This article necessarily has a lot of business jargon content, and I'm having trouble parsing it. Could somebody with subject knowledge please summarize the article in terms a simple hacker can understand, and speculate a bit on the possible ramifications?
Treasuries are securities that the US government sells. It's a piece of paper you can buy, that promises the US government will pay you back, with interest (simplification) at some point in the future.
People with spare cash (which goes down in value over time) can put their money into Treasuries, with a very high expectation they'll get some some interest over their invested principle. US Treasuries are considered a very good "stable" investment in that the risk of not getting back your interest or principal is very very low.
China bought a lot of these when they had lots of spare cash. These things involve so much money and are integrated in the US monetary system that rapid changes of their ownership can have big impact in US economy (world's largest) as well as large markets (big simplification; there is a bunch of macroeconomic theory, as well as a bunch of irrational behavior that causes shifts in markets).
By selling these, the supply of treasuries will go up, which will probably reduce their value, which will have ripple-through effects on the economy.
Beyond that it's truly hard to evaluate the specific ramifications. The stock market is constantly evolving around a large number of indenpdent agents most of which behave irrationally.
> The stock market is constantly evolving around a large number of indenpdent agents most of which behave irrationally.
I think they actually behave rationally, but all according to different fact-bases. People usually don't say "this is really dumb but I'll do it anyhow" most of the time, most of the time they really believe that they're doing something pretty rational.
But a lot of times they have incomplete, ignorant, or just plain crazy fact bases from which they operate.
Or in the case of China, they want to defend their currency peg. You might disagree with their decision to peg, but if you accept for a moment that this is their goal, then it's super rational.
> I think they actually behave rationally, but all according to different fact-bases. People usually don't say "this is really dumb but I'll do it anyhow" most of the time, most of the time they really believe that they're doing something pretty rational.
> But a lot of times they have incomplete, ignorant, or just plain crazy fact bases from which they operate.
Believing an action is a good idea or in your best interests when it actually isn't, or basing decisions on a warped perception of reality, is pretty much a textbook case of acting irrationally. Rational versus irrational is not about perception, it is about how well perception matches reality.
So I hear what you're saying, but if that's the case then everyone, everywhere acts irrationally all the time. Because nobody is an oracle who knows how everything will play out. Is that the point that you're trying to make? Nobody has perfect information.
I guess what I was trying to describe is that people might act foolishly, but they don't know it's foolish. And most of the time we only know it's foolish in hindsight. At the time it might have been brilliant, but they went broke so it wasn't. If they'd made billions, it would have been genius.
So basically most people have "facts" that they believe to be true, and use them to make decisions that in light of those "facts" are smart. Few people disregard all facts and reasons and just do whatever, or do something counter to what their facts tell them.
What I'm describing might not be the economics definition of rationality, but it's closely tied to the colloquial definition and the idea that pops into my head when someone says "rational".
Often people have the information they need to make a rational decision, but they choose to discount, ignore, or misinterpret it. No decision based on this choice can meaningfully be called "rational" without stretching the definition of rationality to the useless.
This is quite different that making a rational decision based on incomplete or imperfect information.
Modeling human beings as rational actors, even in aggregate, is often a deeply flawed approximation for this reason.
> So I hear what you're saying, but if that's the case then everyone, everywhere acts irrationally all the time.
More like: a sufficient number of independent agents (or aggregate populations behaving as an agent) behave irrationally often enough to make discrete predictions impossible.
I don't think that predictions have anything to do with rationality. Just because YOU think people should behave one way with the information that YOU have doesn't necessarily have any bearing on what they will do. Especially since you don't know what information they have that you don't, and what information you have that they don't.
Even when you know the information they have it's (currently) impossible to predict what someone will do. It's impossible to know what information they will care about, what they think is in their best interests versus what actually is in their best interests by a more objective standard, etc.
> It's impossible to know what information they will care about, what they think is in their best interests versus what actually is in their best interests by a more objective standard, etc.
