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Thread: Are interest rates determined by the free market?

  1. #31
    Quote Originally Posted by osan View Post
    On what basis?
    Here's the article he posted:

    "As a free-market loving individual, it pains me to see so many of my fellow travelers claim the Fed has artificially suppressed interest rates since the onset of the crisis.....

    What I wish George Will, Bill Gross, and other free market advocates would consider is the possibility that the Fed itself is not the source of the low rates, but simply is a follower of where market forces have pushed interest rates. That is, the Great Recession and the prolonged slump that followed caused interest rates to be depressed and the Fed did its best to keep short-term interest rates near this low market-clearing level.

    But there is more to this story. The crisis was so severe that the market-clearing level of short-term interest rates was pulled down well below 0%. That is a natural consequence of the sharp collapse in business and household spending. The Fed, however, cannot push short-term nominal interest rates very far past 0% because people would start hoarding cash rather than earn negative interest. So instead it was forced to keep short-term interest rates near the zero lower bound (ZLB) while the actual market clearing interest rate level slowly worked its way back up toward zero as the economy healed.

    The irony of this is that the free marketers of the world, like George Will and Bill Gross, should be sympathetic to this story. They believe in the power of prices to clear markets so they should be open to the possibility that sometimes--in severe crises like the Great Depression or Great Recessions--interest rates may need to go negative in order to clear output markets. If so, it is incorrect for them to ascribe the low interest rates to Fed policy since it was simply chasing after a falling market-clearing interest rate level."



    My first thought is that if interest rates need to be negative to clear the markets (which I doubt), then no one should be loaning money. If he's supposedly a free market guy then the he should realize it's not the government's job to stimulate the loan market. Maybe that's the free market's signal that there's too many loans and we need to stop loaning money until the debt is under control.

    Also I posted a whole list of artificial things besides the Fed that are driving down rates. Like guaranteed loans and supply from foreign banks. Given how desperately the government want to keep rates low there's probably some other things that I haven't even thought of. I just thought of another one. Underreporting the CPI.



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  3. #32
    Quote Originally Posted by osan View Post
    Oh, you're plenty crazy. Just not for those reasons.
    I can't argue that...



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  5. #33
    Quote Originally Posted by osan View Post
    Then you should have written that. Words matter. "Nominal" and "real" as modifiers to "rate" and "interest" renders the latter two potentially very different.

    Did I mention that words matter?
    I was responding to Madison who did not specify any types of rates- short term, long term, "real" rates, "nominal" rates. Thanks for clarifying what was being discussed. Unless somebody says they are talking about "real" rates I assume they are talking about "nominal" rates since that is the most common usage of the term.
    Last edited by Zippyjuan; 11-05-2018 at 03:11 PM.
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  6. #34
    Quote Originally Posted by Zippyjuan View Post
    I was responding to Madison who did not specify any types of rates- short term, long term, "real" rates, "nominal" rates. Thanks for clarifying what was being discussed. Unless somebody says they are talking about "real" rates I assume they are talking about "nominal" rates since that is the most common usage of the term.
    Not a good assumption, IMO.

    Clarity is pleasurable, and of high utility.
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  7. #35
    Quote Originally Posted by Madison320 View Post
    Here's the article he posted:

    "As a free-market loving individual, it pains me to see so many of my fellow travelers claim the Fed has artificially suppressed interest rates since the onset of the crisis.....

    What I wish George Will, Bill Gross, and other free market advocates would consider is the possibility that the Fed itself is not the source of the low rates, but simply is a follower of where market forces have pushed interest rates. That is, the Great Recession and the prolonged slump that followed caused interest rates to be depressed and the Fed did its best to keep short-term interest rates near this low market-clearing level.

    But there is more to this story. The crisis was so severe that the market-clearing level of short-term interest rates was pulled down well below 0%. That is a natural consequence of the sharp collapse in business and household spending. The Fed, however, cannot push short-term nominal interest rates very far past 0% because people would start hoarding cash rather than earn negative interest. So instead it was forced to keep short-term interest rates near the zero lower bound (ZLB) while the actual market clearing interest rate level slowly worked its way back up toward zero as the economy healed.

