless they're seriously rich.

People should be a lot angrier than they are, I suspect they're not because it hasn't affected them yet, it will.
I'm not so sure that inflation will go up. I know that basic economics say it will, but this isn't exactly basic. There are a few factors at play that I think will hold inflation, atleast temporarily.

First, there is the shrinking of the credit market. This is essentially a reduction in the money supply. Money supply increases faster than goods and services, and you get inflation. Cutting interest rates usually does this, but not necessarily when the credit supply shrinks.

Second, commodity prices have fallen from their summer peaks. These peaks already drove a round of inflation unrelated to interest rates. With the lowering of commodity prices, especially oil, I think there may be enough slack to cover inflation, at least temporarily.

There is also the factor that the economy is still growing, albeit very slowly (I think 2.7% was the last figure I saw). While this is slow, and in and of itself would never be enough to prevent inflation, I think the three factors give us just enough room to avoid inflation.

out of curiosity, does anyone know the current real interest rate?

edit: By my quick calculation, it's -.6. But it should be remembered that these interest rates likely won't be passed to consumers

Here's the truth, that although cutting interest rates might be the best among some fairly shit options, inflation will go up, it simply has to.
Inflation is no longer on the cards anywhere in the world. That's because money demand is shifting downwards rapidly as people stop spending. Looking at a classic IS-LM model, the central banks are merely counteracting this with traditional looser monetary policy. Nothing particularly special about this.

The special part is that most of the cut in the cash rates won't actually make it into that model in the first place, since banks are unlikely to pass on their lower costs to people who might want to borrow.

Either way, inflation is not a concern. Bernanke has said that in very strong terms in his statement (http://www.federalreserve.gov/newsevents/press/monetary/20081008a.htm). A real redution in the value of their deposits over time is not the major concern American consumers right now.

Inflation is no longer on the cards anywhere in the world.

Iceland, at 14% inflation might disagree with you, though I understand your sentiment, but inflation does still exist.

That's because money demand is shifting downwards rapidly as people stop spending. Looking at a classic IS-LM model, the central banks are merely counteracting this with traditional looser monetary policy. Nothing particularly special about this.

They will have to print money, if only for the government to continue spending itself, this will lead to inflation.

The special part is that most of the cut in the cash rates won't actually make it into that model in the first place, since banks are unlikely to pass on their lower costs to people who might want to borrow.

Banks may remain competitive for new customers, older savings accounts may very well have those lower interest rates passed on.

Either way, inflation is not a concern. Bernanke has said that in very strong terms in his statement (http://www.federalreserve.gov/newsevents/press/monetary/20081008a.htm).

A lot of the market is sentiment right now, Bernanke cannot guarantee anything.

A real reduction in the value of their deposits over time is not the major concern American consumers right now.

Well perhaps not the major concern, the major concern is whether they'll have jobs in 6 months.

Inflation is no longer on the cards anywhere in the world.

When I was taught economics, the key factor wasn't any technical or fundamental driver. Inflationary expectations were ultimately the prime mover of inflation. Basically, if people thought inflation was likely, inflation appeared. I've seen nothing to disprove this in today's market, with fuel prices driving other prices higher due to excessive transportation costs. I know I'm paying more for food, gasoline, building materials, and most of the other things I'm exposed to daily. It's not being offset by lower prices on cheap electronics or imported clothing, as I don't buy those every week.

While there may not be a direct correlation between a half-point reduction in the Prime and increased inflation, don't assume that a crashed credit market means that inflation has gone away. It's real as long as we think it's real. Perception = Reality in today's economy.

When I was taught economics, the key factor wasn't any technical or fundamental driver. Inflationary expectations were ultimately the prime mover of inflation. Basically, if people thought inflation was likely, inflation appeared. I've seen nothing to disprove this in today's market, with fuel prices driving other prices higher due to excessive transportation costs. I know I'm paying more for food, gasoline, building materials, and most of the other things I'm exposed to daily. It's not being offset by lower prices on cheap electronics or imported clothing, as I don't buy those every week.

While there may not be a direct correlation between a half-point reduction in the Prime and increased inflation, don't assume that a crashed credit market means that inflation has gone away. It's real as long as we think it's real. Perception = Reality in today's economy.
Even with that, gas prices have come down (as they always do this time of year...shift away from higher demand and higher production costs of summer formulas). With lower fuel prices, other aspects should either hold stable or come down. I know that my gallon of milk has come back down off its high...not hugely, but still down.

