Fighting inflation by increasing prime rate by 3x

Often I wish the Fed would stop printing funny money and just let the economy alone.

Personally, I think the US dollar jumped the shark when we stopped having a dollars' worth of gold for each dollar printed and have now gone to monopoly money where you just print as many dollars as necessary to control the economy.

I realize there are many different opinions on this.

 

Good points.

FTX may have highlighted the foolishness of cryptocurrency

 

I have never paid credit card interest. Yeah, I have multiple cards I use to pay for various things I purchase regularly or occasionally, but I get 1-4% cashback on them. It pays to use credit cards, that's as long as the card is paid off each month. If I can't budget to pay it off each month, then I don't use the card. That is the golden rule of financing. There are bad loans and good loans.

My current auto loan, which I had intended to pay it off sooner, but decided to keep the loan for now. The rate is locked at 1.02% APR. Same with my mortgage. I was going to pay it off earlier by paying more principal, but I stopped the practice for now. The rate is locked at 2.0% APR. These are examples of good loans. Any extra money I had intended to use to pay extra principal for the loans, I am putting in the investment account to buy bargain-priced securities.

I will see how those financial moves pan out down the road.

 

I agree on your approach to credit cards. Sometimes, though, it's not possible to avoid carrying a balance in cases of unforeseen emergency expenses. I'm carrying a balance for the first time in about 14 years as one of the two dogs we rescued came with heartworms and part of our roof was damaged when an intense storm blew through in September. We'll gradually pay it back down and our tax return should handle whatever is left when we get it. Then it will be back to paying off the "cash back" card on a monthly basis.

Our home loan is also at a low enough rate that even if we had the cash we wouldn't pay it off early. As for cars, we simply do some serious research and pay cash for what we can afford. We haven't had a car loan in about 35 years.

 

rising interest rates are slowing consumption. since supply constraints can't be controlled, this seems to be the intent of the fed and the administration.
some things can't be controlled, even with less consumption. pretty tough to cut back on heat and food.

just finished a good book about a scotsman in france back in the early 1700's, who propesed an economic system to bail them out when all there tax money was being spent on fighting wars.
it worked for awhile, and he intended to have gold and silver to back up paper currency. but like anything else, it got out of hand, and they started printing more paper beyond the value of the metal back up.
eventually, it all collapsed on itself. so we've had at least 300 years of economic theory since then, and pretty much no solutions.

 

on the plus side, 4% t notes have been wonderful

 

I understand there are times when you need to use the credit card for an amount more than budgeted. But I keep a separate "Emergency Fund" account just for such events. A liquid account with cash that can be accessed easily in case of emergency. Saving for the emergency fund should be the very first and most priority for any financial planning.

Auto loans are an interesting beast. When you go buy a car either new or used at a dealer, they always emphasize the "monthly" payment, not the total payment. Some people think paying a $200/mo car payment for a 72-month loan is better than paying $500/mo for a 24-month loan. I have been using the same ~$20K money I set aside for purchasing a car for the last 5 cars I purchased. For each purchase, I did use financing from the dealer at the time of purchase. Most times, financing through the dealer gives better negotiation leverage to a buyer partly because they also get a commission from the bank for getting a loan contract. Of the 5 times, I took auto loans, three of them were paid in full within the first year, one time within a few weeks, without any penalty erasing most of the financial fees associated with the loan as interest. For the other two cars, one was with a manufacturer incentive 0% APR loan, in which case, paying the loan sooner has no financial merit. On another current PP, I could have paid the initial loan but opted to re-finance it with a very low 1.02% APR loan and keep the money in the investment account instead. Unfortunately, the investment account has not been performing as well as I wished for the period I have kept the money. But still, under the current economic situation, I'd rather have the liquid fund in the investment account for now than pay off the low-interest car loan. Just in case we need more cash to pay for the daily necessity... such as heat and food, @bisco mentioned in his comment.

Yeah, inflation is hitting hardest those people who are cash-strapped. If they have to use a credit card to pay for those necessities and can't pay it off every month, then they are double hurt. I am glad we are not in that situation.

 

i read yesterday that people are spending less on baby clothes. and some were being forced to wear hand me downs because of higher interest rates. they made it sound like impending doom.
maybe i'm an old fart, but that's the way we were raised, and the way we raised our children. it wasn't so bad

 

Auto loans are interesting as well as the automobile financing/reselling industry.

When we buy a brand-new product and start it up and drive off the lot we have immediately experienced a $5,000 to $10,000 loss or more in some instances. Plus, we financed the payments on this loss with interest if borrowing money.
Auto financing is a game all its own

Car loan statistics 2022 | Americans owe $1.3 trillion in auto debt (finder.com)

 

Oh yes. My "fixed rate" annuity-tied investment account has performed the best this year. Unfortunately, this is an carry over account from my previous job and I can't put any new money into it. But the this is the only account that has shown annual gain this year at a steady 4% gain. LOL

If I have to list the most expensive "items" as categories, then I am 100% certain that "kids" are the most expensive of all the "things" we spent money on. It was not a house, not a car, not even food on the table (for us anyway). Yep, raising kids costs money. And I think it does more now than 20 years ago. No question about it.

That was always the case for us too that was until the first purchase of my Prius Prime back in 2017 with huge incentives. For each purchase of PP which I did three times, the trade-in did not lose any money. In fact, for the last transaction, the 2020 PP sold ended up making a profit of ~$4000. And for my current 2021, if I sell it now, I will gain ~$8000.

