The way he explains it is weird... it's not that people are deciding to keep their money in banks because banks are PAYING higher interest rates, it's that the demand for loans decreases when banks CHARGE higher rates of interest. Higher interest rates means fewer loans which means a tighter economy. Stocks and bonds are known to typically pay much better than simple bank interest, which is always measly. Higher interest rates contract the money supply.
@tamxhah Can anyone tell me why Central Banks increases or decreases interest rate? To be precise what's its impact on other economic indicators of a country?
Quantitative Easing ends June 2011 Starting July 2011 the U.S. Treasury is being taken off Federal Reserve life support and has to sell a record 180 billion a month in new issues on the open market and not to the Fed. What do you think is going to happen when no one steps up to the plate to buy the record amounts of new issues that need to be sold at these ridiculously low rates? bloomberg-com/markets/rates-bonds/government-bonds/us/ Peter Catranis cta-online-com/index-4.asp
a level business studies, degree in business and this is the first proper clear explanation of Interest rates effect on economy, cheers mate all the way from Ireland!! :)
I wish they would hike rates a.s.a.p I am sick of having a small amount of money left out of my full time earnings each month after I have paid all my mortgage,bills, food etc. Recently I have been able to take the kids out and enjoy life a little. get them rates up so i can be skint and forced to borrow money and live in debt, just like i'm used to. Life is not there to be enjoyed, it is there to be worked and then die. No-one gives a fuck. case closed. Lots of love, ba ba black sheep x
artificial low interest rates creates and encourages MALINVESTMENT. Listen to Peter Schiff, Ron Paul, Tom Woods ect if you want to know how an economy grows and why it crashes......Don't listen to anything other than the Austrian School of economics! You will never listen to anything else after you listen to this school of thought. I realize now that I paid my college instructors to teach me exactly the WRONG STUFF.
HAHA... I love your example... To bad it's not helping me pass my midterm... but it was entertaining I must say... one week till my midterm... I NEED A DRINK!! I need to learn this formula and how to use it... HELP ME!!! (r=r* + IP + DRP + LP + MRP)
HELLO!!!! The main reason why lower interest rates speed up the economy is creates an incentive to borrow money for investment, since loans are cheap with low interest rates!
Thank you so much!!!!! Please don't remove this video!!!! Or make it unoperable Google (I use to love you so much when you were a free thinker, now you are profiteers like all the rest, you, Apple, who next?)
A better analogy would be shooting heroin, lowering rates is getting high and produces a quick rush but depletes your body of it's savings, then to rebound you need to raise rates and hope to recover. The fed right now has decided to shoot even more heroin and risk overdose (hyperinflation) and the death of the dollar, they justify it like any heroin junkie by saying they can stop any time, in reality they're drugging themselves to death and will end up broken like some drugged crack whore.
That's because Keynesian economics is dead wrong. When people save their money, it does not 'disappear' out of the economy. It goes into the pool of money available to be lent, so it still gets spent, except that it is spent by businesses making investments in the future, with which they will be able to pay interest on the money borrowed. The policy of central management of the economy through bureaucratic control of interest rates, is the root cause of the economic problems we face.
@Panpiper Sigh. There is a difference between having cash in a savings account and investing in equities or corporate paper. The former produces less investment because the bank must keep some funds as a reserve requirement, and when it does lend them eventually to a business, the business is paying a higher interest rate; therefore it is likely to be more conservative in acquiring new capital.
@Panpiper you are dead wrong... many businesses also save money if interest is high, because it's more profitable to save money than investing...and borrowing money is to expensive...so people and businesses would delay there investments
this scenario sounds horrible, but it's very usefull to keep inflation low and it prevents the economy from "over heating"...the same effect has the increase of taxes...both get money out of the market...to much growth can be dangerous
@BlackScholes80 Yes, and in order for interest to be paid on that money they save, it must first be 'loaned' so that it can be paid back, with interest. Typically such loans are to other businesses, but regardless, the money does 'not' leave circulation. I agree that it is good to keep inflation low (sound money would have it non-existent). But it is actual 'policy' to maintain a certain level of inflation that is substantially above zero.
About this time you should look in the passenger seat and make sure your friend in the credit card industry isn't pulling up on the interest emergency brake!
Obviously there is a lot more to it than that. Like how low interest rates may also causes inflation since you may be sending a false signal to grow like we had with the housing bubble.
