0
$\begingroup$

Most of you are probably aware that a lot of the countries are increasing their official interest rates in order to fight inflation.

Interest is an expense for the companies and individuals, thus an increase in the interest rate will reduce companies profits and cut individuals dispensable incomes. It will indirectly increase the unemployment rate and reduce total consumption in the economy.

Recession has traditionally been viewed as undesirable. However, recession is also essential for a healthy economy.

Low interest rate is like Junk food - it's delicious & addictive. But if an economy binge long enough on it, it will become 'obese' and unhealthy. Cheap money creates bubble and jobs that should not be there in the first place.

Ideally, increase in the interest rate will chase money out of those 'unproductive' companies and industries - especially those that add no additional value to the society and release those resources to those that create real value. As such, money will be lost from the former, people will lose their jobs from those fields too. However, in the long run, the money and labour force will be re-located to more effective and constructive companies and industries.

Recession is in fact, creating a more efficient economy!

So what's your take on this?

$\endgroup$
7
  • 1
    $\begingroup$ Do you have a concrete example of a company that is unproductive and created jobs that shouldn't exist? In terms of the stock market the biggest gainers in the SPX since there were very low interest rates are the biggest companies like Google, Microsoft and the like. In my opinion money will flow to companies and projects where the biggest return is expected, irrespective of interest rates are negative or plus 10 percent. There latter will make it just harder to get credit for everyone. There is a benefit of stable prices though, it makes planning easier and more predictable for everyone $\endgroup$
    – Alex
    Jun 17 at 15:18
  • 1
    $\begingroup$ @Alex any company which is so unprofitable that it goes bankrupt has been determined by the market to be unproductive and not worthy of existing. $\endgroup$
    – user253751
    Jun 17 at 17:15
  • $\begingroup$ Yes, but that is true at all times. I still would like to hear an example of a company where you think it wouldn't exist if rates wouldn't be so low and where the economy would be better off if the workers wouldn't work elsewhere. Alternatively, what do you think is a high enough interest rate so that the effect you postulate does not happen? Or what about high interest countries like Turkey? $\endgroup$
    – Alex
    Jun 17 at 17:49
  • $\begingroup$ I am not arguing recessions are just bad. Survival of the fittest generally works in finance as well. However, recessions are happening quite often anyways, no need to artificially cause them by unnecessarily hiking rates. If you argue the market determines what is (un)productive, you don't need a central bank inducing bankruptcies. $\endgroup$
    – Alex
    Jun 17 at 20:32
  • 1
    $\begingroup$ Your main argument was that there exist companies that shouldn't because money is so cheap. None of your examples depend on interest rates though. If you think tobacco and crypto or ntfs are good or bad is unrelated to the business cycle as well. Since tobacco demand is relatively inelastic, you can actually expect these industries to be impacted very little by recessions and interest rates. $\endgroup$
    – Alex
    Jun 18 at 14:43

0

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Browse other questions tagged or ask your own question.