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Inflation

psionl0 said:
Government borrowing doesn't cause inflation. It puts pressure on interest rates. It is the central bank's attempts to counter the effect on interest rates (by printing money and buying government debt) that is inflationary.
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Central banks don't care if interest rates rise or fall so long as inflation is in the target range. Since they use inflation to judge whether interest rates should rise or fall so it's nonsensical to suggest they "create inflation by attempting to counter possible changes in interest rates."
 
lomiller said:
Central banks don't care if interest rates rise or fall so long as inflation is in the target range. Since they use inflation to judge whether interest rates should rise or fall so it's nonsensical to suggest they "create inflation by attempting to counter possible changes in interest rates."
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You seem to be assuming that higher interest rates are not deflationary.
 
rjh01 said:
I think lomiller needs to re-read what psionl0 has said. This includes the context. It may not be the best wording, but it is correct.
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No, It most certainly is not correct. It's the complete opposite of how central banks actually operate.
 
psionl0 said:
You seem to be assuming that higher interest rates are not deflationary.
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I'm not assuming anything.

BTW it's not higher interest rates that cause deflation, rather restricting the money supply causes both deflation and a rise in interest rates.
 
lomiller said:
BTW it's not higher interest rates that cause deflation, rather restricting the money supply causes both deflation and a rise in interest rates.
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If you can't see the link between the government competing with other borrowers and interest rates then I can't help you.
 
psionl0 said:
If you can't see the link between the government competing with other borrowers and interest rates then I can't help you.
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Goalpost moving noted. What you originally claimed was that central banks would cause high inflation in order to keep interest rates low. This will not happen because central banks target inflation rates not interest rates.
 
lobosrul5 said:
What that does is lower bond rates. Its inflationary, it makes borrowing for everyone cheaper.... sovereign, municipal, corporate, and individuals.
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Excess government borrowing should actually result in an increase in bond rates. Higher yields make the bonds more desirable to investors which allows the treasury to sell more of them.

In the real world, however, governments in first world countries rarely have any problem selling as many bonds as they need to, so more borrowing doesn't change borrowing costs much if at all. And, as I said above the central bank wouldn't care if it did since they target inflation rates not interest rates. Interest rates are simply a tool they use to signal what they are going to do wrt money supply.

Cash flow reasons notwithstanding, government borrowing us used to finance deficit spending. When governments engage in deficit spending there is more money chasing goods and services which creates inflationary pressure. Fiscal policy, however, plays second fiddle to monetary policy which has a far bigger impact on inflation and economic growth except in rare circumstances. The result is that any growth or inflation caused by fiscal stimulus is easily canceled out by tighter monetary policy.

The important thing to remember is that central banks target the highest possible economic growth possible while still keeping inflation in a desired range and they have far and away the most powerful tool available for achieving this.
 
lobosrul5 said:
What that does is lower bond rates. Its inflationary, it makes borrowing for everyone cheaper.... sovereign, municipal, corporate, and individuals.
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It makes the cost of past borrowing cheaper, yes (because you are paying back with less valuable money), but it raises the cost of current and future borrowing as investors are quick to demand a larger inflation premium. In finance, interest rates are "built-up"; that means that they are made up of component parts. Inflation is one of those components, as is maturity risk, default/credit risk, as well as the desired "real" rate of return. When assumptions about future inflation change (as they have markedly this year) interest rates change with them (ditto). The 10-year treasury rate (an important benchmark rate) started 2022 at 1.52%; currently it's at 4.216%. The additional 270 basis points is all increased inflation premium.
 
Brainster said:
It makes the cost of past borrowing cheaper, yes (because you are paying back with less valuable money), but it raises the cost of current and future borrowing as investors are quick to demand a larger inflation premium. In finance, interest rates are "built-up"; that means that they are made up of component parts. Inflation is one of those components, as is maturity risk, default/credit risk, as well as the desired "real" rate of return. When assumptions about future inflation change (as they have markedly this year) interest rates change with them (ditto). The 10-year treasury rate (an important benchmark rate) started 2022 at 1.52%; currently it's at 4.216%. The additional 270 basis points is all increased inflation premium.
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Not exactly, inflation only indirectly affects bond rates**. If the fed was still holding short term rates at near 0 and still buying back treasury notes/bonds they'd still be low yielding.

Anytime the market gets the jitters, yields on treasuries plummet, because suddenly there is extra demand by investors for risk free assets. The reason the 10 year is yielding more than shorter term t-notes/bills is because the market is pricing in the chance of a recession and lowered rates.

I've never even heard of maturity risk, do you mean interest rate risk??

To complicate matters, I hold two bonds* whose coupon is based on the 3m Libor and unlike fixed rate bonds... I've made money on them this year.

*actually no, one of them is a trust preferred stock issued from Citigroup.

