Why are interest rates so low?

[npalen]

U.S. Government bonds are currently paying just under 10% interest.

 

[Reddogs]

It was back in the early 1980s when prices started skyrocketing just like they are doing right now in 2022. The difference is that the gov't is saying we just have a 7% inflation rate while everything we buy is 2 or 3 times what it was a year ago. In the early 1980s I put $20,000 in a 5 year CD at 18% interest and after 5 years it was over $45,000. It seems that inflation is worse now than it was then but cd rates are still less than 2%.
Putting $20,000 into CDs now means they will be worth less than $10,000 in 5 years after inflation.

Your numbers are pretty much on target, the banks are not paying much of anything on CDs. It's because the regular interest rates where they make their money is so low. Won't change till they get up there a bit like 5-6%...

 

[Snobdds]

Well the problem is multi faceted. We have high .gov debt and a lot of leverage on assets due to long term low interest rates. It is also well understood that to bring down inflation, interest rates need to be higher than the inflation rate. So knowing that...

Since we have around 30+ trillion of debt, every time we raise the interest rates, the US treasury has to pay out higher interest payments on the debt. This goes straight to other countries like China. There is no way we could raise interest rates higher than the inflation rate as all our tax receipts would go to paying debt servicing. There would be little left over for the government budget.

There has been low interest rates, financially engineered by the Fed, for almost 15 years now. It made cheap money flow to business and assets that don't need to make a profit or a very small one. All this cheap money created what they call zombie business or zombie assets, if financial in nature. If they had a bad year, they could just put new debt financed cash infusions very cheaply into the company. So it created this huge leverage on collerateral that may or may not be worth something. This is the same thing with housing, are houses really worth what they are bringing in?

So we have an economy that really can't handle a increase in interest rates as it will not only cripple .gov, it will also cripple the small business that borrowed cheap money for years.

The fed is now, starting this month for the first time ever, going to try quantitative tighting. The opposite of there decades long quantitative easing. Banks use to only be able to loan out what they had in deposits. This change around 2009 to where the fed would give banks extra money, very cheaply, to loan out beyond their deposited assets. It did work to flush liquidity into the US...but they had no idea when to turn off the tap. Now the Fed wants to take that money back, but banks gave out that money on collateralized assets that may or may not be worth anything. The fed reversed a decades long trend and made it cheaper for business to fund growth through debt financing rather than equity financing.

The more they try and get us a "soft landing" the worse they are going to make it. I am starting to think to just let the market do it's thing and flush out all this leveraged money.

 

[Snobdds]

Banks, businesses and the banking business is one huge organized crime ring. It's all about the almighty profit for the sake of profit. Any other justification for high prices is irrelevant.

Savings, checking and CDs are paying 1% or less while CCs are charging 20% or more. 3-4% interest on a $50K vehicle loan yields them much more than 5% on a 10K used vehicle loan. Banks are literally raking it in hand over fist.

I play the game though and chase promotional bonuses and no interest introductory periods. I've pulled in several hundred dollars in bonuses and rewards in the last couple of years and have not paid a penny in interest. I've been able to buy a few things I needed and spread the payments out over a year or more without paying interest AND get the prices reduced by the bonuses. These are things I needed and could have paid for in other ways.

Tractor is due to be paid off by the end of this year, about two years early which saves me considerable interest even with the low 3% rate.

Banks are out to screw you. It's what they do. You just have to figure out a way to do it to them before they can do it to you.

Why do you think Banks only have to pay 1% for CD's? It's because they don't have to compete for your deposits anymore so they can loan that money out. They can just get stupid cheap money from the Fed and loan this printed money out for way less hassle.

Long gone are the days of the bank president trying to recruit people for their deposits. Bank Presidents are now laughing at how they can borrow money for <1%, turn around and lend that money out at 4% and have no risk of the fed doing a run on their bank.

 

[TheMan419]

CD rates are low because the FED is NOT fighting inflation. (caused by too much money in the economy) Paul Volker won the inflation battle in the 80's because the FED raised interest rates HIGHER than the inflation rate. The FED won't do the same because they fear starting a recession (diminishing Democrat election chances) and as Chevy said gov't debt service.

Yet our current administration still yet wants to throw more gasoline errr... money on the fire.

Correct re the FED not fighting inflation. Rule of thumb is the prime rate has to be one point HIGHER than inflation to start to bring inflation down. That will cause banks to have to give higher rates on CD's and other deposits. That in turn will cause people to save more. That in turn will reduce the money supply and THAT will reduce inflation.

Currently prime is about 4% and inflation is about 8%. So we have a way to go with raising the prime rate. It would shock the h e double hockey sticks out of the economy if the FED raised prime to 9% overnight.

