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naraburns  nihil supernum  1yr ago (text post)   3325 thread views

Small-Scale Question Sunday for March 26, 2023

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Economy+politics 101 question for someone who knows: Let's say that the central bank of country A raises the interest rate a little bit. Which groups gain and which groups loses from this? What if the reverse happens and the central bank lowers the interest rate, are the winners and losers reversed as well then? It seems self-evident that people with lots of loans and few assets (e.g. new families with unpaid student loans who just took on another loan to buy an expensive home) would lose from higher interest rates, is that correct? What's a fuller picture of the interest rate special-interest groups?

Let's say I'm a young professional with a good wage, some minor investments and no major loans. For purely selfish reasons, should I want interest rates to go up or down?

(Much of the media discussion about monetary policy centers on what's "good for the economy", I think we should discuss the redistributive effects more. Does that make sense?)

It seems self-evident that people with lots of loans and few assets (e.g. new families with unpaid student loans who just took on another loan to buy an expensive home) would lose from higher interest rates, is that correct?

Not necessarily, if the loans are fixed-rate and were taken out when interest rates were low, and then interest rates go up, the value of that loan in today-dollars just went down. There's no guarantee you'll be able to take advantage of this, but it could happen. Though yes, if you have to take out new debt, you're in a much worse position if interest rates are high.

Let's say I'm a young professional with a good wage, some minor investments and no major loans. For purely selfish reasons, should I want interest rates to go up or down?

IMO, you should want rates to be high. One of the ways you can think about investing for retirement is that you are using your money today to buy money 30 years from now. Higher interest rates lower the price of 2053 dollars in 2023 dollars, so you get more bang for your buck. This is true even if you are investing in stocks, as stock valuations discount expected future cash flows by the interest rate.

This all assumes the US economy keeps on chugging pretty much as it has been for the last 300 years, which may not be a valid assumption.

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