    The irony of this is that the free marketers of the world, like George Will and Bill Gross, should be sympathetic to this story. They believe in the power of prices to clear markets so they should be open to the possibility that sometimes--in severe crises like the Great Depression or Great Recessions--interest rates may need to go negative in order to clear output markets. If so, it is incorrect for them to ascribe the low interest rates to Fed policy since it was simply chasing after a falling market-clearing interest rate level."



    My first thought is that if interest rates need to be negative to clear the markets (which I doubt), then no one should be loaning money. If he's supposedly a free market guy then the he should realize it's not the government's job to stimulate the loan market. Maybe that's the free market's signal that there's too many loans and we need to stop loaning money until the debt is under control.

    Also I posted a whole list of artificial things besides the Fed that are driving down rates. Like guaranteed loans and supply from foreign banks. Given how desperately the government want to keep rates low there's probably some other things that I haven't even thought of. I just thought of another one. Underreporting the CPI.
    Yeah well, peddling the Fed as babes in the woods doesn't fly.
    Through lives and lives shalt thou pay, O' king.

    "Itís just interesting to note how constant government oppression can kill peopleís fighting spirit." - Withur We




    Pray for reset.


  8. #36
    Quote Originally Posted by Madison320 View Post
    Up until now I didn't think "artificially high" was even an option.
    You would think you would be more open minded then. I think I first heard this argument in like 2011 when I realized Peter Schiff was a gold salesman with a terrible track record of money management and not economist or trader.

    https://www.alt-m.org/2016/12/01/fed...nterest-rates/ Has the Fed been Holding Down Interest Rates?


    The unvarnished truth, I hope to persuade you, is that interest rates have been low since the last months of 2008, not because the Fed has deliberately kept them so, but in large part owing to its misguided attempt, back in 2008, to keep them from falling in the first place.
    Let's see why kind of Keynesian socialist we have here. Hmmm.... George Selgin... *Uses Google*

    George Selgin
    Professor

    Influenced by: Friedrich Hayek
    Fields: Macroeconomics, Monetary economics "Selgin's principal research areas are monetary and banking theory, monetary history, and macroeconomics. " " He is one of the founders, along with Kevin Dowd and Lawrence H. White, of the Modern Free Banking School,[3] which draws its inspiration from the writings of Friedrich Hayek on denationalization of money and choice in currency"


  9. #37
    Quote Originally Posted by Krugminator2 View Post
    You would think you would be more open minded then. I think I first heard this argument in like 2011 when I realized Peter Schiff was a gold salesman with a terrible track record of money management and not economist or trader.

    https://www.alt-m.org/2016/12/01/fed...nterest-rates/ Has the Fed been Holding Down Interest Rates?




    Let's see why kind of Keynesian socialist we have here. Hmmm.... George Selgin... *Uses Google*

    George Selgin
    Professor

    Influenced by: Friedrich Hayek
    Fields: Macroeconomics, Monetary economics "Selgin's principal research areas are monetary and banking theory, monetary history, and macroeconomics. " " He is one of the founders, along with Kevin Dowd and Lawrence H. White, of the Modern Free Banking School,[3] which draws its inspiration from the writings of Friedrich Hayek on denationalization of money and choice in currency"

    I don't care who a google search links him to. His theory makes no sense at all.

    There's some good responses to this topic over in the political forum where I started a new thread. I think the best one is "How could adding 3 trillion in reserves RAISE the rate of interest?"

  10. #38
    Quote Originally Posted by Madison320 View Post
    I don't care who a google search links him to. His theory makes no sense at all.

