Have high interest rates created the risk of a crash?

Economics says high interest rates should deflate share prices. But that’s not been true since 2021, because the real world does not work the way economics says it does. Instead, high interest rates have led to high share valuations. And now all that could change.
#uk #money #economic #politics #bank #government #tax
ABOUT RICHARD MURPHY
Richard Murphy is Professor of Accounting Practice at Sheffield University Management School. He is director of Tax Research LLP and the author of the Funding the Future blog. His best known book is ‘The Joy of Tax’.
This video was edited by Thomas Murphy.
DONATE TO KEEP THIS CHANNEL ADVERT FREE
ko-fi.com/taxr...
RICHARD MURPHY ON TWITTER
Follow Richard on his Twitter: RichardJMurphy or on his blog: www.taxresearch...
HIT SUBSCRIBE & GET NOTIFICATIONS
Subscribe and get notified of new videos released.
INTRODUCTION: • Welcome to my channel ...
PLAYLISTS:
Accountancy: • Accounting
Economics: • Economics
Tax: • Tax
Taxing Wealth Report: • Taxing Wealth Report 2024
Green New Deal: • Green New Deal
Money: • Money
Questions from subscribers: • Questions
Miscellaneous: • Miscellaneous
#richardmurphy #richardjmurphy #economy #economics #accountancy #accounting #tax #uktax #ukeconomy #greennewdeal

[@colecohen4581]

This is exactly the sort of video I want to see from this channel: longish and dense. Sometimes with the shorter videos I feel like there isn't enough time to fully back up your central point, and I couldn't internalise it and reason it myself based on the video's contents. Not so with this one

[@RichardJMurphy]

@@colecohen4581 Thank you. Noted.

[@abody499]

I disagree. Simplifying many of these apparently mystical concepts into small chunks is exactly what is needed. Long dense videos on economics are never going to attract a lay person audience, which seems to be the goal of this channel.

[@pensarfeo]

@@RichardJMurphy Some graphics would also help :)

[@Killergoat69]

@@abody499 yeah I agree, I nodded off a couple of times

[@RickProcterLane]

Very interesting, the question becomes do you cater more for the layperson or for economics nerds? Maybe a bit of dual branding is in order if you’re going to try to do both?

[@quantarrow]

Start early with diversified investments in Bitcoin, stocks, bonds, and real estate. Maximize contributions to tax-advantaged accounts like 401(k)s and IRAs. Regularly review and adjust your strategy to ensure security

[@IshrakHossain-rt8is]

I feel sympathy for our country, low income people are now suffering to survive yet inflation and recession keep increasing daily, many families can't even enhance the good cost of living anymore. You've helped me a lot Sir Brian! Imagine I invested $50,000 and received $190,500 after 14 days

[@katiekilbo]

Very possible! especially at this moment. Profits can be made in many different ways, but such intricate transactions should only be handled by seasoned market professionals.

[@MianHussnain-tu1wi]

Some persons think inves'tin is all about buying stocks; I think going into the stock market without a good experience is a big risk, that's why I'm lucky to have seen someone like mr Brian C Nelson.

[@ysareyes]

Finding yourself a good broker is as same as finding a good wife, which you go less stress, you get just enough with so much little effort at things

[@kabengele-vo4dr]

Brian demonstrates an excellent understanding of market trends, making well informed decisions that leads to consistent profit

[@S34NP4THURL]

Still waiting for the @@garyseconomics & Murphy collab

[@timwoodger7896]

That would be interesting.

[@RichardJMurphy]

@@S34NP4THURL These things take time…

[@barerfont]

Add Mariana Mazzucato and Grace Blakeley. Would love to hear a discussion between on how to transform tax and economy. Think it would be a great thing between all four to test their positions.

[@PaddyWV]

I tune into RTE Radio 1 these days and this past week we heard about their bank AIB reporting (quote ) "an after tax profit of €1.108 billion, 😊up from €854m the same time last year. The bank said its net interest income (NII) - the key driver of bank profitability - was up 18% year on year at €2.1 billion." Maybe that's normal to those in the industry, but you can't help wonder if a crash is not far away. Ireland, despite having a budget surplus, appears to have a lot of other pointers An overheating property and rental market (again), being another familiar stepping stone.