Don't you think it's a little crazy to say that someone else can know what's in a persons' best interests by a more objective standard?
I feel like it's incredibly arrogant and belies a substantial lack of induction. You almost certainly believe that you know what's best for you. By induction we can conclude that everyone knows what's best for themselves, and that those who claim to know better are either charlatans or have a distinct lack of empathy.
"Believing an action is a good idea or in your best interests when it actually isn't, or basing decisions on a warped perception of reality, is pretty much a textbook case of acting irrationally."
No. It is not. This is just a flawed definition you have invented on the go.
The people at Rapa NUI were totally rational about destroying trees to build Moais, because their model of the word implied God wanted that.
If the God Rapa Nui people believed in actually existed and he wanted to destroy trees for satisfaction, then it makes total sense to destroy all the trees.
I thought rationality was a measure of how one's actions are based on what you know, but not the things you don't know.
Prior to finding out that the NSA was wiretapping all the things, it might be considered irrational to expect them to intercept and store all of your information. Now that we know that, it would be irrational NOT to think that. The truth in both cases is the same: the NSA has been carbon copied on all of our packets for ages, the only difference is that now we know it's true (and not a "conspiracy theory").
Maybe someone will prove me wrong (and thus irrational), but I believe you're mistaken about what "rational" means:
The definitions and synonyms for rationality (found, e.g., with Google Define) are heavily clustered around reasoning, i.e. the ability to reach valid conclusions from your premises. Nowhere do I see mention that your information had to correspond to reality.
If I were to believe with great certainty that my wife is an alien breeding a cluster of biological weapons that will destroy all of humanity, and assuming that I want to prevent this from happening, reason would compel me to kill her. It would be a completely rational act.
People get this wrong because holding such beliefs is typical for crazy (= irrational) people. Because to _arrive_ at this belief, unless it was imposed on me through drugs, brain damage or brainwashing, would involve some major failures of reasoning at some _earlier_ point. I would have to e.g. believe that I was privy to information that the rest of the world didn't have, which is a pretty unreasonable thing to believe, given what every adult knows about how the world works.
Less radical example: At some point in history, it was considered common knowledge that the world is flat, and seafaring too far in any given direction runs the risk of falling off the edge. So sailors were afraid to sail too far. Was this fear irrational? Not at all! Based on the best human knowledge at the time, people had good reason to be afraid. That fear would be irrational for a well-informed person of our time, sure, but only because we meanwhile have access to better information.
Hypothetical: Maybe there's a meteor headed for Earth, due to destroy us all in a month. Let's say for now that this is reality - but we don't know it because NASA hasn't seen this meteor yet. If rationality were based on absolute reality, then the rational thing for us to do would be to build spaceships or blow our life savings on drugs and hookers. But that's silly, because we can only base the well-reasoned-ness of our actions on what we know. And for lack of omniscience, everyone's knowledge will always be imperfect, and with perfect reasoning (= rationality) our actions can only be as good as the information we have.
>At some point in history, it was considered common knowledge that the world is flat, and seafaring too far in any given direction runs the risk of falling off the edge.
I'm unable to find any historical evidence this statement was ever true.
For example, pop culture thinks it was true in the Middle Ages, but it was not [1].
You say "I'm unable to find any historical evidence this statement was ever true." I can only guess that your failure is based on a reluctance to even try, or you would have found a whole raft of ancient cultures and their public intellectuals documenting flat-earth beliefs in the Wikipedia article on "Flat Earth."
I am and was very aware that knowledge about the Earth's sphericity is more ancient than some people may think; so I intentionally made my statement sufficiently vague to avoid your kind of quibble.
They behave rationally... the issue, more than informational assymmetry that you note, is that they're facing Newcomb-like problems: They're betting on what other people are going to bet on what they're going to bet on what other people are going to bet...
And they're all trying to do it faster than the average participant, in order to attain advantage.