Interest rates were supposed to be set by the Federal Reserve as a mechanism to control inflation. By dropping rates I can enable more growth. By raising rates I can drain excess capital from the market through monetary destruction mechanisms.
you got it wrong. completely wrong. low interest rate only mean more money in circulation. this is not economic grow. if this year is a tax free year and I sell you my car for 1 millions and then you sell me back the car car for 1 millions also. and this process repeated itself for 1 millions. will that help the economy? however, in economic theory, this will added to comsumption, which is one of the GDP component. just by repeating this can boost GDP to trillion but the economy did not grow.
Tax=free has nothing to do with the above analogy you go it wrong. I thought Pat would talk about inflation which would've been a topic closely linked with interest rates.
The reason the economy isn't moving Pat is because the banks are not lending that money to the public. They are making their financials strong at the moment.
tax free in my example mean that the car that I sell to you. you do not need to pay for sale tax. bank is not leanding is only part of the reason. in the old day (maybe 2-3 thousand yrs ago) there is no banking system. so there is no economy? All people are talking about for economy grow is to make GDP bigger, low interest rate make cost of borrowing is low. but if the borrowed money is used for comsumption. this will hurt the economy. it is good only if the borrowed money is used for investment
I agree entirely, m'lord. Interest rates are low and the banks are borrowing at zero and buying Treasuries at a few percent higher. A nice little earner for them, but not for the rest of us. They're growing, but we are not.
As for inflation, it often goes hand in hand with rapid growth, and because we're not really seeing much inflation right now (OK, apart from some asset inflation) it makes no sense to take the foot off the gas.
Like I say, this is a theory. Low interest rate does indeed mean more money in the economy, which many HOPE will lead to more growth. That's not so say it will, of course! paddy
the theory is wrong. if low interest rate work. why we have crisis? we have zero percentage rate and still not moving. should we try negative rate? according to this theory, it should work better because there will be a lot of people happy to borrow.
Well, the theory isn't WRONG, it's just a theory that hasn't worked this time. To be fair to the Fed, it has worked quite well in the past. But you're right, we are pedal to the metal and still stuck in a rut. And in need of a drink!
the theory is right only if the bank is lending for bussiness or investment purpose. not of consumption. that is the problem. plus there is no money for the bank to lend. ask yourself. we have low saving rate. where is the money coming from? how can we owe so much money. the answer is we owe the money that does not exist. search youtube for a video call "money as debt" then you will know what is wrong with the theory of low interest rate help the economy grow.
Behavioral economics is all about this. If you are an investor, and you are afraid about the entire financial market, you frankly don't care about 0% interest, all you care about is not losing more than the 15-60% (depending on portfolio allocation) you lost back in late 2008!...mind you, if you stuck to a porfolio appropriate for your age, you would have either made money, or recouped most of your losses!
no, with zero interest rate, I worry about paying $10/gallon gas in 1-2 yrs, a gallon of milk may cost $15 and thing like that. I am not worry about financial market, I worry about the overall economy.
Time will tell...but looking at the financial markets will give you a heads up on the overall economy...like if you are right about gas prices...you should see oil companies stock price surge ahead of time.
The way he explains it is weird... it's not that people are deciding to keep their money in banks because banks are PAYING higher interest rates, it's that the demand for loans decreases when banks CHARGE higher rates of interest. Higher interest rates means fewer loans which means a tighter economy. Stocks and bonds are known to typically pay much better than simple bank interest, which is always measly. Higher interest rates contract the money supply.
jumpoutatree 1 week ago
love the analogy ill never be confused about that again ! ill just imagine myself in your sports car haha
houdapurple 3 weeks ago
that throwing the pen thing is coooooooooooooooool!!!!!!!!
017pratik 3 months ago
Can anyone tell me why Central Banks increases or decreases interest rate? To be precise what's its impact on other economic indicators of a country?
tamxhah 4 months ago
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@tamxhah Can anyone tell me why Central Banks increases or decreases interest rate? To be precise what's its impact on other economic indicators of a country?
tamxhah 4 months ago
i learned more off the comments then i did the video :P
jtg2k10 4 months ago
You're more likely to crash when you're accelerating.
HandsOffLibya 5 months ago 2
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The5starSTUNNNA 5 months ago
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The5starSTUNNNA 5 months ago
sHUT UP U FAG
The5starSTUNNNA 5 months ago
why is the car not moving even when the accelerator is down? is it kaput?
Heissenburger 6 months ago
Hi, I like your vids very much, great work. Thanks a lot!!
