What bothers me is that in Europe it was expected to affect the real estate prices. The higher the interest, the lower the prices, which sounds logical but...the prices kept increasing.
So what's going to happen when Lagarde decides to lower them? The demand is way to high and the offer is almost non existent.
And it seems that it didn't affect the inflation either. Bad years for everybody who's not getting a 10% raise every year.
> The higher the interest, the lower the prices, which sounds logical but...the prices kept increasing.
This is a side effect of "demand" I think.
Higher interest rates increase mortgage/financing costs. This is supposed to "destroy" demand.
Except, there's so much demand (and so little supply) that it didn't, and we're getting the worst of both worlds.
In the US: A $500k 3/2 house at 2.75% 30-year fixed in 2020 is now $750k at 6.75%
It "shouldn't" have played out that way but my theory is
Home buyers from before ~2015 (random guess) are "up so much" in equity from this quiet "real estate inflation/demand appreciation boom" that they don't care to "overpay" $200k compared to what they would've paid 4 years ago because they were "gifted/given" $200k+ in equity out of the sky. They're just moving the money from one property to the next.
Homebuilders are hesitant to set up new projects as the new builds will be more expensive than the already elevated house prices- higher labour and materials costs higher interest payments for the home builders And finally More expensive mortgages for the end clients. This kills supply and it will send prices into the stratosphere.
This explains what I am seeing in various parts of Europe too. Bad properties (mostly by location) experienced some swings (as they always do when some troubles come like in 2008), but better ones didnt even flinch and just continue rising (maybe only moderately when adjusted by inflation but still).
Maybe a bit harder to sell but still they seem to sell. And everybody seems to expect interest rates to decrease soon, which will lead into even higher rise.
But what do you expect - people in Europe generally dont use / trust / understand stock market, and real estate at least in past 5-6 decades was by far the best investment for common folks. Stuff they understand, can use, can physically see and hold.
Plus in at least a bit touristy locations airbnb is helping massively with mortgage payments, and before 'communists' here come again with 'eat the greedy rich because we want our own houses too' - the demand from travellers is there, in past few years massive (and often hotels are simply not good enough for ie families with small kids while being 2-3x more expensive).
Isn't effective tightening for global multinationals a function of tightening the lowest global interest rate? Which refers to Japan, and Japan only just a few weeks ago exited negative territory and has not tightened meaningfully at all.
For monetary policy to work it requires rate sensitive borrowers. If borrowers don't care what rates are then it's not going to have much impact. US households have fixed mortgages so most don't care what interest rates are and the US government obviously doesn't give a damn what interest rates are and will continue borrowing regardless.
Another thing to consider is that counter intuitively higher interest rates might be acting as a form of stimulus for many US households. If you've got a fixed mortgage and the government is now paying you for your savings your total disposable income might actually be increasing with rate hikes.
>> Central bankers have long argued that changes in interest rates affect global economies with “long and variable lags”.
Which is another way of saying if there's a link it is very weak, and those not very useful for driving anything behind long-term strategic direction, certainly not day-to-day policy.
> Monetary Policy is the various set of policies initiated by the Central Bank to try to stimulate or slow the economy. This typically includes changing interest rates, altering the size of the balance sheet and communicating via “open mouth policy”. The transmission mechanism of these policies are controversial and the goal of this post is to add some clarity to the ways in which this works.
It should also be asked "working at doing what, exactly?". If you have an hot economy because of a lot of demand because of easy credit creation, then clamping down on credit creation can help in slowing things down:
If however you have (e.g.) a geopolitical event that causes (say) a spike in food and energy prices, then that's not really an issue that is largely controlled through credit creation:
Some of these things monetary policy can deal with better than others, but a lot of folks expect monetary to do something (anything!), and if it doesn't make an attempt than there's all sort of other drama.
lol, except for all the bank failures that required BTFP / another bailout. Commercial real estate meltdown anyone? Imagine if the FT didn't publish economist propaganda for once.
The core point from the article (because no one will actually read it):
"Higher interest rates have proved a lot less destructive than investors feared in 2022, when the world’s central banks embarked on one of the most aggressive episodes of monetary tightening in history. Nothing has “broken”, contrary to the prevailing view two years ago; and this has even sparked a lively debate about why mainstream macro exaggerated the dangers of higher rates."