    There's some good responses to this topic over in the political forum where I started a new thread. I think the best one is "How could adding 3 trillion in reserves RAISE the rate of interest?"
    Supply and demand. If the money is in reserves, it is not circulating and not increasing the supply of money and driving its price (interest rates) down. It has to move out of reserves and into the economy to have any effect.
    Donald Trump: 'What you're seeing and what you're reading is not what's happening'

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  11. #39
    Quote Originally Posted by Zippyjuan View Post
    Supply and demand. If the money is in reserves, it is not circulating and not increasing the supply of money and driving its price (interest rates) down. It has to move out of reserves and into the economy to have any effect.
    I asked how adding 3 trillion could RAISE the interest rate. The fact that most of that 3 trillion was held in reserves at the Fed only decreased the LOWERING effect it had. Less of a lowering effect is not a raising effect.

    And as I've said many times besides QE and Fed Funds there's other artificial lowering effects like guaranteed loans and foreign govt demand.

  12. #40
    Quote Originally Posted by Madison320 View Post
    I asked how adding 3 trillion could RAISE the interest rate. The fact that most of that 3 trillion was held in reserves at the Fed only decreased the LOWERING effect it had. Less of a lowering effect is not a raising effect.

    And as I've said many times besides QE and Fed Funds there's other artificial lowering effects like guaranteed loans and foreign govt demand.
    Increasing reserves has zero effect on interest rates. If rates went up, there were other factors at work.
    Donald Trump: 'What you're seeing and what you're reading is not what's happening'

    "Truth isn't truth"- Rudy Giuliani

    "China has total respect for Donald Trump and for Donald Trump's very, very large brain," - Donald Trump.

    I am Zippy and I approve of this post. But you don't have to.



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  14. #41
    Quote Originally Posted by Krugminator2 View Post
    You would think you would be more open minded then. I think I first heard this argument in like 2011 when I realized Peter Schiff was a gold salesman with a terrible track record of money management and not economist or trader.
    He started his investment business in the 1990s. He didn't start selling gold into 2010 and a year later you call him a "gold salesman" as if that's all he does?

    Question for you. Suppose John sells only chocolate, but Bob sells chocolate and oranges. John tells you that chocolate is healthy and oranges are unhealthy. Bob tells you that chocolate is unhealthy and oranges are healthy.

    Who are you more likely to believe?

  15. #42
    Quote Originally Posted by Zippyjuan View Post
    Increasing reserves has zero effect on interest rates. If rates went up, there were other factors at work.
    LOL!

  16. #43
    1 year, 10 year, 30 year... what’s the treasury yield curve?

    Is the lack of QE and possible boycotting of US Debt by China driving rates up?
    Twitter: B4Liberty@USAB4L
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  17. #44
    Quote Originally Posted by Madison320 View Post
    LOL!
    Money has to be in in circulation to have any impact on prices- whether that is prices off goods and services or the price of money (interest rates). Money in reserves is not circulating so it has no impact on any prices. The money has to be loaned out from those reserves and spent to have any impact.
    Last edited by Zippyjuan; 11-07-2018 at 11:48 AM.
    Donald Trump: 'What you're seeing and what you're reading is not what's happening'

    "Truth isn't truth"- Rudy Giuliani

    "China has total respect for Donald Trump and for Donald Trump's very, very large brain," - Donald Trump.

    I am Zippy and I approve of this post. But you don't have to.

  18. #45
    Quote Originally Posted by Zippyjuan View Post
    The rates on Treasuries are determined by auctions.
    Who is the seller of the item being auctioned, and how did they come to own it in the first place?

  19. #46
    Quote Originally Posted by Superfluous Man View Post
    Who is the seller of the item being auctioned, and how did they come to own it in the first place?
    The US Treasury is the seller. How things work. The Treasury is notified of how much money the government needs to borrow at a particular point in time. Treasuries are usually in $10,000 face value (what they are worth when they reach maturity). They (the Treasury) decides how they want to break down the maturities- how many one year notes, how many 30 year notes, etc. They then publish a list of how many they want to sell along with their maturities. That goes out to the Primary Dealers- those licensed to participate in Treasury auctions.

    https://www.newyorkfed.org/markets/primarydealers

    Primary Dealers
    Bank of Nova Scotia, New York Agency

    BMO Capital Markets Corp.

    BNP Paribas Securities Corp.

