|
|
|
|
|
|
by astro_robot
3048 days ago
|
|
|
It seems like the article can be boiled down to 2 points. 1.) Deficit increasing projects (Infrastructure the main example) should be conserved for when the economy is weak so the Government can use it as a way to introduce money into the economy. 2.) Increasing deficits during an economic strong period requires the Government to increase the number of lenders by increasing the interest rates, which in turn puts unneeded pressure on companies to increase their interest rates. I have a couple of confusions from this article. Isn't beneficial for the Government to increase interest rates so they are able to cut the rates during the next recession to increase borrowing? Also, why is it bad for companies to be increasing their interest rates? I am presuming that the tax cut bill will introduce more money into companies to be able to increase their rates. I'm always worried reading the opinion articles on Five Thirty Eight since they tend to have a left-ward leaning bias. Their articles that focus on statistics are usually fantastic. |
|
|
I am no economist but interest rates not raised so that they can cut it later. Rates are used for variety of reasons - control money flow and inflation are two of them.
If say today you can get cheap credit at say 1% interest rate you will take it. I can't afford whatever you built but I can get 1% interest, I will take it and spend it. Sooner or later, there will be lot of companies and consumers jostling the limited space and prices start to spiral making it stifling the exact innovation cheap credit was supposed to inspire. So government starts to raise rates.
The idea is to keep things in balance but no one really has an exact formula. Hence, things go from one extreme to other.
> Also, why is it bad for companies to be increasing their interest rates? I am presuming that the tax cut bill will introduce more money into companies to be able to increase their rates.
Let's take the example of Tesla. They have taken tons of debt. Their strategic plan might be to scale to x number of cars each year to pay off the debt.
Every time car production is delayed, there is stress on their cash reserves.
Today they might need to pay back y amount of money. But if interest rates are increased tomorrow it might be y +2 which might deplete their cash reserves even faster.
Tax cut just like interest cuts are one of the tools used to encourage spending. Just like higher interest rates, tax cuts are more beneficial during a slump.