Basically, a lot of people assumed (high interest rates = slowing economy), but the current status quo reflects otherwise. Personally, I'm happy that it has now re-incentivized saving, and a much more mercenary and productivity driven outlook.
This wasn't "one of the most aggressive episodes". This was nothing compared to Volcker in 1979-1981.
And the fact that nothing has broken indicates that they didn't go overly aggressive. They stopped inflation from getting worse without driving the country into a recession. That's a pretty decent balancing act.
The economy that Volcker hiked into wasn't nearly as leveraged (because the debt had been inflated away / soft defaulted upon). A small rate increase on a lot of debt vacuums up as much money as a large increase on a small amount of debt. However, the duration on most household/corporate debt at the moment is such that it hasn't felt the sting of rate increases yet. As usual, it's complicated.
> a lot of people assumed (high interest rates = slowing economy)
A fair assumption. It is extremely likely that the economy is slower than it would have been if interest rates remained low. Things were starting to get extremely hot – which is why we saw higher interest rates arrive in reaction.
There was a lot of concern floating around that rates would overcorrect (which, to be fair, may still prove to be the case – it is still early days), leading to an economy slowing more than needed, but the so-called "soft landing" was always the goal. Explicitly so. The status quo is in quite in line with what we were hoping to see come out of the higher rates, slowing the economy just enough, but not too much.
They can't stay this high for long without a federal debt crisis, which is a key reason the Fed is hoping to get interest rates back down.
If we weren't so indebted, interest rates could indeed stay high for a long time without much concern. But there's a point in the not-so-distant future where our government will need to print even more money to pay the debt (which will spark more inflation) or we'll need to cut all spending that isn't interest on the debt.
If so, there is a way to destroy inflation, its raising taxes. Put taxes on wealth and on secondary homes and non-commercial renting, destroy the money, less inflation. Easy.
No politician is ever going to do that, not with that reasoning, not so much it would actually matter. Way too many people's wealth would be burned to the ground. We talk avout tens of percents of every populatiin in literally every country.
It may be a reasonable advice when isolated from complexity of reality, but at the end its a bit like saying for example: solve all evil by separating / killing all evil people.
They did slow it down ( including the form of couple banks going under and Summers begging for a bailout ). It just so happens that federal government also managed to pass some corporate stimulus in the form of 'green new deal' or whatever they ended up calling it and war of Ukraine, which helps domestic warmachine ( billions from misnamed foreign aid ).
edit: Oh, and the Summeers did manage to scare enough people to rescue SVB so that impact was absorbed, amusingly, by other banks via extraordinary FDIC fee ( most banks have it listed now on their quarterly statement in case you are inclined to check ).
Foreign Aid for Ukraine is overstated. It's just $5bil, which is a drop in the bucket for even state governments in the US.
If that's the cost to fight a proxy war, it's fairly cheap.
That's how much it costs to build a highway from Pittsburgh to Morgantown (Mon–Fayette Expressway).
> managed to pass some corporate stimulus
This is the key point, and a critical one at that. That corporate stimulus suddenly made swathes of American manufacturing, construction, etc cost effective again.
We didn't send $75B to Ukraine. Sending an almost expired 155mm artillery shell is counted as sending $8000 to Ukraine, but in reality we're saving ourselves the cost of destroying the shell once it expires. Yes, we'll have to spend $8000 to replace the shell, but we would have to replace it anyways since it has a limited shelf life.
The current argument against US Aid to Ukraine is over the current foreign aid package of $5B, which has turned into a culture war issue. I never heard similar arguments in 2016, 2019, or 2021.
The total amount that we’ve already gifted Ukraine is absolutely relevant when we discuss sending even more.
Since we are running historic Federal deficits, every dollar we agree to send them comes at the expense of decreasing the purchasing power of Americans.
Government spending at these levels contributes to inflation and makes Americans worse off. Enough is enough.
If US loses half a billion in European countries that are by far the most aligned with US view on how to run world and who should do it, suddenly it will be just US, Australia, New Zealand and... maybe few small states against russia and China. Nobody else, some 6?% of global population. Also its extremely rich continent when compared to the rest.
Ie most of Africa already currently is anti-US (and anti-european) if you didnt notice and welcoming China and russia like long lost brothers, and its progressing.
If US will give us big FU, we will manage russian expansionism on our own, with heavy losses, eventually, despite mostly pathetic leadership (ie germans really know how to put clueless folks sabotaging their own countries into leadership). But we wont ever be friends like we are now.