Stocks aren't traded on some fundamental objective functions of accounting value and projected profits, they're traded purely on what people believe that other other people will be paying for the stock five milliseconds / five minutes / five days / five years from now. All at once, in a recursive mess. The professed theory is that some kind of objective truth underlies all this, and eventually generates some theory of value that all the speculators can latch on to - but that sort of investing is a tiny fraction of trading volume.
Whether agents act rationally is an open question in the economic literature. I claim most investors are irrational, but that the market appears to have an emergent behavior that makes it appear rational. Truly explaining this sort of emergent behavior in a feedback and partial information and game-player system with a trivial narrative about whether agents are rational seems to deny the inherent complexity of the system.
> I think they actually behave rationally, but all according to different fact-bases.
Rationality, in the economic sense, involves (among other things) actors acting with accurate and complete information about all consequences of their market choices. Actors acting with "different fact-bases" are necessarily acting with inaccurate and/or incomplete information (because if it was both complete and accurate, it wouldn't differ between actors), and therefore, economically speaking, irrationally.
>Rationality, in the economic sense, involves (among other things) actors acting with accurate and complete information about all consequences of their market choices.
No, it assumes that agents use all available information optimally. Complete information is not a requirement.
> No, it assumes that agents use all available information optimally.
No, it is defined to include perfect information; actors using all available information optimally within the limits of their cognitive ability and considering, also, the opportunity cost of devoting resources to informationa evaluation and decision-making is a weaker alternative ("bounded rationality") to pure rationality.
> Complete" and "perfect" information are not the same thing.
Perfect information, in the rational choice theory sense, is both complete in the sense that it covers all economic consequences that impact the experienced utilities of the decision maker positively or negatively out to an infinite time horizon, and free of errors over that entire scope, which is why I used "accurate and complete" as a less-formal equivalent of "perfect" upthread.
> In games like poker, players have perfect information, but not complete information.
In poker, players do not have perfect information in the rational choice theory sense (or the game theory sense, which is generally stated differently, but I think is actually equivalent.) Poker is, in fact, one of the canonical examples of a game featuring imperfect information.
This is impossible, because unless the information is also complete then the utility functions of opponents (and hence future payoffs) are unknown by the decision maker at the time of the decision.
>which is why I used "accurate and complete" as a less-formal equivalent of "perfect" upthread.
I suppose if you believe that the two are equivalent, there's not much point in arguing.
Well, yes, rational choice theory is based on premises which are known to be impossible, but which are analytically convenient and which produce models which are (at least, argued to be) useful approximations of real world behavior.
I wonder if the impression that others are acting irrationally is really a symptom of the local knowledge problem on the observer's part. Or even the part of the actor. To the extent this is true, is acting on incomplete information "irrational" or is it "rational" but flawed.
I don't know about that. Lots of people make emotional decisions when it comes to money and will sell at the first sign of trouble. I think personal finance is one area where many are not rational.
This could have serious implications for the US. Here is why:
With a lot of supply, the price of treasuries will go down, so the US government will be forced to offer higher yields for the newly issued debt to sell. This will:
- increase the servicing cost of the $19T debt (will cause the debt to increase even faster).
- cause a drop in the stock market, as more cautious investors (retirees, etc), enticed by increased yields, reduce their stock market exposure
It all depends on how many treasuries China wants to sell.
>cause a drop in the stock market, as more cautious investors (retirees, etc), enticed by increased yields, reduce their stock market exposure
You've committed a fallacy: the overall stock market exposure cannot be reduced because those more cautious investors, moving their dollars to treasuries, have to sell the stock to someone else.
China has their currency, the renminbi (RMB), pegged to the US dollar. Since the Chinese economy has been weakening and their stock market has been plunging, people have been pulling money out of the renminbi, this has put downward pressure on the renminbi.
Now China has acquired vest foreign exchange reserves, mainly in the form of treasury bills, over the years. This was a result of pegging the renminbi to a rate that was artificially to low. Now that people are pulling money out of China, the renminbi might actually be too high.
