For those that are more verse in economics...

[hsmith]

Was part of the fed pushing the rate so low the last few years due to the governments debt?

This along with flooding the market in cash reduces (effectively) the amount of money we have to pay back to our creditors.

Is this a valid "theory" for keeping interest rates low as well as adding more cash to the market?

[WickedLou9]

Usually the fed adjusts the federal discount rate ( I assume that is the rate you meant?) upwards to fight inflation. They had been steadily raising the rates for quite some time actually. IT seemed like every month they would raise it a 1/4 point. For a little while they were reaising it every 2 weeks. Only in the past year have they started to cut rates again. It actually was sitting at about 6.25% up until last august. Up until that point they were nervous about inflation and people were talking about the stag-flation boogey man. Once the credit crisis started to hit in earnest, they began cutting rates like crazy to try and encourage lending. Inflation is still a concern but the fed felt that trying to free up credit in the market was a greater concern.
government debt is not the direct cause that led to these rate cuts, but perhaps you could try and draw a connection with debt and the overall economy and perhaps the credit market collapse. That might be difficult though. that's more private sector debt.

[bheld]

My opinion is that it was done in spite of the debt rather than because of it. Those bills are all out there but when they drop rates the major holders might decide they want to use their dollars to buy commodities or gold or just get out of the dollar altogether. That causes inflation which is usually what the fed has to weight rate cuts against. They've been spinning it like inflation hasn't been a problem but lately Bernanke has mentioned it as a concern.

[WickedLou9]

Originally Posted by bheld

My opinion is that it was done in spite of the debt rather than because of it. Those bills are all out there but when they drop rates the major holders might decide they want to use their dollars to buy commodities or gold or just get out of the dollar altogether. That causes inflation which is usually what the fed has to weight rate cuts against. They've been spinning it like inflation hasn't been a problem but lately Bernanke has mentioned it as a concern.

yeah it's up at about 4% which isn't aweful, but it's higher than it should be.

[bheld]

Nobody takes government numbers seriously anymore, so you can be sure that it's a lot higher than 4%.

[WickedLou9]

Originally Posted by bheld

Nobody takes government numbers seriously anymore, so you can be sure that it's a lot higher than 4%.

as far as I am concerned the number isn't important it's the trend. Just so long as the measurement is consistant we can see if inflation is trending upwards or downwards. At one point I believe we were below 3%, now we are at or over 4%. So whatever the actual number is, we can see that it's trending up and that's not good.

[Ardentfrost]

The fed stopped publishing the M3 aggregate which not only tracked the M2 and below (all the physical cash and cash in savings accounts, etc..) but also the big institutional cash and long-term investments cash. Without that number, we can only guess they're being honest about what inflation really is, but with the increasing rate at which they issue Treasury bills and bonds as well as the effects of dropping the fed rate (which they do by creating more money to lend), it seems the inflation over the past few years is surprisingly stagnant.

Take that however you want, but obviously I just don't believe what they're saying.

At any rate, to actually talk about to OP, there are MANY side effects of raising and lowering the fed rate. A good one to note is that when the government engages in inflationary practices (as it often does), after some time lots of people have more money (most quickly gotten through Wall Street). Because gains are taxed, the government then has more money to spend. Therefore, the government doesn't need to raise taxes to get more money, they can just lower interest rates which require a pumping out of more dollars. The obvious side effect of this is increased prices which will especially hurt people with fixed or low incomes (particularly the elderly).

The money we have to pay back to other countries is generally in the form of Treasury bills and bonds that they have bought. There is an interest associated with these things and if the rate of interest falls below the rate of inflation (at least that rate believed by the buyer), then the demand for them falls and the government cannot raise the money they need to pay off the ones at maturation. The rate of interest for these T-bills and bonds ride close to inflation, but it cannot ride lower. That means that the act of writing these bills and bonds itself creates inflation. As with any debt, it grows the more we don't pay it back.