Magas or similar fringe folks need to put together way more coherent arguments than these, since they dont make any sense from any rational point of view, even if completely US-centric and selfish.
You probably wouldn't be happier in the long run if Russia succeeds in their goal of reconquering much of Eastern Europe. That will make the entire world poorer and more violent. A few billion dollars is a cheap price to contain Russian expansionism.
What would have been really cheaper is if when Russia told NATO not to offer MAPs to Ukraine and Georgia in 2008, claiming that doing so would lead to regional instability while refraining would support peace, NATO had thanked them for their input and done the opposite, rather than complying.
Over a decade of unchecked Russian aggression before the 2022 Russian escalation in Ukraine made constraining that aggression more expensive, but still less so than it would be with additional Western appeasement.
Why would Ukraine and Georgia belong in NATO for any reason other than to piss off the Russians? Should we put Uganda and Congo in NATO? I hear Rwanda has territorial ambitions. Why don't we just stick to places we belong instead of trying to control every part of the world. Would you like to fight in Ukraine? Because I hear they take volunteers.
Guaranteeing the security of volatile third rate countries you don't really care about is a sure fire way of avoiding war, as we saw in WW1.
> Why would Ukraine and Georgia belong in NATO for any reason other than to piss off the Russians?
For mutual defense against outside aggressors and to coordinate regional security efforts, same as every other NATO member.
The fact that the Russians were clearly in 2008 (and have demonstrated that even more clearly since) the most likely and dangerous outside aggressors facing Georgia and Ukraine doesn't mean the purpose is to piss off Russia, though, to be fair, pissing off someone who w is inclined to aggression against you because you've made that less easy is not a bad thing.
> Should we put Uganda and Congo in NATO?
Uganda and the DRC have expressed no interest, that I know of, in NATO membership or partnership, and are rather distant from the explicit geographic focus of NATO as specified in the treaty (Europe and North America) [0], as well as having political issues (like Russia when it tried to jump ahead of the readiness process and join) that would require, at best, a long onramp leaving geography aside. They'd probably be better candidates for NATO global partner status if they decidedto pursue a NATO affiliation than membership any time in the forseeable future.
[0] Hence the language in Article 9 that, beyond the founding members which notably include some North American states, “The Parties may, by unanimous agreement, invite any other European State in a position to further the principles of this Treaty and to contribute to the security of the North Atlantic area to accede to this Treaty.”
Yeah, thanks for the boilerplate. Exactly what mutual defense of the United States or Western Europe is Ukraine or Georgia going to provide? Western Europe and the United States is not under any outside threat, let alone one that these countries could meaningfully assist with. This is nothing more than "containment" policy, an attempt to restrict another power's freedom of action, which only works as long as they're weak enough to be imposed on. When they're strong enough to contest it, you're going to be over there fighting for Ukranian soil, and if you care that much, you should just volunteer and leave the rest of us out of it.
We literally still have Russian nuclear weapons pointed at us. That seems like a serious threat.
Containment as a policy worked well enough during the Cold War as the least bad alternative. There's no reason to stop it and allow Russia to reconquer Eastern Europe, which they absolutely would do absent a strong containment policy. The historical record shows that isolationism and appeasement never works in the long run.
The Ukrainians are still willing to fight for their own soil so your point is illogical and irrelevant. They're just asking for weapons, logistics, and intelligence. The more Russian soldiers that they can kill, the less threat that Russia will pose in other areas. It's sad the situation has come to this point and I take no delight in those deaths but there is no realistic alternative.
How the heck is putting Ukraine or Georgia in NATO going to protect us from Russia's nucleus weapons?? If anything it will make the threat more immediate.
> The Ukrainians are still willing to fight for their own soil so your point is illogical and irrelevant.
This thread is about bringing Ukraine and Georgia into NATO, which means we would be obligated to fight on the ground to defend those countries. I don't know what you're arguing against, but it seems you didn't read the thread.
> This thread is about bringing Ukraine and Georgia into NATO, which means we would be obligated to fight on the ground to defend those countries
Strictly speaking, it obligates the US (like any other NATO member), in the event of an attack on any other member, to “individually and in concert with the other [NATO members], such action as it deems necessary, including the use of armed force, to restore and maintain the security of the North Atlantic area.”