China has had to user its reserves to prop up both the price of its currency and their stock market, to do this they have had to use their foreign exchange reserves. In one estimate, China has already spent $400 billion propping up the stock market and their currency. (http://www.ft.com/intl/cms/s/0/521f9f12-4a56-11e5-b558-8a972...) To do this China needs to sell some of it treasury bills.
This will have the effect of a minor increasing in the interest rate the federal government has to pay to borrow. While the Federal Reserve has been keeping rates low, it has been signaling for a while that it wants to increase interest rates. So this actually would be in line the Federal Reserve’s monetary policy.
In this end the selling of these treasures will have very little effect on the Unites States or the world wide economy. The big worry is that China might be slipping into recession. As the second largest economy, and the generator of most of the world growth, a Chinese recession would be a huge drag on the world wide economy.
It is critical to understand how the balance of payments works with regards to international trade to explain what is going on.
We can already see the impact China's slowdown has had in the price of raw materials. The massive drop in luxury goods consumption & Macau gambling revenue has been attributed by the press to Xi Jinping's corruption crackdown. I didn't buy that explanation. It is plausible that the economic engine which carried them for the past 20 years ran out of steam a while ago.
Contractions are good, for both public economies and private companies. They force the removal of waste and expose accounting frauds. The big question now is how much of China's economy is dependent on questionable things? Perhaps outright fraud, maybe business models that work only during sustained growth, or just stuff that requires the continued successful implementation of particular government policies (subsidizing interest rates, keeping exchange rates low.)
For years, China has been selling its own currency (RMB) and buying USD. This has the effect of depressing the value of RMB vs the dollar, since it puts more RMB into the market and removes dollars. It takes the dollars it owns and buys US Treasury debt. China wanted to keep the RMB artificially low to keep Chinese goods affordable in export markets, which keeps the economy growing. They didn't completely cancel out increases in exchange rate, instead they were managing it to be a slow rise over years.
Now that the China economy has started slowing, the RMB has actually started dropping in price vs the dollar. Although good for trade, this is panicking the markets, who expect stability or a slight increase. So, the government is reversing the flow, selling treasuries, selling the dollars, and buying RMB. This is called "unwinding" the position.
This unwinding has its own effect on the U.S. markets -- it's going to tend to drive down the price of treasuries, which will INCREASE their effective interest rate. Higher interest rates in the U.S. might threaten the economic recovery -- the Fed has been trying to keep rates low for the past 7 years or so.
It's certainly true that when predicted interest rates go up, existing bonds (which have fixed yields built into them) become less attractive and their prices go down.
So it's certainly true that decreasing bond prices can be indicative of higher future interest rates.
But if bond prices are decreasing only because the Chinese government is unwinding its position in Treasuries, surely that doesn't apply.
Parallel example: Suppose I hold a vast quantity of exotic options that pay off in some rather specific circumstances -- e.g., Apple shares increasing by more than 10% during January 2025. And suppose I have carelessly mismanaged my financial affairs so that these are a large fraction of my assets, and now I need more money. So I start selling off these options. That will reduce their market price, but that doesn't (unlike most movements in the price of such options) indicate that anyone actually thinks Apple shares are now less likely to gain 10% in 2025-01.
Perhaps there's some subtle way for these artificially decreasing bond prices to cause higher interest rates in the future? I'm not seeing it, but I'm not an expert in finance or economics...
First of all, the reverse of this situation (buying up lots of Treasury notes) is the basis for the Fed's "Quantitative Easing" policy, which was in place for most of the past decade and is credited with holding down US interest rates. So, government economists clearly believe that the price of these notes has a downstream impact on interest rates.
Second, the China sale is not "artificially" impacting bond prices, any more than I'm artificially impacting the price of avocados if I start buying all of them. As long as the price is a fair market price, then it's by definition not artificial, because everyone is participating by their own free will.