Iceland, at 14% inflation might disagree with you, though I understand your sentiment, but inflation does still exist.His point, I believe (and correct me if I am wrong) is that increasing inflation isn't in the cards...not that inflation has suddenly vanished.



They will have to print money, if only for the government to continue spending itself, this will lead to inflation.
Not inherently. With GDP still growing, and a general shrinking of the money supply in the form of reduced credit, even printing more money does not necessarily mean inflation.


Banks may remain competitive for new customers, older savings accounts may very well have those lower interest rates passed on.
Doubtful. Banks tend to give all depositors the same rate...mostly because depositors are not under any contract to keep their money in that bank.

A lot of the market is sentiment right now, Bernanke cannot guarantee anything.
This is quite true. Despite several sections of the economy actually being..."okay"..., 51% of Americans view depression as "likely".


Well perhaps not the major concern, the major concern is whether they'll have jobs in 6 months.
Depends on whos concerns we're talking about. The average American? Yes, you are more than right.
Those making major economic policy? Well, they have quite a few concerns right now. Inflation happens to not be one of them for the first time in a while.

Iceland, at 14% inflation might disagree with you, though I understand your sentiment, but inflation does still exist.
Iceland has truly bigger things to worry about. And indeed, the reason for their particular problem is that its currency is crashing and as a small island it imports a lot of stuff. As a result, it pays more kroner for each bit of imported toast now. In their case, somehow containing the credit crunch by flooding the world with money (not that that would work) might actually reduce inflation.

They will have to print money, if only for the government to continue spending itself, this will lead to inflation.
Milton Friedman would be proud of you.

Still, modern macroeconomics takes account of the fact that there are more reasons for the behaviour of inflation than just the printing press.

Banks may remain competitive for new customers, older savings accounts may very well have those lower interest rates passed on.
And central banks would hope so, because more than anything this was meant to send a signal to equity markets that the risk of a long recession has been recognised and that there will be action accordingly. And this is back in Bernanke's traditional ballpark too, which is good news because at times you got the feeling that high finance wasn't his thing.

A lot of the market is sentiment right now, Bernanke cannot guarantee anything.
As far as inflation and the reaction of the government is concerned, there is no one else to talk to. And it's not like equity traders in particular need convincing that inflation isn't the big issue right now.

Well perhaps not the major concern, the major concern is whether they'll have jobs in 6 months.
Precisely. And trying to inject cheap money into the economy is one way to try and fight the recession and stimulating a bit of growth.

While there may not be a direct correlation between a half-point reduction in the Prime and increased inflation, don't assume that a crashed credit market means that inflation has gone away. It's real as long as we think it's real. Perception = Reality in today's economy.
All correct, but would you go to your job and ask for a raise right now? ;)

All correct, but would you go to your job and ask for a raise right now? ;)

Just did. I'm overdue for at least a COLA, and I let my HR people know that.

Yes, I'm directly contributing to inflationary expectations. Sue me.

Just did. I'm overdue for at least a COLA, and I let my HR people know that.

Yes, I'm directly contributing to inflationary expectations. Sue me.

*bites thumb in your general direction*

thats for possibly increasing inflation. And getting a raise. And having a job in which you can get a raise. And having a job that doesn't suck.

*grumbes as he puts on his uniform to go be peoples bitc...er....serve people wonderful Italian food*

Doubtful. Banks tend to give all depositors the same rate...mostly because depositors are not under any contract to keep their money in that bank.

No, different interest rates apply to different customers, it's considered more of a hassle to switch banks, hence a higher premium is on new money, not old savings.

Not inherently. With GDP still growing, and a general shrinking of the money supply in the form of reduced credit, even printing more money does not necessarily mean inflation.

IMF has just forecast the UK GDP to contract by 0.7% over the next year, I'm just not sure GDP is definitely growing, it might be offset by India/China but they're quite dependent on an external economy as well.

All correct, but would you go to your job and ask for a raise right now? ;)

You know what, yes I would, and I might just do - I'd almost expect a company would not want to lose its most profitable employees, in a sense I could be said to be at a premium.

That's a little by the by, it may not even be true, it's simply saying that people should understand their worth to a company and this might be the better time to do that, might be the worst time as well :)

I simply refuse to believe there's an easy way out of this, I think there's a real value discrepancy between what we've been buying and what we can get by with, and I don't mean struggle to get by, I mean value being shifted away from owning 'things'.

Capitalism thrives off 'keeping up with the Joneses', that might not be the case over the next couple of years - I suspect it's always true over the long-term.