    Barclays Capital Inc.

    Cantor Fitzgerald & Co.

    Citigroup Global Markets Inc.

    Credit Suisse AG, New York Branch

    Daiwa Capital Markets America Inc.

    Deutsche Bank Securities Inc.

    Goldman Sachs & Co. LLC

    HSBC Securities (USA) Inc.

    Jefferies LLC

    J.P. Morgan Securities LLC

    Merrill Lynch, Pierce, Fenner & Smith Incorporated

    Mizuho Securities USA LLC

    Morgan Stanley & Co. LLC

    NatWest Markets Securities Inc.

    Nomura Securities International, Inc.

    RBC Capital Markets, LLC

    Societe Generale, New York Branch

    TD Securities (USA) LLC

    UBS Securities LLC.

    Wells Fargo Securities, LLC
    Each of these dealers decides how many of which securities they want to buy. They submit that along with the prices they are willing to pay for each one of them. Say 100 15 year notes at $9,000 each by one firm and say 200 five year notes at $9500 by another firm. This is the auction process. They get ranked into a list based on offered price. The Treasury then draws a proverbial line at the point which allows them to sell all the notes they wanted to sell- that becomes the "set price" for that auction. All of the bids above that price get to purchase their shares at that set price- even if they offered to pay more so all the notes in that batch will have the same price and interest rate (the interest rate is calculated by taking the face value, subtracting the selling price and dividing that by the face value- a $10,000 note which was sold for $9,000 has a ten percent rate of interest).

    Once they make their purchases, the Primary Dealers can then turn around and sell them to other investors in the open market.
    Donald Trump: 'What you're seeing and what you're reading is not what's happening'

    "Truth isn't truth"- Rudy Giuliani

    "China has total respect for Donald Trump and for Donald Trump's very, very large brain," - Donald Trump.

    I am Zippy and I approve of this post. But you don't have to.

  20. #47
    Quote Originally Posted by Zippyjuan View Post
    Money has to be in in circulation to have any impact on prices- whether that is prices off goods and services or the price of money (interest rates). Money in reserves is not circulating so it has no impact on any prices. The money has to be loaned out from those reserves and spent to have any impact.
    Wasn't about a trillion out of the 3 trillion loaned out?

  21. #48
    Quote Originally Posted by Madison320 View Post
    Wasn't about a trillion out of the 3 trillion loaned out?
    Before the recession hit, banks had only about $2 billion in excess reserves (money beyond what they were required by law to keep and not loan out). They peaked at the end of QE at $2.7 trillion in 2014. https://fred.stlouisfed.org/series/EXCSRESNS Yes, since then, the totals have declined by almost $1 trillion or about $250 billion a year. US GDP is almost $20 trillion a year so that amount would be about one percent of GDP- not a significant amount of money.
    Donald Trump: 'What you're seeing and what you're reading is not what's happening'

    "Truth isn't truth"- Rudy Giuliani

    "China has total respect for Donald Trump and for Donald Trump's very, very large brain," - Donald Trump.

    I am Zippy and I approve of this post. But you don't have to.



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  23. #49
    Quote Originally Posted by Zippyjuan View Post
    Before the recession hit, banks had only about $2 billion in excess reserves (money beyond what they were required by law to keep and not loan out). They peaked at the end of QE at $2.7 trillion in 2014. https://fred.stlouisfed.org/series/EXCSRESNS Yes, since then, the totals have declined by almost $1 trillion or about $250 billion a year. US GDP is almost $20 trillion a year so that amount would be about one percent of GDP- not a significant amount of money.
    That's probably hundreds of thousands of times more money they ever had to loan out and you don't think it had any effect on rates?

  24. #50
    Quote Originally Posted by Madison320 View Post
    That's probably hundreds of thousands of times more money they ever had to loan out and you don't think it had any effect on rates?
    What are the total amounts currently borrowed by business and individuals? About $20 trillion. $250 billion is about one percent of that. Is that a significant increase? Enough to change interest rates? Did the economy and the demand for more money increase or decrease over that time?

