Do you want higher or lower interest rates?

[4K2K]

Interest rates are really low.
Would you like it if they were higher or lower?

[quexos]

Whichever benefits me. But Since I'm no specialist in interest rates I can't say which.

IF low interest rates mean I have to pay less interest when getting a credit then low it is, if not then I don't know. I am better off not taking credits anyways.

[Maximus]

Lower interest rates may get us out of a recession right now, but it will make the next one much worse and interest rates won't help us then...

The other problem is the threat of deflation, and with all of the tax cuts just passed in the UK, deflation is a very real threat.

[ground chuck]

well, by lower rates they're trying to get banks to lend to each other which is still not happening. a higher interest rate would yield you more of a dividend on any cash savings you have. don't expect any 6 or 7% interest rates anytime soon.

[xtop]

a poll by 4k2k?! no way!

interest rates i dont really care about right now tho, just fix the economy!

[york weir]

Originally Posted by Maxpower1987

Lower interest rates may get us out of a recession right now, but it will make the next one much worse and interest rates won't help us then...

The other problem is the threat of deflation, and with all of the tax cuts just passed in the UK, deflation is a very real threat.

Can you expand upon why deflation is bad?

[Seeking_Alpha]

Originally Posted by york weir

Can you expand upon why deflation is bad?

For a business:
Prices fall--> incomes fall, but debts remain the same...

For your average homeowner:
Deflation is whats happening to the housing market, and look at the trouble that's causing. People start having negative equity positions because the liabilities don't change even if the assets are collapsing.

For a worker:
Wage (the price of labor) falls but his credit card debt doesn't

Basically deflation makes it harder for borrowers to pay back debt.

A perfect world would have low, stable and predictable inflation.

[york weir]

Originally Posted by Seeking_Alpha

For a business:
Prices fall--> incomes fall, but debts remain the same...

For your average homeowner:
Deflation is whats happening to the housing market, and look at the trouble that's causing. People start having negative equity positions because the liabilities don't change even if the assets are collapsing.

For a worker:
Wage (the price of labor) falls but his credit card debt doesn't

Basically deflation makes it harder for borrowers to pay back debt.

A perfect world would have low, stable and predictable inflation.

So inflation is opposite of deflation? If that's the case, why is inflation bad as well? I can understand how keeping it stable is best, just trying to understand either extreme.

[Uniquely]

Originally Posted by york weir

So inflation is opposite of deflation? If that's the case, why is inflation bad as well? I can understand how keeping it stable is best, just trying to understand either extreme.

Inflation is bad because consumer prices rise faster than wages, so people can not afford to consume. Consumer spending is what makes the world go around. Deflation is worse because not only are prices dropping but wages are dropping as well, but your mortgage and your car note stays the same.

[mikejet]

+5% nao.

That will screw us and make us stronger.

[york weir]

Originally Posted by robinandtami

Inflation is bad because consumer prices rise faster than wages, so people can not afford to consume. Consumer spending is what makes the world go around. Deflation is worse because not only are prices dropping but wages are dropping as well, but your mortgage and your car note stays the same.

Gotcha, thanks. So with deflation wages would drop but wages would not increase with inflation? I guess theoretically they should but I don't know any employer that is free to hand out extra money...

[toef]

Originally Posted by york weir

Gotcha, thanks. So with deflation wages would drop but wages would not increase with inflation? I guess theoretically they should but I don't know any employer that is free to hand out extra money...

Inflation is not always bad. High inflation is often caused by huge increases in the money supply, which essentially water down the value of a single unit of currency. This is bad.

However, inflation can also simply be caused by increasing demands for goods. This is simple economics. If something is in high demand, you raise the price. If prices on things rise, then the purchasing power of a dollar goes down, and you have inflation.

So is an economy with growing demand, which leads to inflation, bad? Certainly not. You just don't want it to get out of hand, which is why the Fed will change interest rates around, to try and manage inflation.

The bottom line is inflation is manageable.

Deflation, on the other hand, has already been detailed. If prices are dropping, businesses make less money on the stuff they already made to sell, which means they can't pay their bills...including payroll. This can (and usually does) lead to increased unemployment, because businesses can't pay their workers anymore, and cut jobs. Fewer workers means even less production, which means less money coming in, which means more layoffs. It can become a pretty bad death spiral.

What makes it worse is that the Fed can't really do anything about it. You would think the opposite way of treating inflation would work to fight deflation. So if the Fed raises interest rates to slow down inflation, wouldn't lowering interest rates stop deflation? For some reason, it doesn't seem to.

Even worse than deflation, and high inflation, is stagflation, because it combines the bad parts of each. A stagflation is generally a recessions that includes inflation. So not only are people getting poorer, but prices are going up.

[york weir]

Originally Posted by toefer

Inflation is not always bad. High inflation is often caused by huge increases in the money supply, which essentially water down the value of a single unit of currency. This is bad.

However, inflation can also simply be caused by increasing demands for goods. This is simple economics. If something is in high demand, you raise the price. If prices on things rise, then the purchasing power of a dollar goes down, and you have inflation.

So is an economy with growing demand, which leads to inflation, bad? Certainly not. You just don't want it to get out of hand, which is why the Fed will change interest rates around, to try and manage inflation.

The bottom line is inflation is manageable.

Deflation, on the other hand, has already been detailed. If prices are dropping, businesses make less money on the stuff they already made to sell, which means they can't pay their bills...including payroll. This can (and usually does) lead to increased unemployment, because businesses can't pay their workers anymore, and cut jobs. Fewer workers means even less production, which means less money coming in, which means more layoffs. It can become a pretty bad death spiral.

What makes it worse is that the Fed can't really do anything about it. You would think the opposite way of treating inflation would work to fight deflation. So if the Fed raises interest rates to slow down inflation, wouldn't lowering interest rates stop deflation? For some reason, it doesn't seem to.

Even worse than deflation, and high inflation, is stagflation, because it combines the bad parts of each. A stagflation is generally a recessions that includes inflation. So not only are people getting poorer, but prices are going up.

Thank you for that explanation, I appreciate it!