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Why are interest rates so low ie why so much cheap money around?

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  • Sep 27th, 2011 2:07 pm
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Deal Addict
Sep 27, 2008
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Why are interest rates so low ie why so much cheap money around?

Japan had this problem for a long time. I dont get why there is so much money around. Is it because people in China and India are saving money like crazy and not buying anything? My first thought would be that china and india are growing like crazy and would require a net inflow of cash but I guess that is not true. They are getting tons of our money when we buy crap at walmart. Can anyone explain this?
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mtseymourguy wrote: Japan had this problem for a long time. I dont get why there is so much money around. Is it because people in China and India are saving money like crazy and not buying anything? My first thought would be that china and india are growing like crazy and would require a net inflow of cash but I guess that is not true. They are getting tons of our money when we buy crap at walmart. Can anyone explain this?

Kinda 100 different things going on in this thread post...

It should be fairly obvious why interest rates are low in a recession...
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Aug 30, 2011
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b/c the more loans that are made, the more money banks make.

Indentured servitude.

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Sep 27, 2008
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Super strokey wrote: Kinda 100 different things going on in this thread post...

It should be fairly obvious why interest rates are low in a recession...

Interest rates were low for years before the recession. Dont forget staginflation: high interest rates during a recession.
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popcorneater wrote: b/c the more loans that are made, the more money banks make.

Indentured servitude.

explain how banks make money loanng money at very low interest rates?
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Jul 27, 2008
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Wow that is the most insanely overproduced agenda driven marketing material I have ever seen. If that's not a sign gold is in a bubble I don't know what is.

Interest rates are decreased to incentivize spending and interest rates are increased to discourage spending. The problem is that lower interest rates by itself are not a Holy Grail solution, the reasons are 1) those that can afford to take loans at high interest rates take them at low interest rates anyway 2) those who can't take loans at low interest rates typically can't for good reason, their personal/business balance sheets are underwater paying debt from years ago.

The more people participating in a bubble (periods of overinvestment) the more painful and longer it takes to unwind. China has been aggressively increasing interest rates to slow their economy because they are afraid of their own real estate bubble. Humans are very irrational and in groups can do some dangerous things. Access to credit is a shortcut. You buy a house on a mortgage because you can't afford to pay cash. The problem is these shortcuts become dangerous when practically everyone is thinking about flipping homes for profit instead of buying them for the long-term, and this ruins **** for people that do want the home for keeps. The indebtured servitude thing is ********. Common sense suggest if you can't afford to pay back your loan, don't take it... The idea you can base investment decisions on infinite asset appreciation is seriously flawed and a lot of people don't get that. Personal finance needs to be taught from Grade 1, it's ridiculous we have a society that ended up like this.
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Sep 26, 2007
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mtseymourguy wrote: explain how banks make money loanng money at very low interest rates?

easy look at td's report
increase loan volumes
start giving out credit cards that have 20+% interest rates
lower the rates they pay to their clients (eg you)
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Sep 27, 2008
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extnct wrote: Wow that is the most insanely overproduced agenda driven marketing material I have ever seen. If that's not a sign gold is in a bubble I don't know what is.

Interest rates are decreased to incentivize spending and interest rates are increased to discourage spending. The problem is that lower interest rates by itself are not a Holy Grail solution, the reasons are 1) those that can afford to take loans at high interest rates take them at low interest rates anyway 2) those who can't take loans at low interest rates typically can't for good reason, their personal/business balance sheets are underwater paying debt from years ago.

The more people participating in a bubble (periods of overinvestment) the more painful and longer it takes to unwind. China has been aggressively increasing interest rates to slow their economy because they are afraid of their own real estate bubble. Humans are very irrational and in groups can do some dangerous things. Access to credit is a shortcut. You buy a house on a mortgage because you can't afford to pay cash. The problem is these shortcuts become dangerous when practically everyone is thinking about flipping homes for profit instead of buying them for the long-term, and this ruins **** for people that do want the home for keeps. The indebtured servitude thing is ********. Common sense suggest if you can't afford to pay back your loan, don't take it... The idea you can base investment decisions on infinite asset appreciation is seriously flawed and a lot of people don't get that. Personal finance needs to be taught from Grade 1, it's ridiculous we have a society that ended up like this.
This has nothing to do with the topic. Governments sort of have control over shortterm interest rates but dont have any control over longterm rates.
Why is there so much cheap money??? Why is demand for money so low???? I mean for the past 10 years. EIther there are a ton of savers or there are no worthwhile investment opportunities.
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I'd say its because there's basically a global Ponzi scheme in the housing and bond markets, and governments are now doing everything in their power to keep them inflated. Not just in Canada/USA, but also, in China, Brazil, etc.

