/biz/ - Business & Finance

[Anonymous No.10370215]

why do low interest rates cause inflation exactly? isn't inflation caused by the central banks printing more money? t. brainlet

[Anonymous No.10370221]

>>10370215
>why do low interest rates cause inflation


In general, as interest rates are lowered, more people are able to borrow more money. The result is that consumers have more money to spend, causing the economy to grow and inflation to increase.

[Anonymous No.10370238]

Low interest rates encourage people to borrow and spend, and banks to lend, and the Fed to quantitatively ease (yes, “print” more money - but this is usually just a number on a spreadsheet).

[Anonymous No.10370248]

>>10370215
low interest rates means credit is cheaper, and money is created via credit

[Anonymous No.10370311]

>>10370248
>and money is created via credit

isn't the central bank the only one who can 'create' money?

[Anonymous No.10370687]

Wow an actual good thread

[Anonymous No.10370724]

>>10370311
Google up multiplier effect.

[Anonymous No.10371195]

So the interest rate is just the price of borrowing money. "Hey, if I get $100 from you right now, what will I have to pay you in one year? $105? Okay, so the one-year interest rate, aka the price of borrowing money, is 5%."

The price of money goes up and down with market forces, just like the price of labor (wages), or the price of property, or the price of goods, etc.

When the Fed "sets" a new interest rate, they don't just declare the new interest rate and everybody follows it. Rather, what happens is they announce their target interest rate, and then they expand or contract the money supply to influence the price of borrowing money until the actual interest rate matches their target rate.

So say that right now the interest rate is 2.5%, and the Fed wants to reduce it to 2.0%. The Fed announces the new target rate, and then they expand the money supply ("print money") so that there's more money lying around in the market, and when there's more money available to lend to people, the price of borrowing money goes down, just as how if you flooded the market with Link then the price of Link would go down. Eventually, because of the Fed expanding the money supply, the interest rate falls to the Fed's target of 2%.

The Fed is expanding the money supply, aka printing new dollars, so every dollar that already exists tends to become less valuable, aka inflation. Makes sense?

[Anonymous No.10371245]

>>10371195
>The Fed is expanding the money supply, aka printing new dollars, so every dollar that already exists tends to become less valuable, aka inflation. Makes sense?

yes thank you but i already knew this, like if someone made a shit ton more link tokens my linkies would be worth even less.

but my point is what does that have to do with interest rates? are you saying interest rates is just a way to disguise them saying 'he guys we're printing more money here'???

[Anonymous No.10371390]

>>10371245
When the Fed wants to lower the interest rate, they do so by printing dollars. Printing more dollars makes dollars less valuable. Therefore, lowering the interest rate is associated with inflation.

It sounds like what's confusing you more is why the Fed would lower or raise interest rates. I think I can help with that too.

When you lower interest rates, aka make it cheaper to borrow money, then people are more willing to borrow for various purposes compared to when borrowing costs are high.

Some of that borrowing is good -- borrowing for investment. Let's say you own a factory and there's a fancy machine you can buy that would make your factory more profitable. You would need to borrow money in order to buy the machine. You're much more likely to borrow money and invest in the machine if the interest rate is 2% compared to if the interest rate is 10%. So lower interest rates encourage borrowing for investment.

There's also borrowing for consumption. Low interest rates mean that you can get a mortgage, or a car loan, or a credit card, at more favorable interest rates. So low interest rates are also associated with people consuming more.

The Fed likes to keep interest rates low to "juice" the economy with extra borrowing, for both investment and consumption. Sometimes this is good. And sometimes it leads to bad investments made using borrowed money that blows up like in the 2008 recession.

Does that answer all of your questions?

[Anonymous No.10371459]

>>10371390
>therefore, lowering the interest rate is associated with inflation.

this is the thing im struggling with most. nothing i have read has associated printed money and interest rates

thanks alot for you help its defnitely clarified things but im just struggling with how money printing and interest rates correlate. Like right now argentina has interest rates of like 40%(to stop people from borrowing money) but how do i find out how much money they are printing because obviously thats whats devalued their currency

[Anonymous No.10371550]

>>10370311
All member banks 'print' the money that is loaned.

The people are the credit of the nation.

The FED may not allow interest rates to rise, as this makes sevicing debts impossible. If the value of a loan does not decrease over time due to inflation, most debt becomes unservicable and the ponzi collapses.

There is no choice but to drive the train over the cliff and hope for levitation. Lots of supercomputer time is dedicated to manipulating markets to not crash and suppress inflation flags like silver.

Keynesians begin with the assumption that every actor is rational and has perfect market knowledge.

[Anonymous No.10371575]

>>10371459
This is generally called the M2, or money velocity. But governments stopped reporting this decades ago.

[Anonymous No.10371671]

>>10371459
Oh yeah, Argentina is an interesting case.