Third, the reasoning for this impacting overall interest rates is that debt is a commodity. There is currently a balance in the market between investment in, for example, Treasury bonds and mortgage-backed securities that takes into account many factors such as yield, perceived risk, liquidity, etc. If Treasury notes suddenly become cheaper and offer a higher yield, then some money that would have gone into new mortgages will instead go into Treasuries. With the same number of borrowers competing for less money for home loans, the cost of that money (the interest rate) will go up.
Again, the key point is that the impact on Treasury rates is not artificial, it's a real consequence of the sell-off of China's holdings. One last analogy -- if I dump millions of gallons of water "artificially" into a reservoir, the river that it feeds will flood for real. It would be pointless for the people downstream to argue that the flood is artificial.
> Parallel example: Suppose I hold a vast quantity of exotic options that pay off in some rather specific circumstances -- e.g., Apple shares increasing by more than 10% during January 2025. And suppose I have carelessly mismanaged my financial affairs so that these are a large fraction of my assets, and now I need more money. So I start selling off these options. That will reduce their market price, but that doesn't (unlike most movements in the price of such options) indicate that anyone actually thinks Apple shares are now less likely to gain 10% in 2025-01.
People do, almost by definition - the price is how you express an opinion. At the very least, you've shown yourself to be incompetent, which reduces everyone else's faith in your judgement.
The Chinese government isn't unwinding its position in Treasuries for fun; they're doing it because they think dollars are going to be less valuable in the future, i.e. that China will be importing less and/or exporting more than they had previously thought.
Point 1 is correct, the selling of bonds by China will have the effect that their prices will drop. That's the law of supply and demand in action.
Point 2 will probably also happen; but only up to a limited amount, because:
Point 3, and the others, won't happen. There will not flow more money towards the USD. What happens now is the opposite; China is selling USD's. Again because of the law of supply and demand, this will lead to a drop of the USD rate.
If the drop will be too much for the FED's taste they will increase the interest rate (point 2), but only so much that the depreciation will stop.
>There will not flow more money towards the USD. What happens now is the opposite;
I guess it is an event in the chain.
jpollock asks the question in point 6 "That USD->Renminbi sale might result in a drop in USD because there will be more USD around?"
3. A little, perhaps - demand is somewhat elastic (although treasuries are weird). But the economy is damped rather than chaotically oscillating; the amount of money flowing into USD that way will be less than the amount that China's pulled out. You may be missing the point that treasuries are pretty much equivalent to USD; China isn't selling the treasuries for USD, they're selling them for RMB. The effect on treasuries and USD will be pretty much the same.
4. Again, less than the amount it depreciates.
5. They might continue, or they might not.
6. Yes
7. Yes
8. There's not going to be an increase, there's going to be a decrease.
9. Likewise, oil prices will rise
10. Maybe. The thing is, Sorros was right; fundamentally, UK manufacturing was less competitive than German, and the price needed to adjust to reflect that. This move is, at least partly, China brassily saying that their companies are still up to snuff, and will outcompete those in the US (something that a lot of people are a lot less confident in than they were a week ago, if you go by Shanghai stock exchange prices). Are you sure they're bluffing?
The other part is that Sorros had more money than the British government. A modern-day equivalent would have to put their hands on more money than China's total US treasury holdings - $1.2 trillion. Bridgewater, the largest hedge fund firm, has $78 billion. They could probably lever that up a bit, but betting the whole firm at 14:1 ?
Thanks for this. I look forward to more answers on the questions you highlighted in this thread.
One additional question I have now is, what about the impending Fed Rate Hike? As in your point 7 - if the China Govt. action is equivalent to a rate hike, then will the Fed's own hike get pushed further into 2016?
China's currency and it's exchange rate is managed by The People's Central Bank of China. It is not allowed to freely float in value in response to supply and demand for it. However, it is allowed more up or down each day within a set amount, before the People's Central Bank of China will intervene, and in actuality many times the PBOC just does whatever it wants to do it.
Which brings us to a few weeks ago, when overnight the PBOC decided Yuans would be worth about 2% less than the day before. The PBOC also expanded that daily trading band to 4% a day. They did this in an apparent attempt to increase exports, as Chinese goods, on paper, became Cheaper overnight, at least in terms of USD.