So, I think you're kind of separating the act of lowering interest rates and the creation of more money too much. Lowering interest rates can only occur when more money is introduced into the market. Raising them is coupled with removing money that is in the market to pay back debts. But rates can theoretically remain constant if the government uses tax revenues to pay back debts instead of the fed doing it by removing money. It would still destimulate the economy, but I think it would do so a bit more realistically and slowly.

Of course, THAT would have to be coupled with either major spending cuts, or major tax increases... the first would involve the government giving up some of the power it has acquired over the years (not likely), the second would destimulate the economy just as much as raising rates.

[A_C_E]

Originally Posted by bheld

Nobody takes government numbers seriously anymore, so you can be sure that it's a lot higher than 4%.

I actually think it's lower than the CPI says it is.

Hedonic adjustments and base-year methodology have completely fucked the inflation numbers. I wish they would just use a chain-weighted measure, it's so much more accurate these days due to the technological advances

Or use the REAL inflation equation..... d/dt[(Money Supply) * Velocity = (Prices) * (GDP)] -> (Money Supply Growth) = (GDP Growth)

[A_C_E]

Originally Posted by WickedLou9

Usually the fed adjusts the federal discount rate ( I assume that is the rate you meant?) upwards to fight inflation. They had been steadily raising the rates for quite some time actually. IT seemed like every month they would raise it a 1/4 point. For a little while they were reaising it every 2 weeks. Only in the past year have they started to cut rates again. It actually was sitting at about 6.25% up until last august. Up until that point they were nervous about inflation and people were talking about the stag-flation boogey man. Once the credit crisis started to hit in earnest, they began cutting rates like crazy to try and encourage lending. Inflation is still a concern but the fed felt that trying to free up credit in the market was a greater concern.
government debt is not the direct cause that led to these rate cuts, but perhaps you could try and draw a connection with debt and the overall economy and perhaps the credit market collapse. That might be difficult though. that's more private sector debt.

This is a good synopsis.

[6SpeedTA95]

Originally Posted by hsmith

Was part of the fed pushing the rate so low the last few years due to the governments debt?

This along with flooding the market in cash reduces (effectively) the amount of money we have to pay back to our creditors.

Is this a valid "theory" for keeping interest rates low as well as adding more cash to the market?

Is it valid yes, but that also assumes that government keeps spending under control which they have not. If spending had been kept in check it would have been a very effective tool for reducing the real debt of the nation. But they didn't. So now flooding the market with cash on top of deficit spending is hammering the dollar pretty hard (which isn't all bad).

Also another big negative is it gets the markets used to very low rates and when rates go up to say 5% even though thats not a high rate, the markets behave as if it were a high rate.

[hsmith]

Originally Posted by WickedLou9

yeah it's up at about 4% which isn't aweful, but it's higher than it should be.

That number doesn't even take into account 1) housing, 2) fuel, 3) food all which have been rising like crazy lately

the CPI is a joke it is so skewed

[hsmith]

but good info

[6SpeedTA95]

Originally Posted by hsmith

That number doesn't even take into account 1) housing, 2) fuel, 3) food all which have been rising like crazy lately

the CPI is a joke it is so skewed

You're right the CPI is skewed, however, total inflation numbers aren't much higher than the CPI.

The food portion alone was up about 4.5% last year and in 2006 it was up about 6.8%.

The other thing to consider is when energy prices go down or housing goes down (as it has the last year) or food prices go down the CPI can still go up.

[Ardentfrost]

Originally Posted by 6SpeedTA95

You're right the CPI is skewed, however, total inflation numbers aren't much higher than the CPI.

The food portion alone was up about 4.5% last year and in 2006 it was up about 6.8%.

The other thing to consider is when energy prices go down or housing goes down (as it has the last year) or food prices go down the CPI can still go up.

Again, assuming what the gov't is telling you the inflation numbers are is correct. Without M3 we don't know as well as we used to.