    Now if you dumped $1 trillion all at once- that could effect things. But this was gradual and over several years.

    If $250 billion is "hundreds of thousands times more money than they ever had to loan out" then I guess they only had less than $2,500 to loan out. Can't even buy a car with that. Excess reserves (money which can currently be loaned out right now and stay within their reserve requirements) stands at over $1.7 trillion.
    Last edited by Zippyjuan; 11-07-2018 at 07:28 PM.
    Donald Trump: 'What you're seeing and what you're reading is not what's happening'

    "Truth isn't truth"- Rudy Giuliani

    "China has total respect for Donald Trump and for Donald Trump's very, very large brain," - Donald Trump.

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  25. #51
    Quote Originally Posted by Zippyjuan View Post
    The US Treasury is the seller. How things work. The Treasury is notified of how much money the government needs to borrow at a particular point in time. Treasuries are usually in $10,000 face value (what they are worth when they reach maturity). They (the Treasury) decides how they want to break down the maturities- how many one year notes, how many 30 year notes, etc. They then publish a list of how many they want to sell along with their maturities. That goes out to the Primary Dealers- those licensed to participate in Treasury auctions.
    "Treasury" meaning the department of the federal government. Right?

    Why does anybody buy this product? Is there some expectation that the government will pay them back with interest?

    If so, what gives these buyers confidence that the government will be able to do that? Is it perhaps because of the government's ability to fund this via taxation?

  26. #52
    Quote Originally Posted by Zippyjuan View Post

    If $250 billion is "hundreds of thousands times more money than they ever had to loan out" then I guess they only had less than $2,500 to loan out. Can't even buy a car with that. Excess reserves (money which can currently be loaned out right now and stay within their reserve requirements) stands at over $1.7 trillion.
    According to that chart you posted the banks had between 1 and 1.5 billion in total to loan out at any point in time between 1984 and 2008. Then it ballooned to 2.6 trillion in 2008. So they had about 2,600 times more money to loan out, in total, after QE.


  27. #53
    Quote Originally Posted by Madison320 View Post
    According to that chart you posted the banks had between 1 and 1.5 billion in total to loan out at any point in time between 1984 and 2008. Then it ballooned to 2.6 trillion in 2008. So they had about 2,600 times more money to loan out, in total, after QE.

    $1.5 billion was their EXCESS reserves- additional money they could have lent out if they wanted to beyond what they already had lent. Banks are allowed to loan out 90% of deposits with a ten percent reserve requirement. Commercial bank deposits are currently $12.2 trillion. https://fred.stlouisfed.org/series/DPSACBM027NBOG If they don't loan out all they are eligible to lend, then that amount gets added to their excess reserves. In 2008, they had $9.1 trillion in loans outstanding- before any QE got started. https://fred.stlouisfed.org/series/TOTBKCR
    Last edited by Zippyjuan; 11-08-2018 at 03:01 PM.
    Donald Trump: 'What you're seeing and what you're reading is not what's happening'

    "Truth isn't truth"- Rudy Giuliani

    "China has total respect for Donald Trump and for Donald Trump's very, very large brain," - Donald Trump.

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  28. #54
    Quote Originally Posted by Superfluous Man View Post
    "Treasury" meaning the department of the federal government. Right?

    Why does anybody buy this product? Is there some expectation that the government will pay them back with interest?

    If so, what gives these buyers confidence that the government will be able to do that? Is it perhaps because of the government's ability to fund this via taxation?
    Yes, the US Treasury is part of the Federal Government. They are not backed by anything but yes, it is the government ability to tax which gives them security. And since they have never been defaulted on (so far), they are considered one of the safest investments one can make. That is what makes them so popular. In exchange for that security, they also usually offer a lower rate of return than other investments.
    Donald Trump: 'What you're seeing and what you're reading is not what's happening'

    "Truth isn't truth"- Rudy Giuliani

    "China has total respect for Donald Trump and for Donald Trump's very, very large brain," - Donald Trump.