[@ProgressiveMastermind]

Seems plausible, but even more money seemed to come directly from.Quantitative easing or revenues sucked out of the economy (and not re-invested), since stock prizes also rose during 0% interest policy time, right?

[@FerryFalco]

The BoE follow the Gilt trend they do not decide it if you ask me. Take the dates of the 10 yr/ 30yr Gilts in 2021for example. They shot up from negligible 0.2% to nigh on 1% on the 1st of April 2021. The bond market moved first not the custodian of rates. The BofE moved rates in December of 2021 to 0.25 and as we know jumped up after consecutive meetings; dragging the 10yr and the 30yr with it. My point is though that the market decided first that there was a problem with inflation and the BofE subsequently overreacted. If I recall the US yields performed in exactly the same manner but the Fed waited until May of 22 to hike to 0.25%. With the same subsequent jump in rates. Some MMt'ers state that central bank rate hikes are useless. That they simply drag down economies. I agree that the idea of raising rates to slow demand for food and energy means willfully starving and freezing the populace until companies take the hint to be a 'throwing the baby out with the bathwater' solution. I suppose it's difficult not to overreact when you have a 'greed is good' Tory government in charge of fiscal policy at the time though.

[@andrewhunt1204]

Hi Richard. Thank you for a reasoned explanation which seems to be rational and logical. Could the increase in stock prices also be due to the huge increases in the wealth of the rich post covid, who as a result have increased their investment in assets such as stocks, property and land ?

[@jamesgraham5470]

Sir I agree with you on interest rates because equities in general have gone up for the past 2 years.I have also noticed that also when shares go down they are recovering faster than ever

[@pensarfeo]

We need something like Murphy's rule for shares, anything that can inflate the value of shares will inflate the value of shares :)

[@127mungo]

Yes, a reasonable deduction. But there are other reasons for the high (but not unreasonably so) share prices we are seeing at the moment. So if a crash does occur, it won't be solely as a technical result of the high interest rates but rather as a self fulfilling prophecy because the market reacts to what it imagines it sees.

[@Jaymark-gk4li]

I remember my economics teacher saying its 'an inexact' science..hmmmm I got an 'ology ' 😅..business studies & commerce too..still skint 😅😂

[@stevefrith9924]

have you discussed this with Richard Werner or Steve Keen? Observation trumps theory

[@GhostOnTheHalfShell]

Another pathway is an increase interest income also furnishes the funds for stock market purchases. For interest income beneficiaries, that extra money defrays inflation as well.

[@jeff__w]

I love the information in these videos-clear, precise, and to the point-but I think we can do without the three-quarter shots. I think they’re a bit distracting and, as they’re going on, I’m thinking “Who is he supposed to be talking to?”

[@nickhbt]

Thanks Richard. Thats quite a convincing argument. By contrast I was very unconvinced by the Carry Trade explanation for the drop in share prices. Your explanation for their rise is far nicer.

[@martinsingfield]

Whilst historically, stock valuations have been more likely to rise than fall when interest rates are rising from low levels, high interest rates don't lead to high share valuations. In theory, a stock is worth the sum of all of its future dividend payments, discounted back to their present value. Therefore, all else equal, higher interest rates should lead to lower stock prices as you discount future cash flows with a higher rate. However, higher interest rates are generally accompanied by faster economic and dividends growth, which lead to higher stock prices. Often, when interest rates are on the rise, the positive impact of rising future dividends outweighs the negative impact of a higher discount rate. Rising interest rates are therefore often (but not always) correlated with rising share prices, but the link is not causal.