EDIT: Oops, point being... throwing easy credit at the situation will, in my opinion, lead to inflation as governments try to deficit spend their way out of this by, essentially, printing money or we simply need to take the hit, it's almost a game of bluff, either banks start lending to each other again or they die - we might say 'oh, but that will affect us all' but it's also, to be honest, up to banks to simply lend to each other.

They're being as selfish as any of us for hoarding cash savings and not spending, more so because they have more effect.

No, different interest rates apply to different customers, it's considered more of a hassle to switch banks, hence a higher premium is on new money, not old savings.Ah...I've never really paid attention to savings deposits because mine, according to a friend in banking, are "laughable". :(



IMF has just forecast the UK GDP to contract by 0.7% over the next year, I'm just not sure GDP is definitely growing, it might be offset by India/China but they're quite dependent on an external economy as well.
Interesting. US grew by 2.7%, but I'm not sure about any current predictions.

Ah...I've never really paid attention to savings deposits because mine, according to a friend in banking, are "laughable". :(

Interesting. US grew by 2.7%, but I'm not sure about any current predictions.

To be honest, I live in HK, the entire city is bankers and lawyers, it's built on finance, bankers are all doom and gloom here, lawyers think they're next.

However, given the conversations I have, I also have a rather pessimistic view of the whole situation.

When I was taught economics, the key factor wasn't any technical or fundamental driver. Inflationary expectations were ultimately the prime mover of inflation. Basically, if people thought inflation was likely, inflation appeared. I've seen nothing to disprove this in today's market, with fuel prices driving other prices higher due to excessive transportation costs. I know I'm paying more for food, gasoline, building materials, and most of the other things I'm exposed to daily. It's not being offset by lower prices on cheap electronics or imported clothing, as I don't buy those every week.

While there may not be a direct correlation between a half-point reduction in the Prime and increased inflation, don't assume that a crashed credit market means that inflation has gone away. It's real as long as we think it's real. Perception = Reality in today's economy.


I love that our economy is apparently a really large and complicated game of three card monte. Really comforting.

I love that our economy is apparently a really large and complicated game of three card monte. Really comforting.

Thing is, unlike the roulette table, the odds are almost stacked in a capitalist economy's favour. Better technology and growing population rates practically ensure that, doesn't mean you can't take a bigger hit when the economy itself is bigger.

Can it crash the whole system? I'm pretty sure this particular crisis can't, but then I'm not sure anyone is sure these days.

This won't work. It doesn't do anything about the "problem". There is no magic monetary cure this time. Names have to be taken &c.

And deflation is what we are facing, not inflation. (Unless you live somewhere that will face a currency collapse, in which case make sure you have food and guns).

There's probably a two month or so window to fix this before great depression II.

Yes, I'm directly contributing to inflationary expectations. Sue me.
There's nothing wrong with it, and if they tag along, why not.

The point is that inflationary expectations only have an effect if they in turn trigger real actions, such as higher wage growth. Higher wages then mean higher costs to business, which passes them on to consumers, who then ask for higher wages and so on.

If people are losing their jobs by the millions, the ability of people to ask for a raise is on aggregate much reduced. Combine that with falling commodity prices, and the initial supply shock that can trigger such a spiral is going away too. And businesses will also face pressures to reduce prices or keep them steady wherever possible, because their consumers are having a tough time and not spending anything.

So this is not an inflationary environment, but one of contracting growth. The standard, and quite reasonable, prescription is for monetary policy to ease.

I simply refuse to believe there's an easy way out of this, I think there's a real value discrepancy between what we've been buying and what we can get by with, and I don't mean struggle to get by, I mean value being shifted away from owning 'things'.
There is no easy way out of this, and plenty of people have been saying this for a long time. Nonetheless, there is no reason for the central banks not to do what central banks do in this case. And the confirmation that authorities have grasped economic realities and are working to contain them, as well as any boost to capital reserves available to the banking system are bonuses that help out falling equity prices too (which ultimately affect a lot of consumers' wealth too).

Capitalism thrives off 'keeping up with the Joneses', that might not be the case over the next couple of years - I suspect it's always true over the long-term.
The motivations people have for buying stuff aren't really relevant to any of this.

EDIT: Oops, point being... throwing easy credit at the situation will, in my opinion, lead to inflation as governments try to deficit spend their way out of this by, essentially, printing money...
Rest assured, when that happens, I'll be with you, buying all the gold I can and moving into a cave. As it is, central banks and treasuries are still separate entities, and deficit spending has nothing to do with printing money.

