TL;DR:

1. There is no empirical evidence that monetary policy (interest rate) has any direct impact on an economy running a floating exchange rate currency.
2. The driver of economic growth is largely a function of government deficit spending. Interest rate can have an indirect impact on the economy when it makes up a large proportion of the federal government spending.
3. Interest rate is a weapon/tool to discipline the working class in the form of monetary austerity, and the developing world when wielded by the global reserve currency issuer.

—-

Full analysis:

There is no empirical evidence that monetary policy (interest rates) has any direct effect on an economy that runs on currency with floating exchange rate. If anything, it’s just the opposite of what the neoliberals had thought would happen.

Take Russia for example - the Central Bank has raised the interest rate to 19% already! Not only did it not curb inflation, not only did it not increase savings, corporate loans have gone up, consumer spending has gone up, auto loans are growing at a record pace, and small and medium businesses are still taking out loans at a rapid pace.

The Russian Central Bank continues to implement the neoliberal directive from the IMF - increasing rate to curb spending and thus inflation, but the opposite reaction has happened. Now they’re thinking of going up to 20% lol. How is this not a complete breakdown of the neoclassical economics paradigm?

The situation in the US is even more ridiculous. The Fed wanted to engineer a recession through rate hikes to curb inflation (remember when Larry Summers wanted 10 million people to lose their jobs to bring inflation down?), but unexpectedly caused deficit to grow because the volume of US treasuries is so huge that the rate hike had caused a $1 TRILLION payout in 2023 alone. With so much fresh money given to the rich people, even small drips of trickle down was enough to keep the US economy afloat. The interest payment of the US federal government has exceeded their military spending for the first time this year! At 8% GDP deficit spending, this was the reason why the US has not gone into recession, yet.

Now, changing interest rates may work in a fixed exchange rate regime (e.g. gold standard, Bretton Woods) because of the coveted “real” or “natural” interest rate that the central bank can somehow “divine” and try to “match” that, but there is irrelevant as the US has already abandoned the Bretton Woods since 1971 and gone full fiat currency. Somehow mainstream economists still pretend as though economics work as it did in the gold standard era.

As such, whether the economy stays afloat or spirals into recession is, for the most part, a function of government deficit spending (how much money is being circulated in the economy i.e. people have money to spend vs how much money has been collected by the government in the form of taxation i.e. people have no money to spend and thus have to take out loans until they can no longer pay back their debt, triggering a recession like in 2008).

The US has a higher risk of recession after lowering interest rates (if sustained over the next few months - now it’s too early to tell), because nearly half of its deficit spending has been driven by interest income payout. When interest rate drops, less interests are being paid out, and if the government does not pass new budget bills that increase spending (and not to the rich people, but in social spending and stimulus), then consumption will go down, unemployment will rise, and recession will happen.

Now, there are other uses of interest rate as well. First is monetary austerity, a weapon/tool to discipline labor. By increasing interest rate, it punishes the working class with high APR rate, while the rich receives free income through interest income, which effectively functions to shift the wealth from the poor to the rich.

Second, rate hike is a weapon/tool to wreck the economy of the Global South. When the US raises interest rates, international capital fled back to US shores, causing a dollar crunch in the developing world. Egypt, Pakistan, Sri Lanka and two dozens of African countries on the brink of default are the direct victims of the US hiking rates over the past 2 years. Furthermore, foreign central banks raise their own interest rates to prevent capital flight to the US, effectively administering monetary austerity on their own citizens!

Now that the US is lowering interest rates, it will ease the dollar crunch problem in the Global South, and increases IMF lending back to the developing countries who are desperately in need of cash to buy food, fuel and repay their debt. This will facilitate the restoration of dollar hegemony in the Global South, in the absence of a viable alternative.

What the Fed just did playing with the interest rate is complex and perhaps will even cause unexpected consequences that we cannot predict due to non-linear effects. and it is not even remotely as simple as what mainstream economists think - high rates means more savings, less spending and lower rates means less savings, more spending.

In the American tradition, rate cuts are meant to be an anti-recession tool, making a softer landing from the high interest rate regime that actually precipitates the recession. Rate cuts can also be a way to attempt to delay recession, though obviously this doesn’t always work. They’re meant to keep nearly-failing businesses afloat a bit longer and make it so that more new businesses are created (lol).

Basically this is more of a symptom than a cause.

Speaking of unusual economies, I recently saw that money managers are net short on oil for the first time in over 10 years of data. I’m not sure what if any impact that will have but it definitely caught my eye.

It’s opposite (in theory): lower interest rates make people more likely to buy lots of machines on rolling credit to do stuff. Its very obvious in solar, where profit margin is allegedly around 5 %, you are basically fucked unless profit margins increase more than interest rates of 5.5 or interest rates drop. (More truthfully, given the choice between bonds at 6% and solar installation at 5%, only very committed person would risk it, when bonds are risk free). Also lower interest rates boost housing prices.

But lower interest rates also produce high movements of capital, because it opens up more and more speculation areas the closer they are to 0.

Waiting in anticipation for the pre-election October Suprise

It could also be a way to finish the kneecapping of Europe. Alot of countries dropped interest rates recently.