It’s quite plausible the US could do that without deciding to “fight on the ground”.
I read it, but you apparently don't understand what's actually happening. While NATO had some preliminary discussions with Ukraine they are not actively moving through the accession process. Every major NATO leader has been clear that the territorial dispute with Russia will have to be settled one way or another before Ukraine can officially join. So, you're being ignorant or disingenuous by bringing up an obligation to fight in the ground in Ukraine.
As for Georgia, they are a sovereign state and can make their own decisions. If they want to join and meet the criteria then let them join. How is Georgia any different from Finland in that regard?
A policy of aggressive containment keeps us safer by wasting Russian resources. When we surround them with hostile powers they have to spend more on defending their homeland and have less for building nuclear weapons or launching invasions. Keep them poor.
And anyway you haven't even proposed a viable alternative. There's no point in negotiating with Putin: he doesn't negotiate in good faith. Even if we gave him huge concessions now he would just come back and demand more in a few years. Nor are we in a position to be able to offer the type of concessions that Russia seems to want. Ukrainian territory and Georgian sovereign freedom of action aren't ours to give away. The citizens of those countries will have to decide for themselves.
> How is Georgia any different from Finland in that regard?
Basically there's isn't a difference, Finland shouldn't be in NATO either. Americans have no business defending Finland of all places. Georgia is even less of a concern, it might as well be on the moon for all the national interest we have in Georgia.
> When we surround them with hostile powers they have to spend more on defending their homeland and have less for building nuclear weapons or launching invasions.
Right, the cornered dog theory. Maybe he'll bark himself to sleep before he bites you.
> And anyway you haven't even proposed a viable alternative.
The alternative is that countries negotiate with regional powers and try to maintain friendly relations. The US is not world policeman and we can't afford to play one on TV, because it invites situations like the Ukrainian one.
> Americans have no business defending Finland of all places.
A very shortsighted view. Norway, Sweden and Finland are currently setting up a joint air force command so that in case of war, they could deliver a fatal blow to the Russian Northern Fleet at Murmansk. The Northern Fleet operates in the Atlantic and is the largest threat to shipping between North America and Europe. They represent the U-boats of the 21st century. Americans get incredible value from closer cooperation with Finland and Sweden.
> The alternative is that countries negotiate with regional powers and try to maintain friendly relations.
And what if it doesn't work out and instead a fascist regime first rolls over the entire Europe again and then starts to threaten rest of the world?
You are not proposing anything new.[1] This line of thought had wide support between the two world wars. The current system of international organizations and alliances is a "lesson learned" from that period.
> Exactly what mutual defense of the United States or Western Europe is Ukraine or Georgia going to provide?
(1) Other NATO members aren't only in Western Europe. Ukraine borders several NATO members and its Black Sea location positions it to provide support to even more. And it pretty clearly has a lot to offer its neighbors when it comes to mutual defense.
(2) NATO's single deployment under the mutual defense provision (Article 5) included Georgian and Ukrainian troops, even though they were only non-member partners at the time, and Ukraine has greatly increased its capacity in the intervening period, due to grim necessity imposed by Russia.
> This is nothing more than "containment" policy, an attempt to restrict another power's freedom of action, which only works as long as they're weak enough to be imposed on.
Containment worked with the Soviet Union — it can work again with Putin's Russia.
It can work, or it might not, in which case you or your children will be dying for some town in Eastern Ukraine you've never heard of and you can't pronounce.
Yeah, and the one lesson we should certainly take from the past is that taking a pass on containment to appease powerful, aggressive states never leads to those doing so (including, but limited to, Americans) paying a very high, avoidable price in blood and treasure overseas as a consequence when not trying to contain aggression surprisingly does not contain the aggression.
I can see this conversation is leading to Hitler. But sometimes containment leads to a stupid quagmire which you should never have been in in the first place, like Vietnam, and security guarantees to backwards unstable countries leads to larger, more all consuming wars like WW1. Ukraine and Georgia are Russia's back yard, we have no business there.
Well then if it might not work, I suppose we should just let Tsar Vladimir — abetted by his kleptocratic henchmen and his millions of state-media-deluded followers — do whatever TF seems good to His Imperial Majesty. Because heaven forbid we should take any risks to try to preserve a rules-based world order.
I disagree with the guy you're replying to, but he brings up a fair point to a certain extent.