 

[duffer]

...will cause people to save more. That in turn will reduce the money supply and THAT will reduce inflation.

Currently prime is about 4% and inflation is about 8%. So we have a way to go with raising the prime rate. It would shock the h e double hockey sticks out of the economy if the FED raised prime to 9% overnight.

You are correct about the saving rate. But there is another way to reduce the money supply (liquidity) which is the primer for inflation. When the Fed sells some of the bonds it holds on its balance sheet, that takes money supply out of the economy. Probably faster than you and me saving a little more.

If the Fed really wanted to curb inflation, they would have agressively been selling assets from their balance sheet for the past year, AND started to raise rates.
But as usual....they swung and missed. And now they are in one helluva corner. And we're all under water with negative cash flow thanx to energy costs, food costs, and commodities costs. You can decide who's the blame for that...but his name is not Putin.

 

[Larry Caldwell]

The older I get the more I start to think it's all a load of BS and smoke and mirrors.

Look at the historical price of gas and diesel vs crude oil. We hit $140/barrel back in 2007-2008 and I wasn't paying $2.00/L for gas at the pumps - closer to $1.40/L. Our peak oil price set this year is under $120/barrel.

Funny how the news right now is getting spun up over monkey pox which is pretty much an STD and covid has disappeared.

Refinery capacity is the problem. While many have been upgraded, some have been closed or converted to only storage, and we haven't built a new refinery since the '70s.

 

[mikester]

Refinery capacity is the problem. While many have been upgraded, some have been closed or converted to only storage, and we haven't built a new refinery since the '70s.

I guess that must be the case. Just the way they ran out of toilet paper manufacturing capacity at the start of the covid pandemic ;-)

 

[Larry Caldwell]

Well the problem is multi faceted. We have high .gov debt and a lot of leverage on assets due to long term low interest rates. It is also well understood that to bring down inflation, interest rates need to be higher than the inflation rate. So knowing that...

Since we have around 30+ trillion of debt, every time we raise the interest rates, the US treasury has to pay out higher interest payments on the debt. This goes straight to other countries like China. There is no way we could raise interest rates higher than the inflation rate as all our tax receipts would go to paying debt servicing. There would be little left over for the government budget.

There has been low interest rates, financially engineered by the Fed, for almost 15 years now. It made cheap money flow to business and assets that don't need to make a profit or a very small one. All this cheap money created what they call zombie business or zombie assets, if financial in nature. If they had a bad year, they could just put new debt financed cash infusions very cheaply into the company. So it created this huge leverage on collerateral that may or may not be worth something. This is the same thing with housing, are houses really worth what they are bringing in?

So we have an economy that really can't handle a increase in interest rates as it will not only cripple .gov, it will also cripple the small business that borrowed cheap money for years.

The fed is now, starting this month for the first time ever, going to try quantitative tighting. The opposite of there decades long quantitative easing. Banks use to only be able to loan out what they had in deposits. This change around 2009 to where the fed would give banks extra money, very cheaply, to loan out beyond their deposited assets. It did work to flush liquidity into the US...but they had no idea when to turn off the tap. Now the Fed wants to take that money back, but banks gave out that money on collateralized assets that may or may not be worth anything. The fed reversed a decades long trend and made it cheaper for business to fund growth through debt financing rather than equity financing.

The more they try and get us a "soft landing" the worse they are going to make it. I am starting to think to just let the market do it's thing and flush out all this leveraged money.

I have been saying for years that the longer they postpone the inevitable crash, the worse it will be. We're stuck with too much money chasing too little wealth. On the up side, every 10% of inflation means a 10% cut in the national debt. The Roman Empire inflated itself out of debt three times. In my lifetime alone, the dollar has lost 90% of its value.

Fiat currency does not hold its value. Buy assets that have some real value. Don't keep your money in money.

 

[Larry Caldwell]

CD rates are low because the FED is NOT fighting inflation. (caused by too much money in the economy) Paul Volker won the inflation battle in the 80's because the FED raised interest rates HIGHER than the inflation rate. The FED won't do the same because they fear starting a recession (diminishing Democrat election chances) and as Chevy said gov't debt service.

Yet our current administration still yet wants to throw more gasoline errr... money on the fire.

If the president controls the economy, do you think Bush would have presided over the Great Recession? He did what he could to salvage the banking sector after Lehman Brothers went bankrupt. Lots of us think he should have let them all die, and rebuilt from scratch, but the sky was falling. People think the president runs the country. He doesn't. He runs the executive branch, which has surprisingly little power over the economy.

The Democrats passed Dodd-Frank to eliminate the "too big to fail" problem, but as soon as the Republicans got back into power they started poking holes in it.