    I am Zippy and I approve of this post. But you don't have to.

  29. #55
    Quote Originally Posted by Zippyjuan View Post
    Yes, the US Treasury is part of the Federal Government. They are not backed by anything but yes, it is the government ability to tax which gives them security
    This provides the answer to the question posed in the thread title.

  30. #56
    Quote Originally Posted by Superfluous Man View Post
    This provides the answer to the question posed in the thread title.
    The Treasury does not control their interest rates- the market does.
    Donald Trump: 'What you're seeing and what you're reading is not what's happening'

    "Truth isn't truth"- Rudy Giuliani

    "China has total respect for Donald Trump and for Donald Trump's very, very large brain," - Donald Trump.

    I am Zippy and I approve of this post. But you don't have to.



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  32. #57
    The US Treasury provides what the market considers the zero risk interest rate. They are bought and sold on the free market, so the price of risk free assets is known. The interest rate actually provided by the government is essentially the lowest bid. Why would you buy debt with a lower return and higher risk?

    If the government has to raise returns to sell debt, then everyone else has to sell at rate above that, or at a serious discount. The government doesn't force this, the market does.

    So the overnight rate and the treasury rate are two very different mechanisms.

    Treasuries are not inflationary and do ot affect the money supply if the debt is being extinguished. this has not been the pattern in the US for some time.

    People confuse government debt with debt based money, they are separate systems. The government could run quite happily without incurring debt while having a separate debt based money system.
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    Air Traffic Control is a private company run on user fees
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    Rescue helicopters and ambulances are operated by charities and are plastered with corporate logos
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  33. #58
    Quote Originally Posted by idiom View Post
    The US Treasury provides what the market considers the zero risk interest rate. They are bought and sold on the free market, so the price of risk free assets is known. The interest rate actually provided by the government is essentially the lowest bid. Why would you buy debt with a lower return and higher risk?


    I agree with most of what you wrote, but is the treasury market a really free market when 90+% of the buyers are governments and central banks.

  34. #59
    The primary markets a bit of an anachronism, and a backrub. The secondary market where the spot prices come from is a pretty fluid and open market.
    In New Zealand:
    The Coastguard is a Charity
    Air Traffic Control is a private company run on user fees
    The DMV is a private non-profit
    Rescue helicopters and ambulances are operated by charities and are plastered with corporate logos
    The agriculture industry has zero subsidies
    5% of the national vote, gets you 5 seats in Parliament
    A tax return has 4 fields
    Business licenses aren't even a thing nor are capital gains taxes
    Constitutional right to refuse any type of medical care

  35. #60
    Quote Originally Posted by Zippyjuan View Post
    The US Treasury is the seller. How things work. The Treasury is notified of how much money the government needs to borrow at a particular point in time. Treasuries are usually in $10,000 face value (what they are worth when they reach maturity). They (the Treasury) decides how they want to break down the maturities- how many one year notes, how many 30 year notes, etc. They then publish a list of how many they want to sell along with their maturities. That goes out to the Primary Dealers- those licensed to participate in Treasury auctions.

    https://www.newyorkfed.org/markets/primarydealers



    Each of these dealers decides how many of which securities they want to buy. They submit that along with the prices they are willing to pay for each one of them. Say 100 15 year notes at $9,000 each by one firm and say 200 five year notes at $9500 by another firm. This is the auction process. They get ranked into a list based on offered price. The Treasury then draws a proverbial line at the point which allows them to sell all the notes they wanted to sell- that becomes the "set price" for that auction. All of the bids above that price get to purchase their shares at that set price- even if they offered to pay more so all the notes in that batch will have the same price and interest rate (the interest rate is calculated by taking the face value, subtracting the selling price and dividing that by the face value- a $10,000 note which was sold for $9,000 has a ten percent rate of interest).

    Once they make their purchases, the Primary Dealers can then turn around and sell them to other investors in the open market.
    You seem to have left out the non-competitive part of the process, which usually serves to push out the lowest bidders in the smaller “competitive” process. Let’s just call it a “semi-auction”.
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