Here in the US, we view China as the bigger bad. In Europe, it's Russia. And it makes sense. Worst comes to worst, it's going to be Poles, Germans, Turks, etc dying on the battlefields in Eastern Europe, not that many Americans. We'll be dying in the Pacific or North Asia instead.
It'll be for the best if our European allies succeed at taking over continental responsibilities, allowing us to shore up a similar consensus in Asia.
Can you deliver a credible reduction in the amount of future money we will have to spend to contain Putin's territorial ambitions? No? In that case I think the $5b is best spent in Ukraine.
Hmm, not exactly. I can, however, absolutely guarantee that if we do keep the printing press open for geopolitical projects of various kinds, there will be too many dollars of no value in the future. It is a fate America might want to avoid.
Because I assume you know full well that is is not actually 5b. The amount is much greater[1].
Now, we can talk about priorities, which is fair.
If you were in charge, what aid is fair game for scrapping?
Because US will not be able to support it forever.
So you're advocating for fiscal irresponsibility while complaining about it at the same time. How very typical.
> too many dollars of no value in the future
Oh no, not a currency devaluation! You know that not only do many countries intentionally seek to devalue their currency, but there are regular fights in the UN about it. "(Other country) promised to not devalue their currency but did it anyway and now I am upset" is probably one of the top 3 recurring mini-dramas. These generally launch into political grandstanding without covering the macroeconomic basics of why a country might want to devalue their currency because it is such a common occurrence that everyone present is expected to know, and they generally do know, as do I. The way that you bring it up as if it is an unspeakable horror makes me suspect you do not. You might want to fix that.
It's possible that you actually do occupy the parts of the American economy that would be hurt by a currency devaluation, in which case fine, everyone is entitled to their own self-serving opinions, just don't expect me to share them. However, I don't think that's the case -- those parts of the economy generally understand the macro 101 at play. It's a pet peeve of mine when someone who works in an economic sector that would benefit from a currency devaluation recoils from the prospect in horror because all they understand is what they heard on TV and the general principle of "line go down, bad." In any case, my point is: don't threaten me with a good time.
There are negative consequences for fiscal irresponsibility, but that's not the one that keeps me up at night.
<< So you're advocating for fiscal irresponsibility while complaining about it at the same time.
Hmm, no. I am advocating for acting in US interest. I am not sure US in currently in a position to throw money around on feel good projects around the world.
<< How very typical.
No need to make a snide remark.
<< You know that not only do many countries intentionally seek to devalue their currency, but there are regular fights in the UN about it.
Sure, when it is to their direct strategic ( and not tactical ) advantage? Pray tell me what advantage would US gain here? Oh wait, is that your argument and the US masterplan ( the reference to: "(Other country) promised to not devalue their currency but did it anyway and now I am upset")?
To make the dollar so worthless that the debt it owes is worth even less? Do you think US can survive that?
<< don't threaten me with a good time.
Will that be a good time?
<< that's not the one that keeps me up at night.
What does then? I am not going to lie. You got me curious.
Usually, it does equal a slowing economy. But IMO there's a difference this time in that a lot of economic "growth" was being carried out by businesses that couldn't exist in a reasonable interest rate environment (which is exactly what Jerry Powell's environment is) and honestly just wanted to cash out.
Think of how many startups only existed to set money on fire until they completely captured a market, or how many got bought by the likes of FAANG+MS just to only kind-of have an integration into products/services that were made.
This has just been a return to the normal rules of business: you need to be able to create a return on investment in a reasonable amount of time, and with a reasonable amount of resources.
"The obvious one is fiscal policy, with governments everywhere using budgetary stimulus more actively since the pandemic. The impact of higher interest rates has been dampened in two ways. First, consumers had high levels of liquid assets (sometimes called “excess savings”) left over from the pandemic, which provided a financial cushion that protected their spending power. Second, governments have been deploying additional funds since COVID-19, such as the large energy support programmes in Europe and Bidenomics in the US (big tax subsidies that encouraged US companies to invest heavily in green energies). These funds have supported incomes and employment, even as monetary policy engineered a squeeze"
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People on here are overstating the impact of a handful of software companies and buzzwords on the larger economy.
So what's going to happen when Lagarde decides to lower them? The demand is way to high and the offer is almost non existent.
And it seems that it didn't affect the inflation either. Bad years for everybody who's not getting a 10% raise every year.