Rising Interest Rates

[NATI BENGALS]

Im no economist. So I have a question. Are rising interest rates good or bad for the low and middle class?
I get if i want to invest in a CD that should be one area of benefit. But what about everthing else.

With all these tariffs and trade wars starting i was reading a little last night about how American buyers are now paying 50% more for steel compared to other countries. I would assume that will get passed on to consumers. And the cost of washing machines had their biggest spike ever going up 17%.

Costs going up. Interest rates going up. My math tells me that is bad for my wallet. Am i wrong?

[BmorePat87]

(06-15-2018, 08:13 AM)NATI BENGALS Wrote: Im no economist. So I have a question. Are rising interest rates good or bad for the low and middle class?
I get if i want to invest in a CD that should be one area of benefit. But what about everthing else.

With all these tariffs and trade wars starting i was reading a little last night about how American buyers are now paying 50% more for steel compared to other countries. I would assume that will get passed on to consumers. And the cost of washing machines had their biggest spike ever going up 17%.

Costs going up. Interest rates going up. My math tells me that is bad for my wallet. Am i wrong?

We raise interest rates to control inflation. The idea is people will borrow/spend less.

It shouldn't inherently be bad for your wallet unless you planned on borrowing. 

[*michaelsean*]

I never quite get it either, but it seems that while we like low interest rates, the fact that they are so low means the economy isn't doing great, and the Fed is trying to jump start it. Then again really high interest rates mean the same thing, so I'm guessing there's a happy middle ground.

[Yojimbo]

My personal favorite economist is Mark Blythe. He says inflation is actually good for borrowers and bad for lenders, so central banks have created this inflation scare as a way to keep their profits from sinking.

https://www.jacobinmag.com/2015/02/germany-austerity-blyth-speech-spd/

Quote:But look beyond this, and there is a bigger issue for left parties to deal with, one that they unfortunately helped to create. Back in the 1970s, a period that now seems quite benign, corporate profits were very low, labor’s share of income was very high, and inflation was rising. We were told that this was unsustainable, and new institutions and policies were constructed to make sure that this particular mix of outcomes would never happen again.

In this regard we were singularly successful. Today, corporate profits have never been higher, labor’s share of national income has almost never been lower, and inflation has given way to deflation. So are we happier for this change?
What we have done over the past thirty years is to build a creditor’s paradise of positive real interest rates, low inflation, open markets, beaten-down unions, and a retreating state — all policed by unelected economic officials in central banks and other unelected institutions that have only one target: to keep such a creditor’s paradise going.
In such a world, why would you, the average worker, ever get a pay rise? Indeed, is it any wonder that inequality is everywhere an issue? In Europe this plays out at the national level, and at the international level of creditor countries (good) and debtor countries (bad), where the rights of the creditors must be protected and the mantra that “you must pay your debts” must be respected.
Yet even in terms of simple welfare economics, this is nonsense. If the cost of squeezing the debtor is to keep her in debt servitude, or if the losses to the creditors are less than the costs of servicing the debt in perpetuity, then default is efficient, if not moral.

[6andcounting]

(06-15-2018, 09:16 AM)michaelsean Wrote: I never quite get it either, but it seems that while we like low interest rates, the fact that they are so low means the economy isn't doing great, and the Fed is trying to jump start it.  Then again really high interest rates mean the same thing, so I'm guessing there's a happy middle ground.

Inflation (and by extent Fed rates) go up with GDP growth. GDP growth helps the economy and the growth of the market as a whole. Better returns from the stock market.

Inflation forces spending and investment because otherwise the value of your money shrinks. If inflation goes so low it's negative, then money is worth more as time goes on just by sitting there. This discourages people from spending and start saving which slows the economy. 

[NATI BENGALS]

From my understanding most low and middle class peopledont have a lot of savings and do have a lot of debt. While wages are stagnate.

The ones who have to borrow to buy a car buy a furnace put a roof on their house etc.

Some might call them the forgotten people. Im just not putting 2 and 2 together and able to figure out how this helps them

[6andcounting]

(06-15-2018, 05:13 PM)NATI BENGALS Wrote: From my understanding most low and middle class peopledont have a lot of savings and do have a lot of debt. While wages are stagnate.

The ones who have to borrow to buy a car buy a furnace put a roof on their house etc.