In response to this, there has been downward pressure on the Yuan and now the PBOC, wary about capital flight among other things, needs to defend the Yuan by selling US Treasuries, for which they get US Dollars, with which they buy Yuan on the open market, decreasing the supply of Yuan available, which puts upward pressure on its value.
The biggest ramification, I would say, has to do with interest rates on US Treasuries, which influence all types of other debt instruments such as home loans, and of which China has been a huge buyer over the past decade and a half. The interest rate on a 10 Year Note is dictated by how much demand there is for the note. If a lot of people want the note, you can get away with offering a lower interest rate, but if few people want to buy it, you need to increase the rate to attract more buyers.
China informed the US that its going to be selling its treasury notes (for dollars) so that that it can buy back renminbi (its currency) in dollars to increase the value of the renminbi versus the dollar. With any other asset this would be a sort of 'who cares', however the US finances its own government debt by selling treasuries and having two sellers on the market means that you start competing for buyers, and you compete by selling them at a discount (which raises their effective interest rate).
What that means then is that even though the Federal Reserve is interested in keeping interest rates down, you can see interest rates of treasuries can be pushed up, and for the US, selling new treasuries to finance the deficit will pay more interest (causing the deficit to be that much worse) and that can also push interest rates up.
Bottom line, China did the right thing by letting the US know they are pursuing this strategy in order for the Federal Reserve to continue to manage its own economic policy.
China sells US debt treasuries in exchange for dollars.
China sells the dollars it raised to buy Yuan.
Demand for the Yuan increases, hence the Yuan becomes more valuable, hence its exchange rate vis-a-vis the dollar appreciates (it will also appreciate vis-a-vis other currencies).
Dollars are being dumped into the market, so the dollar should decrease in value.
A more valuable Yuan means that China's currency is more expensive, hence its exports become more expensive (and drop) and its imports become cheaper (and rise).
Other people now own US debt, for which they will receive interest payments and a repayment when the debt is due.
In terms of supply and demand what you say makes sense, but:
> China sells the dollars it raised to buy Yuan.
The Yuan is a highly controlled currency that does not behave like other normal free market, floating currencies.
The Chinese government sets the exchange rate as was shown just weeks ago when they devalued the Yuan and Trump call that move the start of a China/USA currency war.
> Demand for the Yuan increases, hence the Yuan becomes more valuable
If the Yuan was free floating that might be true, but even then, since China is a net exporting nation they want a low Yuan, so that their exports are cheaper and their imports are more expensive. So why would they want to drive up the Yuan?
I'm really not sure what is going on but everything they are doing (i.e. selling US bonds) goes against what one would expect.
The only thing I can think of, because of the turmoil in China (i.e. the share market shock, property bubbles etc) they are a bit short of cash and rather than print money (which would causes inflation) they are raising money by selling some of their US bonds.
China cannot just set the exchange rate arbitrarily, well, without creating huge artificial imbalances that even they can't get away with. Instead, they make their peg real by buying/selling RMB and dollars. So if china wants to prevent the RMB from tanking (and believe me, they do) they need to buy satisfy the demand for dollars bought buy exchanging RMB, just like they buy dollars to provide dollars. China bought treasuries in the first place to park USD from trade surpluses somewhere that wouldn't cause their currency to appreciate, and now they are selling that to prevent depreciation. Balance must be maintained, one way or the other.
If the Yuan was free floating that might be true, but even then, since China is a net exporting nation they want a low Yuan, so that their exports are cheaper and their imports are more expensive. So why would they want to drive up the Yuan?
What they want is a very slowly appreciating Yuan. This shows that the economy is growing, and it gives China more buying power overseas, but it keeps imports affordable. This is what has happened over the past 10 years, since the government allowed the exchange rate to float. (see https://www.google.com/finance?q=CURRENCY%3ACNY&ei=bD_fVZnNN...).