 

Agreed. Recently, Charlie Ward mentioned on Rumble that we now have a gold-backed currency called the United States Token Note. Judy Byington, Nick Fleming, and various Q drops all hint on this. The Quantum Financial System incorporates the gold-backed currencies around the world, and the transactions are transparent.
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I believe that we've just entered fiat hyperinflation. And once the fraudulent/treasonous administration of the bankrupt US Corp are uninstalled, I expect 45 comes back as the 19th President of the Republic, to rebuild America, and then I suspect we'll transition to gold-backed currency. And I believe that silver will be counted as money as well. And then that'll put an end to the fraudulent fiat monetary system.

 

LOL

business-spending-recession-fears

 

For those of us who ain't got heat pumps or enough insulation yet, some rebates coming up in several weeks may make the heat part less tough.

All through my years in college, you could walk into any bank and open a savings account and be looking at 5¼% for an FDIC-insured, essentially no-risk investment.

My credit card from my student days was charging 18.6% around that same time. So, I would have to pay a bank about 3½ times as much to use their money as they would pay me to use mine.

More recently, the local brick-and-mortar banks here look to be around 0.05% on savings (and I just googled one up that's offering a fifth of that, 0.01%. Happy I don't bank there).

Over the same period, the rate charged on my credit cards has also dropped, and is now closer to 13% than 18%. So while rates offered to me dropped by a factor of more than 100, rates charged to me dropped by, oh, not quite a third.

So now I'd have to pay them 260 times as much to use their money as they'll pay me to use mine. (That would be 1300 times, if I banked at that other place in town.) And over recent decades, that has just come to be something we consider normal.

And yes, you can go for online-only savings accounts and get better rates, maybe up to 3% or so, which brings that spread back down to a factor of 4 or so. And, like others, I've only carried a credit card balance at certain carefully selected times.

It seems like we just got really used to seeing interest rates so close to zero. Even now, they don't seem super high, compared to not all that long ago.

 

I remember those days. But things were still cheap, but the rates were needed at the time. Nowadays there is a glut of cash, and the home market is insane. It will take awhile to calm down, and it's started. But consumer prices always lag behind, it will take awhile to cool wholesale prices. Energy costs are brutal this year, and a promised no increase in supply isn't helping. The last thing we needed is more stimulus. Many states are still flush with money that even they can't spend.

 

You've touched here on what I think is the core problem. We're seeing Central banks raising interest rates around the world, in an effort to counter inflation.

The classic theory is that it reduces demand. Consumers who've borrowed money to buy a house have less money, so they buy less stuff. Consumers are also less willing to borrow, so they buy less stuff on credit. Businesses are less willing to borrow, so they invest less. It used to make sense: raising interest rates would help balance demand and supply by reducing demand, so there'd be less upward pressure on pricing.

But I think the classic theory is no longer valid. After the pandemic, and during the Ukraine war, supply chains have broken down. This is one of the current supply-side problems driving inflation. The other appears to be unfettered corporate greed, to a degree we haven't seen before. These are both supply-side issues that cannot be addressed simply by putting downward pressure on demand. Demand is already low: wages are falling, and people can't afford stuff. That unfettered corporate greed kicks in again here: those corporations are increasing the prices they're charging, and they're paying less and less for inputs, including wages.

So prices are rising even though they are not being driven by excess demand.

We've entered a whole new set of economic circumstances here. Central banks are using old tools to deal with new problems, and I don't think the old tools are going to work any more.

 

Normally that's true.

I don't know how things are in the US, but the supply crisis with new cars has meant that in Australia cars - EVs especially, but ICE cars too - are now gaining value as you drive them off the forecourt.

A new Hyundai Ioniq 5 costs around A$80,000. Try to buy a lightly-used one here and you'll be lucky to get change out of A$100,000.

 

I know real estate is much, much cheaper in most of the US (possibly not San Francisco and Silicon Valley, but it's close) than it is in Sydney. But here, there are loads of stories about the impact of rising interest rates. I think that on average here people have about A$1m (about US$700,000) outstanding on their mortgage, so a 100bp interest rate rise (the interest rate going up by 1 percentage point) adds US$7,000 a year to such a household's expenses. Over the past year, variable mortgage rates have risen from just under 2% to a bit over 4%, whacking a good US$14,000 onto such a household's expenses. That's not insignificant, and it has caused serious pain for some people. Some are being forced to sell their houses, sometimes at a loss, with what will be lifelong repercussions.

I don't know how things are in the US, but here, commercial banks really deserve a lot of the blame. When we bought our house in 2016, we knew that interest rates were very low and that they were, at some point, liable to rise. We knew that we could only borrow in line with what we'd be able to afford if interest rates were to rise, so we knew what our limits were.

But most banks offered us around A$1m to A$1.5m more than we knew we could afford under such constraints.

We were well-informed economically and we knew this would be a bad idea: we stuck to our self-imposed limit. But most people, I think, believed that the banks knew what they were doing, and were basing their offers on what families could safely afford. So most people took on the mortgage they were offered and bought a house they couldn't afford.

I was horrified by what we were offered. But most people, I think, would have been pleased, and would have accepted it.

The banks' excessive lending has been a major driver of Australia's property price bubble. And their excessive lending is what's going to lead some families to now lose their homes.

I don't know whether the situation is similar in the US.

 

Out of curiosity, who was the 18th president of the republic? How does the counting work?