I can't wait for the AI bubble to be over so HN can talk about something else
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Arguably if the investment here works out we’ll see deflation through extreme technical advancements.
But raising interest rates and keeping them high in an environment where runaway government deficits and high government debts are causing inflation runs the risk of exacerbating inflation.
You have high interest rates on a large amount of government debt which continues to push _more_ money into the economy.
The Fed doesn’t have any real options at this point but to lower rates.
Another possibility is that the rate is still not high enough and needs to be raised much much higher to stop inflation. I think rates need to be in the 6 to 7 percent to really stop inflation. The is just a pause. It will come back like a vengeance.
At some point we need to address the elephant in the room and ask people specifically what they mean by "high" rates, because 5% isn't particularly high by historical terms, it's only high for people who never paid attention to interest rates before 2010.
The amount of interest payments therefore long term (not short term) isn't really affected by the IR rate but more by politics and the amount of IR payments/debt burden they can politically get away with - in the US it is a LOT - in other countries the political appetite can be less.
So while it is true that higher IR payments do increase the money supply, generally with lower IRs governments are encouraged to "borrow more" by many stakeholders to their capacity under the low rate anyway. For example I saw many newspaper articles around our local media stating things like "rates are low, the government should invest that in infrastructure/disability programs/{insert favorite idea here}, etc when rates were low with politicians happy to spend accordingly.
In addition under low IR's the private sector will borrow more increasing the amount of credit in the economy as well - also inflationary money supply.
There's always nuances; these black and white theories can be dangerous. They assume all else is equal which is rarely ever is.
Tech companies decided to respond with lower consumer demand by using price hikes, though. And of course letting go of labor, adding to the issue.
These kinds of companies aren't the ones being slowed by increased rates. They can just whether the storm and drain blood out of the rocks they have left on board.
>Private sector investment can continue to increase but at some point that too will hit a brick wall
At this point I'm betting the economy hits an objective recession before that brick wall happens. But I suppose we'll see.
I don't know what the "new normal" is though. I suppose 2025 will be used to figure that out. I don't think 4.75% will be enough.