Some might call them the forgotten people. Im just not putting 2 and 2 together and able to figure out how this helps them

Most economists think a little bit of inflation in healthy because it forces people to spend and stimulates the economy. Inflation helps if you owe debt because over time the value of the $500 you have to pay monthly is less and less valuable so it's like you're not giving up as much. You get the 100K of loan money up front when the money is worth the most and the money the bank gets paid back is worth less and less over time.

That being said if people are poor they should be saving and not spending. And having  their savings be worth 2-3% less every single year doesn't help them build wealth. 

[*bfine32*]

(06-15-2018, 05:13 PM)NATI BENGALS Wrote: From my understanding most low and middle class peopledont have a lot of savings and do have a lot of debt. While wages are stagnate.

The ones who have to borrow to buy a car buy a furnace put a roof on their house etc.

Some might call them the forgotten people. Im just not putting 2 and 2 together and able to figure out how this helps them

Personally I think you're fishing for something that's really not there. But let's pretend I am low/middle income and have to buy a car. Let's further pretend I'm going to be reasonable and buy a nice used/ bargain basement new for around $18,000 dollars. I can get it for about $282 a month on a 6 year note at 4%, Let's say the interest rate jumps 2% (big jump) I am now paying about $15 more dollars a month.

Higher interest rate is a sign of a strong economy; it just stops folks from spending outside of their means.

[NATI BENGALS]

(06-15-2018, 09:22 PM)bfine32 Wrote: Personally I think you're fishing for something that's really not there. But let's pretend I am low/middle income and have to buy a car. Let's further pretend I'm going to be reasonable and buy a nice used/ bargain basement new for around $18,000 dollars. I can get it for about $282 a month on a 6 year note at 4%, Let's say the interest rate jumps 2% (big jump) I am now paying about $15 more dollars a month.

Higher interest rate is a sign of a strong economy; it just stops folks from spending outside of their means.

I dont think im fishing. 

http://www.cnbc.com/2018/01/18/few-americans-have-enough-savings-to-cover-a-1000-emergency.html

These people say about 1/3 of American households dont have enough to cover a 1000$ emergency. And what household doesnt have emergencies? 

So the broke people have to borrow in these situations and we say the economy is good because they are borrowing at a higher rate yet they are digging themselves into a deeper hole.

[NATI BENGALS]

http://www.washingtonpost.com/news/wonk/wp/2018/06/15/for-the-biggest-group-of-american-workers-wages-arent-just-flat-theyre-falling/?utm_term=.65a79942f5bd

" one measure shows the value of wages has decreased for most American workers. (Jeff Swensen/Getty Images)
The average hourly wage paid to a key group of American workers has fallen from last year when accounting for inflation, as an economy that appears strong by several measures continues to fail to create bigger paychecks, the federal government said Tuesday.

For workers in “production and nonsupervisory” positions, the value of the average paycheck has declined in the past year. For those workers, average “real wages” — a measure of pay that takes inflation into account — fell from $22.62 in May 2017 to $22.59 in May 2018, the Bureau of Labor Statistics said.

This pool of workers includes those in manufacturing and construction jobs, as well as all “nonsupervisory” workers in service industries such health care or fast food. The group accounts for about four-fifths of the privately employed workers in America, according to BLS."

What is going to kick in faster? The trickle down? The higher interest rates? And/or inflation and a pending trade war?

I know one thing im happy about is the tariffs on whiskey. If i recall correctly from econ 101 increase in supply lowers the cost. So if the tariffs slow down whiskey exports... Fingers crossed for plummeting whiskey prices

[Au165]

(06-15-2018, 10:47 PM)NATI BENGALS Wrote: I dont think im fishing. 

http://www.cnbc.com/2018/01/18/few-americans-have-enough-savings-to-cover-a-1000-emergency.html

These people say about 1/3 of American households dont have enough to cover a 1000$ emergency. And what household doesnt have emergencies? 

So the broke people have to borrow in these situations and we say the economy is good because they are borrowing at a higher rate yet they are digging themselves into a deeper hole.

The $1000 emergency issue is more so related to the lack of personal finance we teach. We will hammer science and history and all sorts of advanced math into our kids heads for years, but we think it's fine to offer an elective finance class or possibly one required course on finance. It should be required every year from freshman year onward as it is one of the few things that everyone, no matter your future field of work, will be required to use. 

Sorry, slightly off topic but this is one of my biggest issues with the current education system. This single issue has a huge impact on the entire country yet no one in any sort of place of authority really seems to want to address it.