Sex 'n' Drugs 'n' ZIRP

Generali

How can the Fed (US Central Bank) increase interest rates when they are terrified of the market response and a third of traders on Wall Street have only worked when interest rates have been ~0%

http://krugman.blogs.nytimes.com/2015/05/29/sex-and-drugs-and-zero-rates/

The markets want money for cocaine and prostitutes. I am deadly serious.


Most people don’t realize that “the markets” are in reality 22-27 year old business school graduates, furiously concocting chaotic trading strategies on excel sheets and reporting to bosses perhaps 5 years senior to them. In addition, they generally possess the mentality and probably intelligence of junior cycle secondary school students. Without knowledge of these basic facts, nothing about the markets makes any sense—and with knowledge, everything does.

princeofpounds

Well, I think the most important point to realise is that the interest rate-sensitivity of the economy is likely to be much higher than in the past. You will probably only need a small rise to throttle the economy, and you probably want more momentum going into a rise than previously.


Just my 2 cents.

Generali

princeofpounds wrote: »

Well, I think the most important point to realise is that the interest rate-sensitivity of the economy is likely to be much higher than in the past. You will probably only need a small rise to throttle the economy, and you probably want more momentum going into a rise than previously.


Just my 2 cents.

Why do you think that please? (I think you're probably right but I'd like to know your thinking).

michaels

Generali wrote: »

Why do you think that please? (I think you're probably right but I'd like to know your thinking).

1) The overall level of debt to income - for both consumers and companies, for both groups ultra low short rates have made leverage much cheaper than equity.
2) some sort of proportionate change arguement- ie +100 basis points at 5% = 20% more interest payable on a loan at base, 100 basis points increase from 0.5% = 200% increase in interest payable

wotsthat

Probably similar parallels to homeowners.

It wasn't that long ago people were worried about homeowners 'forgetting' that interest rates could actually go up. As time goes on there must be an increasing number of new mortgage holders in the last 6 years who haven't so much forgotten but never experienced a rate change.

My mortgage rate changed 19 times in the first 6 years (up and down). My perspective on interest rates must be very different to that of later entrants but whether that impacts on the ability of the BoE to increase rates I don't know.

purch

What to look out for, will be the market reaction to large differences in Interest rates between different economies, especially the effect on the relative exchange rate.

The markets are often slow to react to these things, but when they do get hold of the idea movemenys can be large and aggressive.

As for interest rate traders, any market will be easier to trade when it's going up. If the Fed starts hiking and interest rate markets start to drop, it will be a whole different ball game, those who learn quick will benefit, but many will be left behind.

cells

why do interest rates need to go up?

Generali

cells wrote: »

why do interest rates need to go up?

Who said they do?

padington

What are the plausible reasons interest rates might need to go up in
the next five or ten years ?

cells

Generali wrote: »

Who said they do?

I dont think they need to 'go back up'

my view is that as an economy develops and builds its infrastructure the interest rates in that economy will go down and down towards zero.

I think this is the new normal, zero rates for the most deemed risk free debt (governments) and maybe 2% more for mortals like house buyers to take into account admin, profit, and regulation limits.

Generali

cells wrote: »

I dont think they need to 'go back up'

my view is that as an economy develops and builds its infrastructure the interest rates in that economy will go down and down towards zero.

I think this is the new normal, zero rates for the most deemed risk free debt (governments) and maybe 2% more for mortals like house buyers to take into account admin, profit, and regulation limits.

The logic of that position is that people are indifferent between saving and consumption. I have my doubts quite honestly.