Think of it this way: 100 people have their houses paid off; say, they cost $100k to build. One of the 100 decides they want to own a second house, so they borrow $120k. The seller takes that $120k and rents the house they sold, putting the $120k in the bank (the bank makes the loan to buy the $120k house!).

But suddenly, everyone "thinks" their houses are worth $120k, because there was 1 transaction in the marketplace for $120k. So the next buyer has to go up to $130k. Again, putting the proceeds of the sale of the house 'in the bank'.

Banks end up competing, and since these transactions are essentially risk-free (ie: collateralized and/or backed by government in many instances), the prices just keep rising, and interest rates really don't matter. In fact, if people sell their other investments (like stocks, businesses, etc.) and put the money into the bubble, the interest rates look even lower.

It all works, until *kaboom*, the last person buys into the Ponzi. Then it all falls apart, and only the real wealth, not the paper wealth, remains. In fact, the real wealth is often disgorged, inexpensively, by those chasing the Ponzi. Like the idiots who are selling the stock market short right now.
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mtseymourguy wrote: Interest rates were low for years before the recession. Dont forget staginflation: high interest rates during a recession.

I dont think staginflation is a term...stagflation refers to a high inflationary environment with slow or no growth (i.e. high inflation during a recession).
Deal Addict
Sep 27, 2008
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xlfe wrote: easy look at td's report
increase loan volumes
start giving out credit cards that have 20+% interest rates
lower the rates they pay to their clients (eg you)


demand for money is low. that is why interest rates are low. banks dont set the interest rates. interest rates are determined by the market whether you are lender or a borrower. banks make money when there is a high demand for loans and there is lots of inflation uncertainty and rate uncertainty so they can take a bigger slice of the pie.
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Sep 27, 2008
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Mark77 wrote: I'd say its because there's basically a global Ponzi scheme in the housing and bond markets, and governments are now doing everything in their power to keep them inflated. Not just in Canada/USA, but also, in China, Brazil, etc.

Think of it this way: 100 people have their houses paid off; say, they cost $100k to build. One of the 100 decides they want to own a second house, so they borrow $120k. The seller takes that $120k and rents the house they sold, putting the $120k in the bank (the bank makes the loan to buy the $120k house!).

But suddenly, everyone "thinks" their houses are worth $120k, because there was 1 transaction in the marketplace for $120k. So the next buyer has to go up to $130k. Again, putting the proceeds of the sale of the house 'in the bank'.

Banks end up competing, and since these transactions are essentially risk-free (ie: collateralized and/or backed by government in many instances), the prices just keep rising, and interest rates really don't matter. In fact, if people sell their other investments (like stocks, businesses, etc.) and put the money into the bubble, the interest rates look even lower.

It all works, until *kaboom*, the last person buys into the Ponzi. Then it all falls apart, and only the real wealth, not the paper wealth, remains. In fact, the real wealth is often disgorged, inexpensively, by those chasing the Ponzi. Like the idiots who are selling the stock market short right now.
The $120k insnt created spontaneously. Somone had to have $120k in savings. This scenario would see a rise in interest rates as borrowing would increase to build more houses.
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mtseymourguy wrote: The $120k insnt created spontaneously.
The 120k was created when the buyer of the house issued a promise of repayment, colloquially known as a mortgage. The 'savings' were from the person who sold the house and put the $120k proceeds into the bank.
Somone had to have $120k in savings
Nope. The funding for that mortgage came from the seller, through the bank as an intermediary.
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Jul 27, 2008
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mtseymourguy wrote: This has nothing to do with the topic. Governments sort of have control over shortterm interest rates but dont have any control over longterm rates.
Why is there so much cheap money??? Why is demand for money so low???? I mean for the past 10 years. EIther there are a ton of savers or there are no worthwhile investment opportunities.

Dude, deleveraging decreases liquidity. There are no worthwhile investment opportunities while the majority of people have run out of money and banks are scared to loan because they are insucure about their own solvency. Too many people got burned on dot-coms in the 1990s and real estate in the 2000s. Now there's a bond bubble because people perceive it as the only safe transitory asset while the market is slowing, and obviously the more money gets driven into bonds the lower interest rates become.
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Jul 1, 2007
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The problem that Japan finds itself in and the trap the U.S. is falling into is flawed Keynesian economic policy. Central banks flood the economy with money, lowering interest rates and trying to stimulate inflation and incentivizing investment, etc, that's all good. But if at the same time the government is spending like a drunken sailor they are sucking up (borrowing) all that money and thensome, funneling money from potentially productive pursuits (banks invest in t-securities instead of lending, corporations leave their cash in t-securities instead of investing/expanding, etc) into government waste (ie: Solyndra). The result is no inflation, or lower inflation, no growth, and governments foolishly believe they need to borrow and spend even more.

