110 sats \ 2 replies \ @jp 27 Jul 2022 \ parent \ on: Will todays interest rate hike cause a Bitcoin pump? bitcoin
Not sure if this is true. Assume $100 in deposit at a bank with a 1:10 Reserve Ratio means they can lend out $1,000 to individuals. These individuals pay back the interest at 5% annual interest rate which will yield the bank $1,050 (assuming all borrowers 1 year term); the bank can now lend out more money in their next lending cohort.
The reason why minor increases in interest rates cause such a shock is because all company valuations in the past decade have assumed lower borrowing costs. Increases in these borrowing costs make some business unviable, which will lead to layoffs. Higher leverage businesses = more sensitivity to interest rates.
Also, I think your response misses the overall point that interest rates alone aren't sufficient in determining how individuals & companies will response- you need to take into account real inflation.
Doesn't this counter your first quote where Debt wasn't considered inflationary? I am confused where you stand on this topic.
For your first, you show the basic business model of how banks earn money, but you must understand that I'm speaking in terms of 3rd 4th and 5th order effects. This is commonly known as macro economics. What you have shown in microeconomics. The stuff that happens on the little scale.
For your second, I believe you're pointing out the aspect of ponzinomics which is rolling over debt or paying off debt with new debt. This is indeed another problem, but all of these different aspects of the economy all work together. Nothing in a vacuum.
For your third, I can see that a misunderstanding has happened here. Yes, there are people who believe that debt isn't inflationary, but I do not subscribe to that view. I am instead of the other view, the first I mentioned "If you're in the camp that only sees inflation as a general rise in prices, then you should understand when I say, debt is inflationary." I was only looking to explain things in the view that I know some other people have.
Now if you think I'm explaining this terribly, I probably am. Please, I encourage you to look at my primary sources for where I'm getting these ideas from in the first place to understand what I'm actually trying to say.
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I understand both micro & macro; I am handle the entire lending operation for a fintech company. I've been a subscriber to both Ray Dalio and Milton Friedman.
I'll stop here because we're getting way off topic
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