Economics majors, I have a question

[misanthrope]

Being a History major/Poli Sci minor, I am out of my wheelhouse diving into that arena. So I defer to those with better training.

We know Warsh is going to bend the knee to Trump's desires since he wouldn't even state aloud who won the 2020 POTUS election. That means he will start pressuring the fed to lower interest rates.

If Warsh is successful, extrapolate for us the results. WIll it send the economy into an even deeper tailspin, as I suspect?

[bucolic_frolic]

1. The inflation caused by lowering interest rates is a tax. It eats your savings and paycheck.

The price of everything goes up because the currency is worth so much less. That may be what's happening to the stock market. Assets are being repriced with cheaper dollars.

In 1972 an average house was $20,000. After Nixon took the dollar off the gold standard and ran deficits to pay for the Vietnam War and the Fed loosened money to keep the economy from imploding in the 1973-75 recession, stagflation set in. By 1980 the house was $60,000. Similar results with food, gas, shoes, everything.

[A HERETIC I AM]

4. This is a very interesting take.

In December of 1963, almost a month to the day after Kennedy was assassinated, my dad was transferred from the DC area to Miami. He bought a house built only 3 years before, in what was known as "Holly Hills" (couldn't find much of a hill in that area if your life depended on it!), south west of downtown Miami by about 12 miles, basically the Kendall area, for about $25,000. His mortgage payment was $112 a month and he paid that 30 year note off early, in the late 80's. That house was a victim of hurricane Andrew in the early 90's and dad did pretty well with the insurance settlement and subsequent sale of the house and land.

That very property sold last year for $2,065,000!


https://www.zillow.com/homedetails/8900-SW-115th-Ter-Miami-FL-33176/44283579_zpid/


One excellent description I heard years ago about the value of gold and how it was a storage of value went thus:

In the 1870's (or pick a time period 150 years ago), a $20 gold piece would buy you a finely tailored suit from the best tailor shop in New York.

Today, the very same exact coin would buy you a finely tailored suit from the best tailor shop in New York. { This assumption includes the numismatic value}

The biggest problem with using Gold as a standard for currency valuation these days is that China is the largest producer of newly mined gold, and if they wanted to manipulate the price, they easily could. The question to ask people who advocate for a return to the gold standard is "Do you want China to control the value of the US Dollar?"

The point you make is accurate and fascinating.

[GoodRaisin]

2. I think with the debt out of control and a reckless president spending our money like it grows on trees

that the economy is already heading toward a cliff. Lowering interest rates would speed that up. However; with recent inflation numbers revealed there is really no case to be made for lowering rates and fortunately Warsh doesn’t have the only vote.

[Johonny]

3. He is one of 12 votes. He cant single handedly

Change rates. He would have to convince the board this is the correct move. Warsh hasn't been a cut, cut, cut guy before and is possibly just performing for Trump and has no intention of being a trainee seal.

[ProfessorGAC]

5. Spot On

Yesterday, BLS reported annualized inflation of 3.8%. That makes this the worst time to cut rates.
It reduces the incentive to save, pushing more liquid money into a system with a fixed output, at least in the short term.
I'm not not normally am "x therefore y" guy when it comes to a complex system like the US economy. But, this is pretty cut & dried cause/effect.
Plus, the banks would apoplectic. Their whole short term tactical plan is based on interest rates making sense. A cut wouldn't make sense.
I'm not even sure it would stimulate real GDP growth to a meaningful degree.

[okaawhatever]

6. Something else to consider. The FOMC and Fed Chair were created to be independent of political influence. It is

of paramount importance for markets to believe that the fed funds rate is based exclusively on economic concerns. If Warsh becomes fed chair, we don't know how international markets will respond. Trust in all our markets may be affected.

From the Motley Fool

All seven members of the Fed's board serve as voting members of the Federal Open Market Committee (FOMC), which decides on the federal funds rate -- the Fed's overnight benchmark lending rate -- and changes to the Fed's balance sheet.

While the Fed chair has significant influence on the FOMC, it's still a voting committee, and the FOMC has arguably never been more divided than it is now. At Powell's final meeting as chair, the FOMC voted 8-4 to keep the federal funds rate unchanged, within a range of 3.50% to 3.75%.

There haven't been four dissenting votes since October 1992.

[jmowreader]

7. I worked Economics when I was in Army intelligence...

Here's the problem.

The idea behind lowering interest rates is to boost spending by making borrowing money less expensive. What Republican economists will tell you: if you lower interest rate businesses will borrow money for capital investment, which creates jobs, and the new workers will borrow money for large purchases like homes, cars, boats and Margaritaville machines. The interest payments will return to the banks who can loan out even more money for more capital investments, homes, cars, boats and Margaritaville machines, and the economy will take off like a rocket!

The reality is if half the country already doesn't have a pot to piss in (1) the banks get extremely fussy about who they'll loan money to when interest rates fall - after all, if they're making less money on interest they want to be extra sure they're going to get the principal back - and (2) both capital investment and job creation are trailing economic indicators. A business owner isn't going to buy new machines or open new facilities unless the ones he already has are insufficient to the task. He isn't going to hire new workers until he has enough work for them to do. If the consumer can't afford to buy then the business community isn't going to make; making stuff no one's buying leads to a glut which is always bad.

In 1803 a French economist named Jean-Baptiste Say wrote, "a product is no sooner created, than it, from that instant, affords a market for other products to the full extent of its own value." Many people translate this to mean "supply creates its own demand" and call this Say's Law. The theory is that if Company A makes a frammis (what's the difference between a frammis and a widget?) and sells it, they will pay their employees who will buy a frammis from Company B. A window screen has fewer holes in it than Say's Law does. If no one can afford Company A's frammises or the frammises aren't as good as Company B's (or they aren't any good at all), no one will buy them. If the frammises are good Company A's employees might buy them rather than Company B's, so no money flows to Company B. The reality is demand creates its own supply. Acme Ladies Shirt Manufactory isn't going to make purple shirts unless people want to buy them. They're not going to sit there listening to their market researcher telling them "all the ladies are buying cream and pale green shirts this year, those are the colors we should make the most of" and respond with "no, we're going to flood the market with deep purple shirts because people will buy whatever we make regardless of whether they want it." WAY too many companies have made things no one wanted - think Edsels and IBM PCjrs - and learned very quickly that demand is king.