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posted by janrinok on Saturday February 21 2015, @08:30AM   Printer-friendly
from the what-me-worry? dept.

Some time ago we discussed negative interest rates here on Soylent News. At that time there was some discussion of deflation and why it is such a mixed bag for consumers, companies, and countries.

The Economist has an article that explains deflation rather succinctly.

It turns out that deflation is bad because we are all so burdened with Debt. Not only personal debt, but corporate debt, and national debts. You end up paying debts with money that is more and more dear as time goes on.

Deflation poses several risks, some well-understood, one not. One familiar danger is that consumers will put off spending in the expectation that things will get even cheaper, further muting demand. Likewise, if prices fall across an economy but wages do not, then firms’ margins will be squeezed and employment will stagnate or decline. (Neither of these dangers is yet visible; indeed, America and Britain are seeing strong employment growth.) A third, well-known risk is debt deflation: debts become more onerous because the amount that is owed does not fall, even as earnings do. This is a big worry in the euro zone, where many banks are already stuffed with dud loans.

But in addition, all tools of Monetary Policy become useless.

The least-understood danger is also the most serious, because it is already here. Deflation makes it harder to loosen monetary policy. All of which means that policymakers risk having precious little room for manoeuvre when the next recession hits.

While some have been eager to see monetary policy reigned in, we did see the effects of this during the height of the recent depression, (which some claim we are still suffering from).

The US Federal Reserve had run out points it could cut when lending money to large banks. There were periods in 2010 where the Fed was lending money to banks at Zero Interest Rate. The link explains a number of serious risks with this policy.

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  • (Score: 5, Insightful) by anubi on Saturday February 21 2015, @09:31AM

    by anubi (2828) on Saturday February 21 2015, @09:31AM (#147725) Journal

    Here's a longer term overview of interest rates... []

    The banks have been dropping interest rates for quite some time now to fuel round after round of speculative real estate profit-taking.

    Now, globalization is taking hold and fewer people are finding themselves with the take-home pay ( and the ability to shield it from taxation ) to pay debt service.

    A few years ago, the banks could always drop interest rates another notch to egg on yet another spending spree.

    Looks like they are now out of notches. We are not on the ladder anymore,,, we are now on the ground.

    Remember that last notch when Bernake single-handedly drove the whole world into a recession by hiking the rate ( that last blip on the right )?

    We have businesses that need to report a year-over-year "growth", but this time there won't be a downward step of interest rates to monetize that growth.

    On top of this, every dollar taxed from the "poor people" is taken directly from the tills of merchants, as the "poor people" aren't running around buying "investments" and tax shelters. It will not be long before merchants are faced with an ever price-sensitive market, as consumers divvy up what money they can scrape up between necessities and feeding the tax collector. A merchant hiking his prices will quickly lose his customer base, as the "little people" just don't have the money - as their job was outsourced.

    As more and more people feel the pain, more and more attention will be paid to Congress, and which Congressmen's tongue says one thing but his pen does another.

    All in all it might be a good thing if people will focus their attention on the problem and deal with it. We cannot outsource our jobs and all live on "investments" or "social services".

    The next Fed chairman to hike the rate is very likely to start another cascade of business failures, restarting the 2007 crash, except this time there is no room to try to flood liquidity into the market by dropping the rate even lower to egg on more loans. This is going to be very interesting and also very painful, as there is a lot of debt out there and if the ability to repay that debt is hampered, a massive cascade financial failure is likely. Our government did not help much bailing the banks out on that last one, as that only gave those guys reassurance that our Government would protect their asses by taxing even more the working stiff on the street, of whom many of them have now lost their jobs and house.

    We have way too much debt burden. It looks to me like a typical control system problem as the pole moves toward the right hand side. Debt requires payback money, yet the economy requires money as well. Too much debt burden and something is gonna give.

    When I was very young ( at the start of the graph I linked to ). a man was known by what he did. Now a man is known by what he owns. We need to revert to the former to get back on the upward part of that curve, not sacrifice altitude trying to sustain a model of wealth by connivery and lobbying, not work.

    "Prove all things; hold fast that which is good." [KJV: I Thessalonians 5:21]
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  • (Score: 3, Insightful) by Phoenix666 on Saturday February 21 2015, @04:03PM

    by Phoenix666 (552) on Saturday February 21 2015, @04:03PM (#147785) Journal

    As more and more people feel the pain, more and more attention will be paid to Congress, and which Congressmen's tongue says one thing but his pen does another.

    Fresh back from a family trip to DC during the kids' Winter Break, I am happy to report that the trees lining the National Mall have excellent limbs and will serve well as hanging trees. They are planted three deep a side and each can accommodate at least six; there is plenty of room for Congress, the Whitehouse, and the Supreme Court. Alas, for the multitudes of lawyers and lobbyists in that place we shall have to ask the good people of Virginia and Maryland to lend us a few million trees.

    Washington DC delenda est.
    • (Score: 2) by redneckmother on Saturday February 21 2015, @04:26PM

      by redneckmother (3597) on Saturday February 21 2015, @04:26PM (#147792)

      Now I understand why the US outlawed growing hemp.

      Mas cerveza por favor.
      • (Score: 4, Insightful) by Phoenix666 on Saturday February 21 2015, @04:32PM

        by Phoenix666 (552) on Saturday February 21 2015, @04:32PM (#147797) Journal

        Yes, it makes excellent rope.

        Washington DC delenda est.
        • (Score: 2) by fadrian on Saturday February 21 2015, @05:57PM

          by fadrian (3194) on Saturday February 21 2015, @05:57PM (#147824) Homepage

          Yes, but won't our leaders get silk ropes, anyway, as nobles are wont to do?

          That is all.
    • (Score: 0) by Anonymous Coward on Saturday February 21 2015, @08:34PM

      by Anonymous Coward on Saturday February 21 2015, @08:34PM (#147882)

      Trees are reusable for purposes like this. I'd rather start with the people on k street myself.