We are entering the Cool Zone.
We are entering the Cool Zone.
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lol I’ve been hearing this from right wing neoclassical economists for the past 2 years.
sorry but at 8% budget deficit there is no way that the US will enter recession. Even if you take into account the fact that the vast majority of the deficits went into rich people’s pockets, because of the absolute behemoth of the size of US economy, there are still enough crumbs to keep people from not spending enough to trigger a spiral into recession.
i will give a hint though: when the Fed rate starts to drop, that’s when the US will truly enter a high risk of recession. Still, it will take time for the excess money to dry up so the impact is likely not immediate, and may last for many months or so.
there is another risk with such high interest rates though: the banking sector runs the risk of collapsing and we actually saw a small scale banking crisis back in March 2022 with the silicon valley bank and such, but it had been well mitigated. This is the true wild card though, and I don’t think anyone can predict that with confidence.
In summary, the US monetary policy has created the conditions where the economy has entered a quandary that it will find itself increasingly difficult to get out of. Keep running high interest rates and the banking system might run into crisis, and lowering the interest rates would inevitably cause a recession (because a lot of the deficit spending came from interest payments i.e. handout to the rich people). It’s kind of stuck at around 5% now and Biden is basically betting that it will be enough to keep the economy afloat until election day.
How do i learn about this? I feel like i dont even understand the basics
To be clear, what I have written is unorthodox (heterodox) economics based on modern monetary theory (MMT), so it’s not mainstream understanding of how the economy works, but I have got to say it’s the most accurate prediction (and quite honestly, makes far more sense that neoclassical theory) of how the economy has managed to behave so far.
For basic understanding of MMT, I recommend Stephanie Kelton’s The Deficit Myth as a primer for how money works. For dollar hegemony, anti-imperialist geopolitical takes and how the monetary policy results in banking crisis, read Michael Hudson’s work on the subjects. He had plenty of articles last year talking about how the high interest rates raised the risk of banking crisis that precipitated in the Silicon Valley bank collapse.
Not being rhetorical, but shouldn't lowering rates be good for the economy, or, at least, good to keep money moving around? Money that otherwise is making 5pct doing nothing in the bank will need to go be invested somewhere else.
Yes, except that US treasuries are such a behemoth that raising the interest rates ended up creating more money into the economy as interest payments (for example, in 2023 alone the interest income payment was more than $1 trillion! mostly to the rich people though, it’s just that the trickle down from such huge quantity of money has still, so far, been able to keep the economy afloat). It is the most regressive way to keep the economy moving.
The problem here, as you’d have noticed, is that the interest payments comprised quite a substantial portion of the budget deficit, so when the rates start to go down, the budget deficit will go down as well. That means less money are being injected into the economy, and you actually ended up with less money to move around.
So, yes, it is true, on conventional terms, that lower interest rates is better. In fact, it should be 0%. But if they want to lower the rates without breaking the economy, they will have to offset it by pumping more money into the economy, but that’s socialism so it’s not allowed!
I see, very interesting, thanks very much for the color.