So in Argentina there was recently a lot of capital flight -- people moving their money out of Argentina so they can invest it in other countries. So a bunch of people were trying to sell their Argentinian pesos (and buy dollars, or euros, or whatever). A bunch of people selling their pesos caused the value of the peso to drop, aka inflation.

The central bank of Argentina wants inflation to be low, and all of these people dumping pesos was causing inflation to increase too much. So the central bank increased the interest rate -- aka they removed pesos from circulation.

Increasing the interest rate like they did actually helps reduce inflation in two ways:
1. They pull pesos out of circulation; there are fewer pesos so each peso is worth more
2. Now that the interest rate is really high, the same people who took their money out of Argentina might consider moving their money back into Argentina, because the interest rate is so high, and therefore they can make a lot of money by parking their money in Argentina. So international investors buying up pesos will also help bring the inflation rate down.

Basically, low interest rates --> printing money --> more borrowing and more inflation --> investors move their money out of the country in search of higher interest rates.

High interest rates --> removing money from circulation --> less borrowing and less inflation --> investors move their money into the country to take advantage of the high interest rate.

I don't know about Argentina, but here's the money supply of the United States: https://fred.stlouisfed.org/series/M2

[Anonymous No.10371675]

>>10371459
Dude the anon above just answered that. The fed lowers interest rates and prints money to stimulate the economy. It encourages spending and keeps jobs going, businesses using credit to keep going etc. the downside to that the value of the dollar goes down and you see inflation. Supply vs demand.

If 5 million BTC were magically added (even tho it can’t) to the circulating supply, would it go up or down in price? It would go down because it’s become less valuable aka inflationary. If there are a billion BTC, it would be way less valuable. 2 billion BTC even way less. Etc.

argentinas problem is not just about because they’re printing too much money. It’s more complicated than that. They’re fucked.

[Anonymous No.10371686]

>>10371459
Allowing bond holders to panic over the ability of the debtor to pay, which is very immediate under rising interest rates, ruins a nation's economy.

It makes it plain that the government intends to jubilee or haircut the debt, which the money changers cannot tolerate anymore.

[Anonymous No.10371691]

>>10370724
>Google up multiplier effect.
This is a fallacy as stated in the creation of money by the BoE

https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf?la=en&hash=9A8788FD44A62D8BB927123544205CE476E01654

>>10370311
OP, When credit is cheap more 'money' is created as more ppl are able to obtain credit/you obtain more for cheaper so more ppl want credit.
Example
i want to borrow 100k to buy a house (the bread & butter of money creation) if i borrow it @ 3% (£422 monthly payment) interest it would be a cheaper payment than if i borrowed 100k @ 5% .(£537 monthly payment) interest. a big jump in the monthly cost. i.e less borrow as it is 'expensive'.

[Anonymous No.10371696]

>>10370687
It's been so long...

[Anonymous No.10371738]

>>10371671
Much enlightening, thank you anon.

[Anonymous No.10371761]

>>10370687
>high school econ
>good thread
Kys brainlet

[Anonymous No.10371799]

>>10371671
>interest rate -- aka they removed pesos from circulation
Anon, can you provide evidence that rising the interest rate removes that currency from the system? I just see that less get printed as less 'money' is being created.

[Anonymous No.10371845]

>>10371675
I think the confusion comes from making the connection between lowering interest rates, and printing more money.

1. Lowering interest rates means people are more likely to borrow money because it will be easier to repay the loans.

2. Printing money means there is more currency in circulation, which means there's more money to spend, and this eventually causes the value of the currency to lower aka inflation.

But what is the connection between 1 & 2? Sounds like you could do one without doing the other and still achieve inflation.

[Anonymous No.10371849]

>>10370215
Banks also create money by giving loans. Read about M3 supply.

[Anonymous No.10371892]

>>10371799
He probably means that if money is being held in high interest loans, no one is going to want to borrow, so the money stays in the bank instead of circulating throughout the economy, causing deflation.

[Anonymous No.10371916]

>>10371195
>>10371390
>>10371550
Thanks senpai learned something else today

[Anonymous No.10371927]

>>10371845
As I said in my first post, central banks don't just dictate the interest rate. "Everybody has to lend and borrow at this interest rate -- or else!" is not how it works.

They achieve the target interest rate, which is just the price of money, by controlling the supply of money. So when they want to reduce the cost of money / reduce the interest rate, they increase the supply of money. And so too when they want to increase the cost of money / increase the interest rate, they reduce the supply of money.

[Anonymous No.10371938]

>>10371892
I know >>10371691

[reluctant kneepad girl No.10371940]

>>10370687
>fetal stage school economics
>good thread

[Anonymous No.10372219]

>>10371671
thanks a lot anon.

[Anonymous No.10372228]

>>10371940
>tripfag complaining about quality
The absolute state

[Anonymous No.10372247]

>>10371927
ahhhhhhh i get it. it just clicked for me.