Oki1840 8 months ago
lol awesome:)
babiestav 8 months ago
Quantitative Easing ends June 2011 Starting July 2011 the U.S. Treasury is being taken off Federal Reserve life support and has to sell a record 180 billion a month in new issues on the open market and not to the Fed. What do you think is going to happen when no one steps up to the plate to buy the record amounts of new issues that need to be sold at these ridiculously low rates? bloomberg-com/markets/rates-bonds/government-bonds/us/ Peter Catranis cta-online-com/index-4.asp
pcatranis 9 months ago
a level business studies, degree in business and this is the first proper clear explanation of Interest rates effect on economy, cheers mate all the way from Ireland!! :)
rewinder69er 9 months ago
nice boot!
fireflies92 10 months ago
I wish they would hike rates a.s.a.p I am sick of having a small amount of money left out of my full time earnings each month after I have paid all my mortgage,bills, food etc. Recently I have been able to take the kids out and enjoy life a little. get them rates up so i can be skint and forced to borrow money and live in debt, just like i'm used to. Life is not there to be enjoyed, it is there to be worked and then die. No-one gives a fuck. case closed. Lots of love, ba ba black sheep x
Yooonited 10 months ago
artificial low interest rates creates and encourages MALINVESTMENT. Listen to Peter Schiff, Ron Paul, Tom Woods ect if you want to know how an economy grows and why it crashes......Don't listen to anything other than the Austrian School of economics! You will never listen to anything else after you listen to this school of thought. I realize now that I paid my college instructors to teach me exactly the WRONG STUFF.
tastyshake 11 months ago
HAHA... I love your example... To bad it's not helping me pass my midterm... but it was entertaining I must say... one week till my midterm... I NEED A DRINK!! I need to learn this formula and how to use it... HELP ME!!! (r=r* + IP + DRP + LP + MRP)
CC4ntStopW0NtStop 11 months ago
This video doesn't explain why would anyone raise interest if it slows the economy.
kricsek 11 months ago
HELLO!!!! The main reason why lower interest rates speed up the economy is creates an incentive to borrow money for investment, since loans are cheap with low interest rates!
coolalrightcool 1 year ago
Question; why is there in inverse relationship between prices of securities and its interest rates???
squaCampos 1 year ago
Thanks a LOT
streetflakes 1 year ago
Thank you so much!!!!! Please don't remove this video!!!! Or make it unoperable Google (I use to love you so much when you were a free thinker, now you are profiteers like all the rest, you, Apple, who next?)
meljmcn 1 year ago
OMG thank you!
nattynovember 1 year ago
wow !!! I'love to know who explained to you this theory, must`ve been bernanke huh?..
Berbanke 1 year ago
THANK YOU SO MUCH :D
LeKden8 1 year ago
Thanks. Nice little piece.
(Some people's 'interest rate' may go lower if they think those size 13boots are a little feminini...)
rollingklouds 1 year ago
A better analogy would be shooting heroin, lowering rates is getting high and produces a quick rush but depletes your body of it's savings, then to rebound you need to raise rates and hope to recover. The fed right now has decided to shoot even more heroin and risk overdose (hyperinflation) and the death of the dollar, they justify it like any heroin junkie by saying they can stop any time, in reality they're drugging themselves to death and will end up broken like some drugged crack whore.
revelationary 1 year ago 15
This analogy is really excellent! thanks for sharing!
assadb 1 year ago
i like the way he explains the theory
kukushat 1 year ago
big shoe size means big socks
MECHITO1330 2 years ago
That's because Keynesian economics is dead wrong. When people save their money, it does not 'disappear' out of the economy. It goes into the pool of money available to be lent, so it still gets spent, except that it is spent by businesses making investments in the future, with which they will be able to pay interest on the money borrowed. The policy of central management of the economy through bureaucratic control of interest rates, is the root cause of the economic problems we face.
Panpiper 2 years ago 13
@Panpiper Sigh. There is a difference between having cash in a savings account and investing in equities or corporate paper. The former produces less investment because the bank must keep some funds as a reserve requirement, and when it does lend them eventually to a business, the business is paying a higher interest rate; therefore it is likely to be more conservative in acquiring new capital.
hymnofashes 10 months ago
@Panpiper you are dead wrong... many businesses also save money if interest is high, because it's more profitable to save money than investing...and borrowing money is to expensive...so people and businesses would delay there investments
this scenario sounds horrible, but it's very usefull to keep inflation low and it prevents the economy from "over heating"...the same effect has the increase of taxes...both get money out of the market...to much growth can be dangerous
BlackScholes80 5 months ago
@BlackScholes80 Yes, and in order for interest to be paid on that money they save, it must first be 'loaned' so that it can be paid back, with interest. Typically such loans are to other businesses, but regardless, the money does 'not' leave circulation. I agree that it is good to keep inflation low (sound money would have it non-existent). But it is actual 'policy' to maintain a certain level of inflation that is substantially above zero.
