Saturday, February 25, 2017

Rate Hike Means $50 Billion


This person gets it backwards as usual but the $50B increase in annual leading USD fiscal flow number is correct.





19 comments:

Auburn Parks said...

On the other side of the ledger that you ignore is that rate increases mean even more interest spending done by debtors that goes to financial institutions instead of to goods and services in the rest of the real economy.

Have you ever tried to do a summary of the effects of interest rate increases both for those who benefit and for those who do not? Have you ever tried to put some relevant weights to these competing sides of the economic ledger and try to get some sense of a net economic result given various levels of private and Govt debt to GDP?

Or do you criticize others for ignoring the income effects for people and corporations of interest rate increases while they focus single mindedly on the debt payments and loan origination effects while you personally continue to focus single mindedly on the income effects for people and corporations of interest rate increases while you ignore the effects on debt payments and loan origination from interest rate increases?

Personally, as I've never done the above systematic calculation to try and get a grip on the net macroeconomic impact of interest rate changes given different levels of Govt and private debt I keep my mouth shut instead of making boisterous predictions and criticisms of others on this particular economic matter.

Hope this is relevant for you Matt

Matthew Franko said...

Auburn,

SP500 firms iirc retain like 150B on like 11T revenues... its like less than 2%... this includes banks, etc.. so if we look at Warren via rote: "its always an unspent income story..." the problem is not coming from firms including banks/lenders, etc....

The interest rate works like this function: f(x,y,r) = x/r + yr

So there is some decrease from the higher rates in the first term but an increase in the second... economists are only aware of the first term... so they say economic activity will retard if they raise the policy rate...

Like this lady here in this article says "rate hike is going to COST..." she doesnt understand that it is not a "cost" it would be increased interest income to non-govt...

Matthew Franko said...

Auburn who was complaining when gas was over $4?

Its not like banks/lenders are not in the economy and people dont work there...

Its not like non-govt savers dont benefit from higher govt paid interest rates...

Auburn Parks said...
This comment has been removed by the author.
Auburn Parks said...

Matt-

I dont know how either of these comments addresses my complaint.

Matt Franko said...

If as Warren says "it's always an unspent income story..." then a rate increase and subsequent increase in interest payments by borrowers on a variable rate loan would decrease the amount of unspent income... meanwhile the govt as payer of interest would also be increasing interest income to non govt...

Both would help...

Auburn Parks said...

I still don't see you grappling at all with any of the negative effects which was of course my original complaint. You can't look on only one side of The Ledger, in your case the positive side, and then Proclaim that raising interest rates is good policy. Because youve failed to take into account, let alone even attempted to calculate, the negative effects of that policy. And until you do that you can't come to some sort of net good or bad conclusion

Matt Franko said...

There is no negative effect I just told you if any policy decreases the amount of unspent income within any fiscal interval then it's by definition a positive...

A borrower having to pay a higher adjustable payment on a loan doesn't decrease that borrowers income one cent...

Matt Franko said...

You are assuming that any increase in interest paid to a lender will be saved... there is no evidence that is what happens... firms don't save very much they pay out dividends and make capital investments with like 85% of their after tax profits... if I am correct it amounts to less than 2% of their revenues...

Matt Franko said...

Auburn if a functional equation has 2 terms you can't just ignore the one term for political reasons...

Matt Franko said...

Economists ignore the second term because they are libertarian biased both left and right and don't want to see the govt institution credited with that function...

Auburn Parks said...

Matt

So 10% interest rates dont hurt small business owners?

potential homebuyers?

Hell, even home sellers are hurt because house prices cant be as high with 10% interest rates as they can be with 1% since Homebuyer montly income can only afford so much in house payments.

Because the Govt spending $1.2 trillion a year on interest to rich people, foreigners, and financial institutions wont hurt domestic spending programs that help people who actually need it. Republicans would be totally on board with all this extra spending, they wouldnt use it as a reason to undermine Govt functions.

And there are many more examples of negative consequences from higher interest rates. So maybe your description rates of higher interest rates having "no negative consequences" was a little over done.

Auburn Parks said...

Im in real estate. I buy foreclosed houses on credit, fix them up and rent them out. A 3BR 2 Bath home about 1500sqft goes for about $1750 a month or $21000 in revenue a yr. Im paying 3% right now on about $150K per house, so please explain how my interest costs going from $4500 a yr to $15000 per year is good for my business? I know, Ill just raise rents by $10k per year for my tenants who make about 75K per year on average. That wont hurt their consumption on other things in any way.

Matt Franko said...

On the way to 10% You'd be able to get rent increases and would be looking at near 10% appreciation on the properties...

Auburn Parks said...

I'm sorry Matt but that's just absolutely insane. You have absolutely no reason to believe that people can afford an extra $10,000 and rent on an average rental property without it negatively impacting the rest of their spending and their standard of living.

Furthermore house prices do not go up with mortgage rate increases it's just simple math that people can't afford more than some percentage of their income per month on housing. For example if your income allows you to spend $1500 a month in housing you can either afford a $350k home at 3% or a $175k home at 10%. That's not a recipe.for.price increases

Matthew Franko said...

There are two terms in the equation... you have the one you're talking about (rate in the denominator) and then the other one (rate in the numerator)...

Jeff65 said...

Matt,

Trickle down economics was slapped down years ago. It's bullshit.

Noah Way said...

Trickle-down is an oxymoron. It's actually trickle up, or as Tom calls it, rent.

Six said...

Higher rates retard price increases of real estate, because the price and the rate determines what the buyer can "afford". Price drops suffer friction (stickiness) because people would rather hold on to a property than take a loss, if at all possible. So you see more upward price movements when rates drop than downward movements when rates rise.