The issue is that over the past month, the Yuan has actually started to DECREASE in value against the dollar, which is a sign that the economy is slowing. That's scaring the crap out of China investors, who have baked in a very high growth rate into their pricing. That's what's driving the government to put their rate control machine into reverse -- instead of trying to keep the rate from growing too fast (to favor exports), they are doing what they can to keep the rate from falling any further.
More like, there is capital flight from China because there are economic problems and yuan devaluation is anticipated.
When people liquidate yuan assets and buy overseas assets, they sell yuan to the central bank, buy foreign currency.
In order to buy the yuan, China's central bank needs to supply foreign currency. To acquire the foreign currency, they sell foreign assets, e.g. Treasurys.
It's not so much they are trying to push the yuan up, as trying to prevent it from falling too precipitously as people sell it.
They are accommodating the capital flight by supplying foreign assets, instead of letting the yuan fall sufficiently sharply to the point that would stop capital flight, because investors would no longer expect further depreciation.
China owns a ton of US treasuries. It will sell some of those in exchange for dollars. It will then buy it's own currency, the Yuan, with those dollars.
Selling treasuries will make US bond prices go down.
Buying Yuan will increase it's price versus the dollar.
So, this is a move by China to prop up the value of it's currency.
...correct in a normal world. China is not normal. Their currency is pegged to the dollar. They are trying to decouple (see IMF comments delaying their inclusion for another year). They are lowering the peg which is increasing the dollar vs. ren. This in effect is lowering/devaluing the ren. which makes manufacturing cheaper there. Other emerging markets are also decoupling so that they can devalue their currency in order to keep up with the Chinese active devaluation. Currently other major markets Germany, Japan, etc. are not actively devaluing. If they do we will have a currency war. This would be very very bad.
...this article is only describing one aspect of a very complex picture right now. One that you could argue has not been seen previously. That and the weird illiquidity problem that happened Monday with ETFs. It makes for a very odd picture right now.
China is selling US Debt, so more dollars are on the market.
Since we've been keeping interest rates at zero for some time for political purposes, we lack a lot of controls (ie. interest rates adjustments) to smooth out whatever fallout takes place.
The risk is that rates might go up. That isn't the end of the world, but will have a negative impact on stocks. As a citizen, the impact varies based on your position. If you refinanced your house with a 30-year fixed, you're good. If you're on a interest-only ARM, not good.
> The risk is that rates might go up. That isn't the end of the world, but will have a negative impact on stocks.
There are more effects on the general economy than just the negative impact on the stock market (the direct stock market is one of many direct manifestation of the diversion of investment dollars into Treasuries instead of other investments as Treasury yields increase); upward pressure on interest rates -- that is, an increase in the market-clearing cost of financing given the same demand for financing -- means less financing happens, and thus less of the economic activity dependent on that financing happens, and there is a general economic slowdown, job losses, etc.
You have junky companies like Amazon, for example, on a decade long binge of expansion, whose plans depend on cheap access to capital. Their only way to deliver profit is by achieving near monopoly status. Why are we subsidizing that behavior?
We have a government on a spending binge, again fueled by cheap access to capital. How is slowing down that train a bad thing?
If you look back historically, we have had plenty of boom cycles without the "record low" rates. It's not the end of the world as we know it.
> You have junky companies like Amazon, for example, on a decade long binge of expansion, whose plans depend on cheap access to capital. Their only way to deliver profit is by achieving near monopoly status. Why are we subsidizing that behavior?
On the other hand, most companies are having a hard time investing in their own businesses and are instead buying their own shares to boost EPS. Companies that spend a lot to expand their business are good for the economy, so Amazon has a leg up on most firms there.
> We have a government on a spending binge, again fueled by cheap access to capital. How is slowing down that train a bad thing?
The government isn't on a spending binge. We've had a Congress unable to agree on anything so we're stuck under a budget freeze that happened thanks to the 2010 Budget Control Act and its sequester. Soft government spending has actually hurt US GDP and slowed the recovery.
