As a child growing up in the late 70s and early 80s (there was a recession then, right?) the banking industry had interest rates of up to 14%…for ordinary savings accounts!
Did that contribute positively to pulling us out of that recession, and could it happen again?
Those high interest rates were the result of the Fed fighting inflation. If anything, they were more of a cause than a solution to the recession. Once inflation was under control, they reduced the interest rates and that got the economy going again.
Right now, despite record high government spending, inflation is not a problem. In fact, over the 12 months ending on June 30, the CPI was actually negative. Interest rates are about as low as they can go, so they are having to try other things to stimulate the economy.
The problem, however, is that so much money has been pumped into the money supply that once the economy picks up, most economists expect inflation to come roaring back. That will require high interest rates, which could then cause a ‘double dip’ recession.
Your parents would also remember mortgage rates, and rates on personal loans, of 18-22%. That most definitely did not pull us out of a recession.
Most economists? Hardly. Only the Heritage Foundation’s cadre of disingenuous Chicago-school policy wonks-for-hire believe that.
Whatever you say.
On the other hand, raises where I worked averaged well over 10%.
I financed the buyer of my house at 12% in 1980, with the proviso that he had to get a real mortgage when rates dropped below that. That didn’t happen until 1985.
As I understand it, interest rates are primarily linked to inflation or at least expectations of inflation. They’re not directly linked to economic cycles except to the extent that inflation is often lower during a recession (with less money around, people are pinching pennies and sellers are trying to minimize costs) and higher during a boom (as demand for labor and other resources get tight, the cost goes up, putting more money in worker’s hands and giving them more money to spend).
But the expectation of inflation is really the key. Today, we expect inflation to be low - possibly 0% or even negative. As a result, we’re happier with 1% in interest on a bank account than we might be otherwise. If you expect 10% inflation and you still want to make 1% in net interest, you expect the bank to pay 11%. And, yes, the expectation of inflation can cause inflation which is why the Fed (and other agencies) work very hard to keep expectations aimed at low inflation.
Of couse, one of the challenges of macroeconomics is that the cause-and-effect relationship is not always clear. Some economists focus on the money supply as the primary driver of inflation (that’s why the Federal Reserve is so involved), but some others think wages and demand for raises play a key role (in Europe, governments have actually gotten involved in labor disputes to argue for smaller wage increases because of the worry that it drives inflation).
Returning to the question of whether high interest rates helped… no, they probably hurt. Remember that the money you put in savings is the same money the bank lends out on credit cards, business loans and home mortgages. If you expect a high interest rate on savings, the bank has to charge an even higher interest rate on loans and that tends to discourage purchasing, growth and risk-taking.
Good thing I have my house and car paid off: indeed, I have no debt whatsoever…I actually am sitting on a pile of cash and want to sock it away in a bank, and double digit interest rates would feel SO GOOD!!!
Unless it is well supported by inflation, in which case you may just be treading water all things considered. 12% interest on your savings account in a time of 11% inflation is the same thing you’d be getting now.
“But these go to eleven.”
Too obscure?
That’s about as obscure as Harry Potter.
Never facts to refute the premise, only name calling.
Don’t you love liberals!
Just wait until the Chinese stop buying Obama’s trillions of dollars of debt. Then you will see how high interest rates go. Its will be the only way to get the Chinese to continue buying.
This being GQ and all, I’ll just point out that they haven’t finished buying up Reagan’s trillions yet.
To answer the OP: interest rates like that only exist to offset nearly equally high inflation. If you’re getting 14%, it’s because your money lost 13% of its value.
There is bound to be some rather horrible inflation when this is over (actually while it’s getting over, more likely) but there are plenty of ways to “make” money before that happens - buying a house, for example. A 6% mortgage is going to look awfully good with inflation at 7%.
(Obviously, you’ll be wanting a fixed rate mortgage)
Moderator Warning
MOIDALIZE and Mangosteen, political jabs of this kind are not permitted in General Questions. Don’t do this again.
Colibri
General Questions Moderator