Sunday, September 06, 2015

Fed Interest Rates Have No Effect on the Economy

Since the day you were born and your parents put an economics textbook in your hand, it was just "known" that lowering interest rates helps boost the economy.  Specifically, "the interest rate" the Federal Reserve controls (also called the Federal Funds Rate) was our monetary policy savior in case the economy looked like it was going to go into recession.  Ergo, in combination with expansionary fiscal policy, "lowering the interest rate" would help put people back to work and defeat the hated "business cycle" forever.

Or maybe not.

For before I hop in my car and head out to Seattle, I decided to do a little research in aiming to make some pre-made very Cappy economic posts.  And one thing I wanted to see was if the federal funds rate had ANY correlation or effect on economic growth.

It does not:

This concludes your pre-made Very Cappy post of the day.


Carlos Rivera said...

What do the lines and the dots mean?

David Suspended said...

The line is the line of best fit. It's the line that best fits the data. The dots are the data - every dot corresponds to a data point. What the chart shows is that the Federal Reserve changing the interest rates has no impact on economic growth.

Anonymous said...

What the fed rate DOES do is make money cheaper to borrow. And that is a good thing is you are the nation's largest borrower and have no idea how you would pay your bills if you actually had to pay market rates to borrow money instead of just creating it out of thin air.

Anonymous said...

"lowering the interest rate" would help put people back to work"

Let me get this straight. You put people back to work by destroying their savings with inflation and by forcing them to earn lower interest rates than inflation ?

This is credit side economics.

What happened to working hard, saving capital and then reinvest the saved capital to grow the economy or consume ?

The reason why the USA did great in the 1950's and 1960's was because credit wasn't cheap and simply wasn't available for the masses.

People had to save money, banks paid decent interest rates. It was mostly businesses that borrowed money to invest in expanding their business and hire new workers etc.

Consumer credit has ruined everything.

I don't care what the Keynesians say, I am saving my money. I eat oatmeal and mac & cheese, I mostly drink water. I wear out my clothes before I buy new ones. I don't spend a dime I don't need to.

I purposely deprive myself to save as much money as I can. Let the rich spend money already. The poor should save.

Anonymous said...

So the FED's interest rate is mostly static and the economic cycle doesn't notice it.

However, make a graph that correlates interest rates with inequality, interest rates with the income gap, interest rates with the wealth gap.

You will see that low interest rates hurt the poor and benefit the rich.

What the poor gain in low interest rate, they pay back big time in inflation and low returns on savings.

Anonymous said...

Isn't the whole FED thing anti market ?

Shouldn't there be many private banks competing against each other by luring savers with enticing interest rates ?

Shouldn't it be let to the market to decide the interest rates ? Shouldn't that interest rate be determined by the demand for money vs the demand for interest ?

If people don't demand stuff but instead prefer to save their money and private banks have a surplus of cash sitting it their vaults then the market should produce low interest rates and this is a signal to business that there is capital available for them to invest in expanding their business and hiring new workers.

It is a signal that there is money there for future consumption so it's smart to invest to increase production.

If people don't save a lot of money, then private banks need to increase their interest rates to attract savers. It's also a signal that there isn't enough money for future consumption so companies should not invest right now and wait until credit is cheaper.

I don't understand why it's a governing entity, The FED, which decides the interest rates. This seems to be a direct intervention that distorts the markets.

Let the markets decide the correct interest rate. Stop fooling around with the markets.

Anonymous said...

What if you compared the change in the rate to the GDP growth? It seems like there should be some sort of relationship there.

Robert What? said...

The Fed don't lower interest rates to "help the economy" even though that is their stated purpose. They lower them to help inflate asset values for the crony classes.

Anonymous said...

I'm starting to think that easy loans, consumer credit and the end of the gold standard is what killed the middle class.

Yes, businesses started outsourcing in the 1970's, yes the computer displaced a lot of jobs and yes women massively entered the work force. But all of that is only part of the problem.

I think that the culprit is more a financial one than a fundamental one. Wages remained flat ever since the 1970's but savings crumbled, thereby thinning out the middle class.

Had money remained hard, the middle class would have kept saving money. The government would not have been able to borrow that much and would have needed to temper spending.

The middle class would have earned a bigger share of the financial and technological pie through investing their savings. But credit and consumption has caused the masses to miss the boat due to lack of savings.

This is why you see CEO's make huge fortunes and why you see such a great wealth gap. Because one class is pocketing the profits of easy credit while the masses are struggling to repay their loans. Businesses are not investing in production at home because there is a lack of capital at home. So they have to outsource production to cheap labor China, India and Bangladesh to make up for the lack of capital at home.

This would have never happened if Nixon had kept the gold standard and disciplined government spending.

Ronald Reagan tried to bring a supply side economy based on production and business investment, but the credit bubble tsunami outpaced reaganomics and tanked the economy.

The economy would have have been over-financialized had we kept the gold standard. Our economy would have been based on fundamentals rather than financials.

So the problems of our economy is mostly due to our junk money and junk credit.

David Suspended said...

Can you do a chart that shows the correlation between the federal funds rate and unemployment?

Guy Tech said...

Lowering interest rates can create a credit bubble which acts like a drug high. Like a drunk, over time, the effect wears off, and the credit bubble stops expanding, or begins to collapse. To prevent it from collapsing, the Fed needs to lower rates more, but also like a drug it takes an ever greater amount of a drug to maintain the same high. At the end, when the drug stops getting administered, there is a widthdrawl, usually severe recession or depression.

Anonmous wrote:
"I'm starting to think that easy loans, consumer credit and the end of the gold standard is what killed the middle class."

Not really:
1. We had the great depression during the gold standard whick destroyed the middle class in the 1930's. There was also a several recessions/depressions and panics during the gold standard era. There was also periods of easy-credit (ie the boom of the 1920's).

2. The US did well after WW2 since it was the only nation with an intact industrial base. The rest of the developed world had its industial based destroyed during bombing and fighting. US factories rebuilt much of what was destroyed creating incredible prosperty in the US during the 1950s and 1960s. But by late 1960's the EU and Asia started competing for market share.

3. Regulation has been a driving force in the destruction of the middle class. Regulation forces lots of American production overseas to escape regulation (pollution, insurance, affirmative action, etc). Which some regulation is necessary, The issue is that their is the case of too much can cause problems. Buecracts need something to do. So they keep on over-regulating.

"Businesses are not investing in production at home because there is a lack of capital at home. So they have to outsource production to cheap labor China, India and Bangladesh to make up for the lack of capital at home."

This is caused by regulation, not capital. there is plenty of capital, but US regulations make production in the US unprofitable. Its just easier to set up manufacturing overseas, not only because of lower labor cost, but lack of regulation on pollution, worker safety, insurance, taxation lawsuits, etc). Technically the US can complete with cheap oversea labor with automation. In an automated production line, a single US worker could out produce 1000 Chinese labors and beat them on labor cost, and quality. Its the regulations and taxation that still make it impracticable. Also consider that US companies are charged 35% in fed corp taxes, plus state, and local taxes. Goods produced overseas and sold in the US aren't subject to US taxes.