The Dilemma of Interest Rate
February 27, 2024
The Dilemma of Interest Rate
Regarding interest rates in the United States and Canada, just a few months ago, most experts' views and expectations were: the arrival of a high-interest-rate era that would persist for a long time. Some even anticipated this to be a period lasting 10 to 20 years, marking the beginning of a prolonged era of high interest rates.
In just a few tight months, almost all experts collectively slapped themselves, with resounding echoes. A sudden 180-degree turn began: predictions now suggest a significant, drastic interest rate cut in 2024, with some even forecasting six or seven consecutive cuts. Can we trust their predictions this time? Will they be accurate?
The rise and fall of interest rates have a significant impact on investments, real estate, businesses, and the lives of ordinary people. Such a crucial matter should be steady, gradual, and foreseeable! Why is it so tumultuous? Why does it feel like a roller coaster ride?
Don't blame these experts and scholars, as this is an era of intense turmoil, making interest rate predictions exceptionally challenging. How many could accurately predict the October conflict between Israel and Palestine last year? How many can foresee the conflict between North and South Korea in 2024?
All these events are interconnected. Understanding the inherent logic of interest rates fundamentally allows you to make sense of this roller coaster ride. Perhaps you could even act as an expert and predict interest rates for this year and the next? After all, predicting interest rates now is akin to gambling – who knows, you might get it right?
Now, let's address the first question: Who determines interest rates in the United States and Canada? The government!
What does the government care about the most? The well-being and happiness of the people, human rights, democracy, the welfare of the citizens, the nation's future development and prosperity, green initiatives, environmental protection, animal rights?
You're thinking too much! Their primary concern is power – whether they can continue to be the government, whether they can be re-elected! That’s their number one priority.
So, who can decide their position in the government? The voters, the ordinary people!
How can ordinary people make them step down? Through a gentle, legal, and gradual means: voting! Or through an immediate, impactful means: violent protests and demonstrations, the second one not always effective, especially if the leads are mental strong enough ). Canada leans towards the gentle approach, while protests in the United States and France can be quite intense, yet we seldom see anyone stepping down!
What do ordinary people care about the most? It's also what the government is most anxious about! Inflation and unemployment rates! If prices soar, and people can't afford the basics, the government is sure to face consequences, no matter how eloquent their speeches are or how attractive they look, or how mentally strong they are, eventually.
If the unemployment rate is too high, and people are out of work and money, they won't be able to survive, and the government is sure to step down finally.
This is the basic logic, so interest rates are not something they care about; they are just a means and a tool for them.
Now that we understand the core principles, the roller coaster ride of recent years becomes easy to decipher: starting from the pandemic, inflation rates have been rising. To combat inflation, interest rates were raised. It worked to some extent last year, bringing down inflation, but not to the previous level, and it's still double the previous rate.
However, many businesses can't bear it anymore. With higher interest rates, costs like rent and loans increased, economic growth stalled, and people's debts for houses and cars went up. Reduced consumption, in turn, makes it harder for businesses because if people aren't buying, who will businesses sell their products and services to? It's a vicious cycle, a downward spiral.
Seeing a looming dark cloud of unemployment, if this cloud brings bankruptcy and a storm of unemployment, it's detrimental to those in power. So, they keep hinting at interest rate cuts, signaling people to endure a bit longer, implying that the tough times will pass quickly.
Why not just directly lower interest rates to solve the problem? Because inflation hasn't been completely tamed; it can flare up again at any moment. Many fundamental reasons causing inflation haven't been addressed. The Russia-Ukraine war, conflicts in Israel and Palestine, the Red Sea crisis – they haven't ended and are escalating. If rates drop immediately, it's like adding fuel to the fire, exacerbating the situation. As interest rates drop, people will start buying, and property prices will rise again and others, leading to a resurgence of inflation.
Stuck between a rock and a hard place, neither raising nor lowering rates, waiting and watching. What are they observing? The core issues: inflation rate and unemployment rate.
My dear friends, do you have any suggestions? Please let me know, Should rates be raised or lowered?"
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