There is no "paradox of thrift".
Panpiper 5 months ago
This guy is great!!!
mw4205 2 years ago
they don't need a drink, they need to go to a gas station and fill up the car ;-)
ReatuKrentor 2 years ago
@ReatuKrentor, except the gas station is empty since the Fed borrowed it's money.
shilohwillcome 2 years ago
About this time you should look in the passenger seat and make sure your friend in the credit card industry isn't pulling up on the interest emergency brake!
Calliber50 2 years ago
You can't stimulate a fake economy...while, at least not for very long.
hiphopsocnroc 2 years ago
Obviously there is a lot more to it than that. Like how low interest rates may also causes inflation since you may be sending a false signal to grow like we had with the housing bubble.
Interest rates were supposed to be set by the Federal Reserve as a mechanism to control inflation. By dropping rates I can enable more growth. By raising rates I can drain excess capital from the market through monetary destruction mechanisms.
But in the end they are both still false signals.
WhoIsJohnGalt4279 2 years ago
you got it wrong. completely wrong. low interest rate only mean more money in circulation. this is not economic grow. if this year is a tax free year and I sell you my car for 1 millions and then you sell me back the car car for 1 millions also. and this process repeated itself for 1 millions. will that help the economy? however, in economic theory, this will added to comsumption, which is one of the GDP component. just by repeating this can boost GDP to trillion but the economy did not grow.
hc167 2 years ago
Tax=free has nothing to do with the above analogy you go it wrong. I thought Pat would talk about inflation which would've been a topic closely linked with interest rates.
The reason the economy isn't moving Pat is because the banks are not lending that money to the public. They are making their financials strong at the moment.
666lordbyron666 2 years ago
tax free in my example mean that the car that I sell to you. you do not need to pay for sale tax. bank is not leanding is only part of the reason. in the old day (maybe 2-3 thousand yrs ago) there is no banking system. so there is no economy? All people are talking about for economy grow is to make GDP bigger, low interest rate make cost of borrowing is low. but if the borrowed money is used for comsumption. this will hurt the economy. it is good only if the borrowed money is used for investment
hc167 2 years ago
I agree entirely, m'lord. Interest rates are low and the banks are borrowing at zero and buying Treasuries at a few percent higher. A nice little earner for them, but not for the rest of us. They're growing, but we are not.
As for inflation, it often goes hand in hand with rapid growth, and because we're not really seeing much inflation right now (OK, apart from some asset inflation) it makes no sense to take the foot off the gas.
paddy
fogpad08 2 years ago
Hi hc
Like I say, this is a theory. Low interest rate does indeed mean more money in the economy, which many HOPE will lead to more growth. That's not so say it will, of course! paddy
fogpad08 2 years ago
the theory is wrong. if low interest rate work. why we have crisis? we have zero percentage rate and still not moving. should we try negative rate? according to this theory, it should work better because there will be a lot of people happy to borrow.
hc167 2 years ago
Well, the theory isn't WRONG, it's just a theory that hasn't worked this time. To be fair to the Fed, it has worked quite well in the past. But you're right, we are pedal to the metal and still stuck in a rut. And in need of a drink!
cheers
paddy
fogpad08 2 years ago
the theory is right only if the bank is lending for bussiness or investment purpose. not of consumption. that is the problem. plus there is no money for the bank to lend. ask yourself. we have low saving rate. where is the money coming from? how can we owe so much money. the answer is we owe the money that does not exist. search youtube for a video call "money as debt" then you will know what is wrong with the theory of low interest rate help the economy grow.
hc167 2 years ago
Behavioral economics is all about this. If you are an investor, and you are afraid about the entire financial market, you frankly don't care about 0% interest, all you care about is not losing more than the 15-60% (depending on portfolio allocation) you lost back in late 2008!...mind you, if you stuck to a porfolio appropriate for your age, you would have either made money, or recouped most of your losses!
Gyrode 2 years ago
no, with zero interest rate, I worry about paying $10/gallon gas in 1-2 yrs, a gallon of milk may cost $15 and thing like that. I am not worry about financial market, I worry about the overall economy.
hc167 2 years ago
Time will tell...but looking at the financial markets will give you a heads up on the overall economy...like if you are right about gas prices...you should see oil companies stock price surge ahead of time.
Gyrode 2 years ago
need a drink + pen toss FTW
atat9998 2 years ago 2
it'll be cool to over some of the theories on how to improve the economy such as Monetary vs Fiscal policies, etc.
write2warriors 2 years ago 2
Those with the desire, have not the power, and those with the power, have not the desire.
D4Shawn 2 years ago