[A_C_E]

Originally Posted by Ardentfrost

Again, assuming what the gov't is telling you the inflation numbers are is correct. Without M3 we don't know as well as we used to.

M3 doesn't really count as currency in circulation though.

That money might be invested in international capital markets, but it isn't going to buy anything in a store. Nor can it be withdrawn and spent in less than a week.

[Ardentfrost]

Originally Posted by A_C_E

M3 doesn't really count as currency in circulation though.

That money might be invested in international capital markets, but it isn't going to buy anything in a store. Nor can it be withdrawn and spent in less than a week.

That doesn't mean it shouldn't be considered in figuring out how much inflation has occurred. If a lot of money has gone into long term investments like that in a year, then the gov't can really say whatever they want as long as the physical increase in money supply didn't surpass that number.

According to resources like The Economist, M3-M2 represents a large portion of money. It most certainly matters if that's the case.

[A_C_E]

Originally Posted by Ardentfrost

That doesn't mean it shouldn't be considered in figuring out how much inflation has occurred. If a lot of money has gone into long term investments like that in a year, then the gov't can really say whatever they want as long as the physical increase in money supply didn't surpass that number.

According to resources like The Economist, M3-M2 represents a large portion of money. It most certainly matters if that's the case.

But why should a long-term investment factor in to a measure designed to compute short-term price growth?

If I have 10 million dollars in a high-yield money market account, and don't touch it for 30 years, what possible effect is that going to have on short-term price changes?

[Ardentfrost]

Originally Posted by A_C_E

But why should a long-term investment factor in to a measure designed to compute short-term price growth?

If I have 10 million dollars in a high-yield money market account, and don't touch it for 30 years, what possible effect is that going to have on short-term price changes?

Because while YOU might have just started yours, others are ending theirs. There is a constant in and out flow from long term investments. The percentage that changes from year to year will affect the amount of circulating money in the system.

And again, it becomes an easy place the government can hide unsavory inflation. We KNOW it's happening, even if the stupid CPI says it's not so bad. We KNOW the effects of lowering interest rates, a policy that has been followed quite dangerously in the past few years. M3 didn't let any money become hidden from view.

As a libertarian, I think government should be majorly transparent, so obscuring this number is a step in the wrong direction. I thought this was something libertarians and democrats agreed on.

[A_C_E]

Originally Posted by Ardentfrost

Because while YOU might have just started yours, others are ending theirs. There is a constant in and out flow from long term investments. The percentage that changes from year to year will affect the amount of circulating money in the system.

And again, it becomes an easy place the government can hide unsavory inflation. We KNOW it's happening, even if the stupid CPI says it's not so bad. We KNOW the effects of lowering interest rates, a policy that has been followed quite dangerously in the past few years. M3 didn't let any money become hidden from view.

As a libertarian, I think government should be majorly transparent, so obscuring this number is a step in the wrong direction. I thought this was something libertarians and democrats agreed on.

Exactly, it cancels out.

I'm not really trying to defend the Fed here. I would like to see the M3 numbers just as much as you would. But I don't think that the amount of money that makes up the difference between M2 and M3 has a big effect on inflation, just because it has INCREDIBLY low Velocity, and you need to multiply Money Supply by Velocity in the supply-inflation equation.

Again, I'd like to see the numbers also. But I don't think they're obligated to release that information---seeing as a lot of private-sector Ibanks would love to get their hands on it.

[Ardentfrost]

It doesn't cancel out. One year it might. The next there might be more outflows than inflows thereby pushing more money into the usable market and increasing overall inflation for that year. The next there might be more inflows than out doing the exact opposite.

Not to mention we're talking about LTI's so people are getting more out than they're putting in. Some guy put in $10 mil 30 years ago is pulling out a lot more than $10 mil this year, whereas you are putting in $10 mil now. That is not balancing out unless the number of people with enough money to make those sorts of transactions is increasing at a scale similar to the rate of interest in the funds. I would say that more people invest now-a-days than they did 30 years ago, but I still doubt it'll be scaling exactly.