When people talk about ‘bringing down rates’ in reference to when the Fed buys treasuries, they mean the rate on the treasury right? The Fed can only set rates for market loans by the rate which they loan to commercial banks right?
Also when there is inflation, people’s savings are being “eroded”. What is meant by this is that the interest rate they are getting in their account is less than the rate of inflation. This erosion of savings then is used as evidence that inflation hurts the economy. But won’t those people want to take their money out of savings and into investment to try to get ahead on inflation? They know that they’re losing in the bank so they might as well try the stock market. So is it so bad for people to be pulling out of savings and into the stock market? I suppose it’s bad because prices on the NYSE depend on expanding credit right now, which creates a situation in which credit expansion is justified because everyone’s assets are at risk.
It seems like investment plays a more concrete role than savings, because you know that it is being used. But with savings, they are only being used if a loan is being taken out. Are loans being taken out so frequently that the contribution to the economy is comparable to that of investment?
Also I figure that it’s just another reason that elites love inflation. Put people’s money in blue-chip stock picks instead of savings which would go to helping people start businesses.
Murray Rothbard once asked Ludwig von Mises at what point on the spectrum of statism is the point that designates a country as “socialist.” To his surprise, Mises said that there was, indeed, a clear-cut delineation: The Stock Market.
Mises said, “A stock market is crucial to the existence of capitalism and private property. For it means that there is a functioning market in the exchange of private titles to the means of production. There can be no genuine private ownership of capital without a stock market: there can be no true socialism if such a market is allowed to exist.”
Investment is money put into a firm for long-term projects and improvements in structure. Stocks are a secondary market that doesn’t directly help a company build a new factory.
Ok so could the former investment be considered savings? In that case I’m referring to the latter: stocks. How does one make the former kind of investment if not through savings accounts?
Ok so could the former investment be considered savings
Well, I mean, in commonspeak it’s still investment, but in yourself, sort of (not quite). It’s definitely not investment in a company unless you consider the PR.
How does one make the former kind of investment if not through savings accounts?
I think I see what you mean now. I wasn’t posing any of this from a reference point of an entrepeneur, who would invest in himself, but just as typical boomers who have savings accounts, bonds, and equities.
Bringing down rates - typically they are talking about the Fed Funds Rate - or the overnight rate banks charge each other to borrow - see http://en.wikipedia.org/wiki/Overnight_market. The Fed, however, likely has the intent for all interest rates to go down. If banks have more money to lend from the Fed lending to them, than the Fed Funds + other rates are likely to go down - (unless the move prompts people to fear inflation, and you can see rates go up for the inflation premium). The fed doesn’t “set” anything, they target - they just buy assets and push money into the system which usually has the effect of lowering rates.
They may pull out of their savings account - assuming they have money - remember a lot of people live paycheck to paycheck and can’t invest in the stock market - and just because the Fed is inflating doesn’t mean the stock market will do well, example - 2000-2010. A lot of other people don’t know how to invest with inflation and may lose more money than they would if they just kept it in the bank.
I suppose it’s bad because prices on the NYSE depend on expanding credit right now, which creates a situation in which credit expansion is justified because everyone’s assets are at risk.
So what’s the solution? Continue to print more and more money to keep an asset bubble alive? You could replace the stock market with “Madoff” and it would be just as absurd. Taking money from the people and giving it to investors is wrong. Why should one interest group get richer why the other gets poorer for no apparent reason? Even if you did support it, to paraphrase Mises, all artificial credit expansion bubbles can only end in the destruction of the currency or a collapse of the bubble. Furthermore, no one should feel forced, due to Fed action, to have to risk their money just to get by. Would you like me to come up to you and say alright, here’s the deal, you can either give me 5% of your annual income each year or you can go to Vegas and play the roulette table and I won’t make you pay the 5%. How would you like that?
The investment/savings thing is a fallacy. Savings are used like investment only they are spread out through the entire economy rather than focused on one specific firm. I wrote a blog post related to this - part of the post deals with this exact question: http://www.acceptancetake.com/the-unnoticed-evil-of-fractional-reserve-banking/ - (if you don’t want to read it all - I don’t know why not!!!, then start right after the bolded "Unlike in FRB, true credit is resources or money set aside for future consumption."
Yes, the elites do LOVE inflation - if you understand how to game inflation, you can become incredibly rich.
This is what I’m talking about. What assets do they buy to lower rates? So when they buy treasuries, it only lowers the treasury rate. Mortgages, the mortgage rate? I’m pretty sure this is right, but I always hear pundits tossing around ‘rates’ as though the phrase is a convenient identifier of anything.
I don’t disagree with you at all, just didn’t quite get the gears of it. I’ll check out the blog, and get my mouse finger ready for QE3 day :).
They usually buy Treasuries, but recently they’ve been buying mortgage backed securities as well. As far as lowering rates is concerned it doesn’t really matter what they buy over the long haul. When more money is flowing through the system there is more money available to lend depressing interest rates across the board. The more money in the system, the more money the FRB system can multiply which has the effect of lowering rates.
One way of looking at it is when the Fed buys Treasuries from the Goldman Sachs interest rates go down on the Treasuries bought if enough is bought because there is more demand for Treasuries. With increased demand for Treasuries other bond issues, like B+ corporate bonds, for example, can offer lower rates because the competition from Treasuries has decreased. If an investor demands a 3% risk premium for the B+ bonds before the Fed intervention, assuming nothing changed, he will accept the lower rate on the new B+ bonds because he still gets the 3% risk premium.