Of course, if we were to get into deflation trouble, it has turned out that printing money is actually the only tool left in the box when interest rates hit zero. In that case, I wholeheartedly condone it, because deflation sucks.

...or we simply need to take the hit, it's almost a game of bluff, either banks start lending to each other again or they die - we might say 'oh, but that will affect us all' but it's also, to be honest, up to banks to simply lend to each other.

They're being as selfish as any of us for hoarding cash savings and not spending, more so because they have more effect.
Banks can only lend to someone they have some idea about, so they can assess their creditworthiness. They can't assess other banks because they've lost all trust into any valuations being provided, not least because they've had trouble even valuing their own assets properly.

They're being selfish in the way they're not willing to die. That's, I think, a reasonable stance for them to take. They're foregoing potential profits from interbank lending too.

What they need is some sort of return of the trust into each others' numbers, so they feel they can create some reasonable assessment of the risks they're exposing themselves (and their depositors, and their shareholders, and now the taxpayer as well) and charge appropriate rates in a competitive market. That's what the Paulson plan is supposed to facilitate, it's what the deposit guarantees in Europe are supposed to do, and what the latest British plan is supposed to do: make banks safer so that other banks will lend to them. Can they do it - only if the plans are credible, which is what markets have been questioning.

Actually, the price of commodities is collapsing...we're talking down 70% on average right now. Not that it's a bad thing, though, since we need all the help we can get on the inflation front.

The motivations people have for buying stuff aren't really relevant to any of this.

Really? I think this is pretty much the main motivation - I mean, people would buy brands-own if this wasn't true. People pay a premium for 'keeping up with the Joneses'.

Once you're beyond subsistence living, which is simply buying the bare minimum, much of the economy is based on premium.

I'm not going to rely on my hazy memory of The Undercover Economist but entire market strategies are based on this, placement of different products are carefully calibrated on the bet that you will buy beyond your needs.

The disparity between rich and poor has never been greater within this system, as in I'm discounting feudal and proto-industrial economies, and 'keeping up with the Joneses' has never been stronger a motivation, hence people are buying on credit beyond what they can afford.

Fine at some level but to stave off the inevitable, means have been found to carry this on.

Slightly off-topic I think.

Actually, the price of commodities is collapsing...we're talking down 70% on average right now. Not that it's a bad thing, though, since we need all the help we can get on the inflation front.

People are desperate to raise cash. The only markets that are really 'working' are stocks, commodities, treasuries. (Though huge demand for the last, esp. at the short end.)

So everything liquid is getting dumped. It's actually outpacing demand destruction at this time.

I love that our economy is apparently a really large and complicated game of three card monte. Really comforting.

Haven't you heard the talking heads saying "This is all really about consumer confidence. If people think the institutions are sound, they actually will be."

Honestly, people talk about money as if it's a real thing. It's a philosophical concept of value, with no inherent value itself. All it ever has been has been pieces of paper chasing each other around the world, and later replaced by electrons chasing each other around the net. How can it be anything other than a shell game?

examples:
U.S. Stocks Retreat on Recession Concern; Alcoa Shares Tumble

Oct. 8 (Bloomberg) -- U.S. stocks fell for a sixth day as unprecedented interest-rate cuts by six central banks failed to convince investors the global economy will avoid a recession.

Bank of England Cuts Rate to 4.5% in Coordinated Move (Update2)

Oct. 8 (Bloomberg) -- Today's cut is ``very welcome and helpful,'' said Willem Buiter, a former member of the rate-setting Monetary Policy Committee, in a telephone interview. ``Although it's more important for the mood music it creates than for any effect on economic fundamentals. I'm much more worried about working on the funding problems and capital needs of banks.''

People are desperate to raise cash. The only markets that are really 'working' are stocks, commodities, treasuries. (Though huge demand for the last, esp. at the short end.)

So everything liquid is getting dumped. It's actually outpacing demand destruction at this time.

True. Of course, if people unload commodities and put the money in to Treasuries, that likely strengthens the dollar and further pressures them downward. No matter the reason, falling commodity prices are a very, very good thing for the world economy.

No matter the reason, falling commodity prices are a very, very good thing for the world economy.
Not for Australia though. :(

Anyways, here (http://www.eurointelligence.com/Article.620+M5a8aaa4348c.0.html) is some more commentary, particularly on the responses from governments so far.