Quote:
Originally posted by Claeren@May 22 2005, 09:35 AM
Let me put it another way, how good are higher interest rates?
Do they help you pay off your car or house faster?
Do they help you finance your new company?
Do they make you more internationally competitive?
Because interest rates are directly tied to debt.
The more debt you have the higher those rates are. Inversly, the lower the debt the lower the rate and the easier it is for individuals and companies to attract investment.
The $400,000,000,000+ in Canadian debt and $8,000,000,000,000+ in American debt are all dollars that are not available to you or the people who employ you. In order to attract dollars for their use they have to BEAT the government rates/(investment attraction factor, so to speak) and therefor costs them (and you) money.
If your employer spends 5% instead of 3% for 100,000,000 in capital the extra $2,000,000/YEAR is potentially coming out of your pocket.
If you have to pay 6% instead of 4% on your $200,000 mortgage you are forced to pay an extra $4,000/YEAR to finance it.
When you start compunding those numbers over time it is an even larger amount....
An odd combination of world factors have kind of blinded us lately to the relationship but it is there (It is even mentioned in some of those entry level econ courses you mentioned). And at some point when Asian financing of American debt (of ALL forms) is pulled back there will be a severe day of reckoning and at that point just how bad debt is will become VERY evident, and EVERYONE, around the world, holding debt, WILL feel the pain.... happy thoughts indeed...
Claeren.
|
Interest rates are not tied to debt at all. They are determined by the Bond and Money markets. The government can affect interest rates by changing the money supply. I have never heard the interest rate being affected by the level of debt. Actual experience confirms this. As the US debt has increased their hasn't been much change in interest rates. In fact they are still very low. Japan is experiencing an extreme debt crunch andtheirinterest rates are practically 0%.
As for your questions.
No, higher interest rates do not help you pay things off faster.
No, higher interest rates do not help you finance your new company.
Yes, higher interest rates do make you internationally competitive.
Did the last one surprise you a bit? Well if we have higher interest rates then we will be an attractive place for foreigners to invest money because they will achieve higher returns. That is why an increase in interest rates lead to an increase in the Canadian dollar. higher interest rates lead to more demand for Canadian investments and for those people require Canadian dollars, so demand for Canadian dollars increases. The lower the interest rate the less foreigners will want to invest in Canada. For foreigners investing in Canadian companies debt levels and interest rates do not matter at all.
That 400 + billion in Candian debt is held by Canadians. The government chose to spend more money then they had so they issued bonds. I got some bonds. Those bonds pay me returns. Much like bonds that companies issue to pay for various projects. That debt means the government has spent more then it had. When they service that debt I get the money, and then I do something with that money. They got the extra cash from Canadians and they give back even more. The debt servicing represents an INCOME to me and the people who employ me. And ofcourse people have to beat government rates to get my money. Why shouldn't they? The government gives a lousy rate, but it is extremely safe.
If the owner of my company is paying more to service debt I don't care if he is paying that money to me. If I own the bonds then that capital goes into my pocket. And that is why debt doesn't matter if it is held by Canadians.
You can compund those numbers all you want as long as Canadians are the ones buying that debt, because it won't make a difference. Also debt to GDP Ratio is the important number. Don' understand why? Well lets say you are 2 million in debt and only making 100,000 a year. Lots right? Sure is. However if your income explodes because your investments increased uour income to 4 million a year then that debt is a lot less significant. That is what the Canadian government has done.
What you say at the end has some truth to it. Debt isn't a problem until no onw will lend you money. But you should also realize that the debt has greatly decreased in Canada and also that it doesn't matter as long as Canadians hold it.
Also I would suggest some course on Keynesian Macroeconomics.