**Kind of a yeah duh... but that doesn't apply to inflation linked bonds, ie TIPS and I-bonds.
 
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The_Animus said:
Inflation is also caused by greedy corporations using inflation as cover to hike prices well beyond actual cost increases and make record profits. At least according to this report from the House subcommittee on economic and consumer policy
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I chuckled when I failed to see the one piece of information that would make it worth reading - exactly how much corporate profits have added to inflation.

Surprised, I was not - the fact that those corporate profits contribute an insignificant amount to actual inflation doesn't fit the narrative was never going to make the cut. And note I'm not a greedy capitalist; I'd love to throw rocks at greedy corporation, but it's misleading at best, and jealousy at worst.

80% of people think corporate profits are the problem, and they wrong, just as the 80% of the world who believe in a sky-fairy are wrong.
 
lobosrul5 said:
Not exactly, inflation only indirectly affects bond rates**. If the fed was still holding short term rates at near 0 and still buying back treasury notes/bonds they'd still be low yielding.
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Maybe the treasury rate would stay low, but corporate bond yields and other interest rates would rise. The Fed can't print that much money.

Anytime the market gets the jitters, yields on treasuries plummet, because suddenly there is extra demand by investors for risk free assets. The reason the 10 year is yielding more than shorter term t-notes/bills is because the market is pricing in the chance of a recession and lowered rates.
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Yes to the first part; this is called the flight to quality. But historically there has almost always been a spread between the short-term rates and long-term rates to compensate for the greater duration.

I've never even heard of maturity risk, do you mean interest rate risk??
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Maturity risk premium discussed here.

Investopedia said:
A long-term bond generally offers a maturity risk premium in the form of a higher built-in rate of return to compensate for the added risk of interest rate changes over time. The larger duration of longer-term securities means higher interest rate risk for those securities. To compensate investors for taking on more risk, the expected rates of return on longer-term securities are typically higher than rates on shorter-term securities. This is known as the maturity risk premium.
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To complicate matters, I hold two bonds* whose coupon is based on the 3m Libor and unlike fixed rate bonds... I've made money on them this year.
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I assume they've changed to SOFR? LIBOR is no more.
 
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Brainster said:
Maybe the treasury rate would stay low, but corporate bond yields and other interest rates would rise. The Fed can't print that much money.
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The fed can "print" as much money as it wants!

The spread between corporate bonds and treasuries has actually narrowed a bit recently.
https://fred.stlouisfed.org/series/BAA10Y

Given the same maturity corporate bonds will always yield more than treasuries. How much will depend on their credit rating. But the spread changes, goes up when the market is turbulent.


Yes to the first part; this is called the flight to quality. But historically there has almost always been a spread between the short-term rates and long-term rates to compensate for the greater duration.
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Yes, indeed, the farther out you go the higher the issuer's coupon has to be to get investors to buy it, ie the more yield you get. However, right now you may notice the yield curve is inverted. 2 year treasuries are yielding more than the 10 year. Thats due to market expectations that rates will go back down.



Maturity risk premium discussed here.
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Yes, as they call it, interest rate risk. BTW, I've read soooooo many articles on that website in the last few years before getting into bond investing. A bond issuer must pay a premium based on how far out the maturity is. You can see why if you look at the losses on bond etf's or mutual funds. The longer the maturity, the worse they've done this year.




I assume they've changed to SOFR? LIBOR is no more.
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Legally everything that was indexed to LIBOR has to transition to SOFR. Though, I don't believe its dead yet for existing securities, can't be used for new issues though.


Thats what I was referring to... https://www.citigroup.com/citi/fixedincome/data/docs/7875due103040.pdf?ieNocache=118

But it has a different kind of risk, call risk :jaw-dropp Although even if they called it tomorrow I have already broken even.
 
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lobosrul5 said:
Yes, indeed, the farther out you go the higher the issuer's coupon has to be to get investors to buy it, ie the more yield you get. However, right now you may notice the yield curve is inverted. 2 year treasuries are yielding more than the 10 year. Thats due to market expectations that rates will go back down.
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Yep the inverted yield curve usually implies recession ahead, which will eventually lead to lower rates.

Yes, as they call it, interest rate risk. BTW, I've read soooooo many articles on that website in the last few years before getting into bond investing. A bond issuer must pay a premium based on how far out the maturity is. You can see why if you look at the losses on bond etf's or mutual funds. The longer the maturity, the worse they've done this year.
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Investopedia is a terrific resource. On the hammering that the longer-term bonds have been taking I have definitely noticed an uptick in students looking for help on bond duration (a measure of how much up or down a bond's price will move in % terms in response to a 1% change in interest rates). It's an annoying calc by hand but of course excel has a function.
 
The_Animus said:
Inflation is also caused by greedy corporations using inflation as cover
to hike prices well beyond actual cost increases and make record profits.
At least according to this report from the House subcommittee on economic
and consumer policy
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When I was searching for information about inflation and its causes I ran
across this video that argues differently on the subject. What do you think
of it.

 
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