Moneybeat: Interest rates and schools of economic thought

MARY REICHARD, INTERVIEWER: Then The world and everything in it is: Monday Moneybeat.

NICK EICHER, HOST: It’s time to talk business, markets, and finance with economist and consultant David Bahnsen.

He is the CEO of the financial management company The Bahnsen Group and is here now.

David, good morning!

DAVID BAHNSEN, GUEST: Well, good morning, Nick. It’s good to be with you.

EICHER: It’s a short week and a holiday, David, but I’m looking at a busy week with the Federal Reserve meeting this week to set the interest rate policy, so let’s get to that before we get to the audience’s questions.

BAHNSEN: Well, last week, the shortened week, you did well again in the stock market. And I think that market expectations continue to back up expectations of the Fed, meaning that people believe that the Fed is going to start tapering, tightening. And if they’re slowing down, they’re tightening, which means they’re getting closer to stopping tightening, the FOMC will announce, and by the way, the FOMC is the Federal Open Market Committee. And that’s the very group of governors who vote on the Federal Reserve Board of Governors who get to set interest rates. And so the FOMC is kind of the higher level of the Federal Reserve. And on Wednesday, they announced that they are raising the prices by half a percent. They have raised rates three out of three times in the last three meetings. So the markets are hoping for a reduction in inflation from this week.

EICHER: Well, so I think that gives us a good answer to our first audience question this week, David. Here’s a Sam Burnett listener.

BURNETT: Good morning, Nick and David. When interest rates rise, can you explain how rising interest rates affect the national debt? And is there an interest rate above which the federal government defaults? Thank you.

BAHNSEN: Well, that’s a great question. And obviously, from a mathematical point of view, the amount of debt in the United States Treasury and short-term debt instruments, they have debt maturing in 30 years and 20 years. in different ways. And it’s up to the Treasury to manage what we call the profile, the different maturity levels at which money must be repaid. But the amount of credit is and always has been short term. And so it has led to more borrowing and more debt, that interest rates have been very close to 0% for a long time.

And now for the first time, you will actually see the cost of the loan increase due to higher interest rates. Now, how many others, Isn’t this a bad thing, then I can’t afford it. I would take a different approach and say, this is why it won’t happen. That In other words, the incentives of the central bank to be able to borrow the government is very high, so that even if they can use the interest rate at this time for a long time, they cannot afford it. and therefore they will not allow it.

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Now, of course, there’s been talk of this thing called ‘bond market vigilantes,’ that the stock market is going to rebel and just want higher interest rates to address their concerns about borrowing, meaning borrowing that won’t go away. to be refundable. But the truth is, the problem is that people think it was like that when we had a national debt. And now we have 31 trillion. And so I think those who are trying to predict the fact that they will not come back because of the government debt are not wise and think of excessive spending that the government did not need. And I dare not put a limit on how long the government can kick this can.

EICHER: You know, David, we get a lot of questions about interest rates, and I thought this listener’s question was representative of most people, so I’m going to use it as a follow-up to this discussion about interest rates. He asks: “You say that interest rates, like all rates, need to be known.” What do you think the interest would be, at this point, if it were allowed to happen, and is there any other way it could be calculated?” What do you say to that?

BAHNSEN: Well, the irony, of course, in this question is that my opinion is not only that 12 PhDs should not impose interest, but also that David Bahnsen should not impose. And for me to be a staunch advocate of setting the prices, not the prices being set, means I don’t believe I can do that anymore. But I think the question is more predictable, if the level would be? And this is one thing that has really bothered my hard money and sound friends over the years, is that I never thought that borrowing costs would be so high if the Fed got off the path of hyper interventionism. The reality is that the demand for US dollars and expectations of future growth – demand for dollars being very high, expectations for future growth being very low – so I don’t think interest rates would be much higher than they have been. . Now one of the ways we know this, Nick is the mess of the Fed is to control and regulate the short term, overnight lending rate so that banks can borrow money from banks. They don’t have direct control over the market, they can control it, but they don’t control it directly for ten years. In fact, the Fed didn’t buy 10-year bonds in six months – from the end of 2014 to 2020, they didn’t buy 10-year bonds, and the interest rate was around 2%. So here’s the bad thing I’m saying: you want the 10-year mortgage to be the same as the short-term mortgage plus your expected growth, the amount you’re paying to borrow your money. So, the price of time. And when the market is making prices to double to 3%, they are putting very little hope on future growth. So if the question is I think what short-term lending would be, right now, if the Fed wasn’t affected, and the banks just lent to the banks, but there was still money, you didn’t need a lender. Finally, there were financial markets operating, I think it would be above zero and below four – where it is now. So I think somewhere closer to three than four, four and a half or five. So this is the first time in at least 15 years that I think the Fed is setting rates above the natural rate. But this is what we don’t know because this is not a lie. I can’t be proven wrong because market forces don’t set prices anytime soon.

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EICHER: We have more time. David, this is Paul Gebel from Edmond, Oklahoma.

GEBEL: I ask this question in honor of my high school teacher, Mr. Paulus. Fifty-two years ago, he made the lesson come alive for me, and you continue in the same tradition. So here is my question. Why are there so many theories about how wealth should be done? One would think that after centuries of trying different methods, and seeing some systems apparently work, while others produce the best results, economists and investors should say, “that’s how money should be used,” but disagreements persist. Why is that? I am waiting for your reply.

BAHNSEN: I think the assumption in this question is wrong, which is that economics is a science that proves that once we see real results, we can make a deal. But the reason you will always have the opposite and, as you said, the wrong view of the economy, despite the evidence of history, is that the economy comes from the culture of the people. What I mean is, there are different human emotions. There are different views of humanity, there are different understandings of what man is here on earth to do, man’s relationship with people, in my worldview, man’s relationship with God. And all these things are what make up our thoughts about money. And the reason we will continue to have different views on economics is that we have different views on anthropology. I do not believe that we would have Marxism, collectivism, Keynesianism, love of wealth and central planning, if everyone adopted the Christian culture. I think that Christian anthropology can be a bridge to a better understanding of economics, which is supported by strong evidence. However, I do not believe that we will go to an era of social equality any time soon. And therefore, all of this at the same time answers your question why we disagree and repeat the story so that it has a well-developed economic perspective, which is based on the difference between Creator / creature. And theology shapes our understanding of wealth and the use of wealth. And along the way, our efforts to persuade people about some legal issues and empirical evidence may be effective, but I’m still trying to treat the symptom rather than the problem. And when we do economics or teach economics at the beginning, at the beginning of the principles, which is our understanding of anthropology, that’s when we have the opportunity to find this.

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EICHER: Well, well, good questions again this week. Thanks to Sam Burnett and Paul Gebel. We love hearing questions and if you have any, please get in touch [email protected].

I am happy to read your question if you just write it in an email. But, I think it’s better to hear your questions in your own words. So if you can take that extra step and create a password for your query and email the file, that’s great. Same address: [email protected].

David Bahnsen is the founder, managing partner, and chief investment officer of The Bahnsen Group. His website is Bahnsen.com, BAHNSEN. Here’s how to pronounce David’s last name correctly and know that it will take you to the right URL on the Internet if you want to see what David is up to. Bahnsen.com.

David, thanks again, and I look forward to speaking next week.

BAHNSEN: Thank you very much, Nick.


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