After 20 years of trying to "stimulate" their economy Japan's debt is now around double GDP, yet almost fully financed domestically. In effect, trillions of dollars of money in the Japanese economy, which could be lent out to growing businesses, used to expand corporations, or invested in their stock markets is instead lent to the government in the form of corporate CCE (they're afraid to expand) and Mr. and Mrs. Watanabe's bank deposits (they're afraid to invest and their banks in turn are afraid to lend and in turn buy government debt with that money).
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Operation Twist is reversing stimulative monetary policy. By rolling 50 billion of maturing short term treasuries into long term bonds every months for 8 months the Fed will flatten the yield curve. This is non-stimulative because it destroys credit, it has enough power to at least erase all of QE2. It will seriously seriously hurt the lending business for banks, the smallest being most vulnerable, because in addition to paying the Federal Reserve to keep their reserve they receive negative real interest rates (lose-lose). My only guess to why they chose this is that they are anticipating things in Europe to get worse before they get better, and wanted to setup conditions for new capital inflow to strengthen the USD before the Euro gets wiped out.
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extnct wrote: Operation Twist is reversing stimulative monetary policy. By rolling 50 billion of maturing short term treasuries into long term bonds every months for 8 months the Fed will flatten the yield curve. This is non-stimulative because it destroys credit, it has enough power to at least erase all of QE2.
I view it a little differently; if the short end of the curve loses value, then more institutions will be taking their short-term debt to the Federal Reserve for discount window lending. ie: the Fed will have to exert more force in order to keep the overnight rate at their target.

More force essentially amounts to simulation. Credit is created, not destroyed through this move. And because the Fed is backing themselves into longer term bonds, they are more susceptible to incurring losses on those instruments as inflation picks up and the market develops a revulsion towards government debt, especially longer-maturity government debt.


It will seriously seriously hurt the lending business for banks, the smallest being most vulnerable, because in addition to paying the Federal Reserve to keep their reserve they receive negative real interest rates (lose-lose).
Of course it will be a problem because it will accelerate the unleashing of an inflation genie, which destroys the banks (US banks' balance sheets are chock-full of long-term debt, which is highly inflation sensitive!). Remember that the Fed Funds rate target is still intact at essentially 0% (or is it 0.25% -- I forget), and the Fed has obligated themselves to provide unlimited amounts of support to defend the 0.25% target.
My only guess to why they chose this is that they are anticipating things in Europe to get worse before they get better, and wanted to setup conditions for new capital inflow to strengthen the USD before the Euro gets wiped out.

Going out on the cure and buying increasingly trashy debt, with the funds of the central bank, is somehow an effort to 'strengthen' the currency? :lol:
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Operation Twist is better than nothing. Don't know if it'll work, but in a perfect world it can. Extnt is right that it hurts the banks' "easy" business of borrowing on the short end of the curve and lending on the long. But what it can entice them to do, what will improve their profitability as well as improve the economy, is stop doing the easy business and start lending to businesses more and buying higher risk assets (corporate bonds and eventually equities).
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We've certainly had excessive monetary intervention in the last while by central banks (QE, agency repurchases, Operation Twist etc). But I don't believe this is at the root of the low interest rate question. In fact, even when central banks were tightening monetary conditions back in 2004-2006, long rates still remained at historically low levels - at the time Greenspan called this a "conundrum". One explanation for why this happened is due to global imbalances resulting in a savings glut in emerging markets. Because of how these nations choose to grow (ie., export led growth based on keeping their exchange rates fixed and low) it created an excess of capital that resulted in heavy demand for US Treasuries. The resulting low long term rates allowed those in the developed world to reduce savings and spend like crazy (often for the very goods that are exported by these emerging markets). This obviously introduced some major distortions in the real economy (including housing bubbles in the developed world).

Right now, we are in the midst of a major deleveraging in developed markets and that will keep interest rates low for a while (Treasury buying for safety). But until these global imbalances are fully unwound and the US is no longer seen as the one and only "reserve currency" in the world, its conceivable that rates could stay low. Add to that mix a rapidly aging population in the developed world with a high demand for fixed income (an interesting topic paper on this subject was recently released by the Fed) and rates could stay low for alot longer that many might expect.

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