[@abody499]

*This is not correct sir.* The line has been propped up by QE and the subsequent cash built up by firms who then buy their own stock back. Interest rate hikes came much later. This has all been unfolding in a near zero interest rate environment since the crash of '08. In fact, the simple way of looking at it is that higher interest rates corelate with stock sell-offs as cash becomes more profitable to hold and borrowing becomes more expensive for firms leading to lower yields on dividends. However, we can see how that applies less and less in practice when it's the firms themselves who are running the price of their own stocks up, rather than reflecting the market's own unadulterated valuation.

[@andielines]

So basically it's all smoke and mirrors then. There are no 'financial truths' or outcomes, it's not all 'unavoidable' like the weather. Government/BoE behaviour is just based on predicting and countering detrimental but profitable behaviour by the markets. Similarly, it's always trotted out that 'printing money' (creating more money from nothing) leads to inflation, when there is actually no longer a direct link. It's the associated assumptions and behaviour that cause the inflation.

[@edwardmclaughlin7935]

andielines The creation of fresh currency units does not cause inflation, it constitutes inflation. If those fresh units are not directed into productive channels, then subsequent, general price levels will rise.

[@andielines]

@@edwardmclaughlin7935 ". . . .then subsequent, general price levels will rise." Please explain the mechanism.

[@edwardmclaughlin7935]

@@andielines Every additional unit of currency degrades the buying power of all the pre-existing units. Goods and services remain at the same volume and therefore are sought-after by more units. In effect, the goods and services command more currency to secure their purchase.

[@andielines]

@@edwardmclaughlin7935 "Every additional unit of currency degrades the buying power of all the pre-existing units." surely that would only be true if we were still on the gold standard. ". . . . In effect, the goods and services command more currency to secure their purchase." Yes, I hear this all the time, but what is the mechanism? It just seems to me to be an assumption.

[@Killergoat69]

At what point was it decided that 5% interest rates be considered to be high?

[@billygunn6185]

At what point was it decided that 0.5%-2% interest rates were too low?

[@Killergoat69]

@@billygunn6185 I don’t think anybody has have they?

[@Killergoat69]

Anyway I think the average for the last 300 years is 7%. So 5% would be considered low

[@billygunn6185]

@@Killergoat69 50 years ago has no relation to present day let lone 300 years. Toilets use to be outside, before toilets people chucked their waste out the window. Times change

[@pipster1891]

Wasn't the very reason for increasing interest rates to increase unemployment?

[@polyphonics557]

If the high interest rates has caused inflation and devalued the buying power of the the Pound then whilst the share prices are high they aren't that high as they have to tread water with the falling value of the Pound. If the share price gains 20% over the year but the buying power of the Pound loses 10% to inflation then at the end of the year surely the share price has only grown an "adjusted" 10%?

[@destrytennea]

Thanks for this. Are you able to go into more detail explaining how the bong market works. Specifically, how it’s relegated, who buys them when the price is falling and why and how exactly the central bank can force the bond prices to fall on the secondhand market. I get the overriding concept but there are still some minor details I don’t completely understand.

[@davidthompson797]

Are you familiar with the MMT Podcast? Several excellent episodes on there dealing specifically with the Bond market. kzbin.info/door/Ep_nGVTuMfBun2wiG-c0Ewvideos

[@theotherandrew5540]

50 years when I read economics, we had the collapse of the Phillips Curve in spite of the myths of rational decisions, free markets, full knowledge e.t.c. It seems to me that professional economists are slow learners, or just prefer theoretical fairies.

[@charliemoore2551]

I'd say reluctant learners, rather than slow. Neoliberalism is an ideology, a cult even. It's not proper theory.

[@rich-rothschild1400]

You should teach Rachel Reeves our Chancellor of exchequer. How she should be running the country is there any chance?. Or at least try and send a letter to her appropriate department whether or not she read it or not is another case. She needs to learn how to run the country. It’s alright going from the bank of England as a glorified Clark. I’m just saying you can’t do that and then run the country like she is I know it’s early stages but it’s debatable.. take care of your friends and family. I will try and spread the word but unlimited on this end take care of of your friends and family again bye for now.

[@Peter.F.C]

It is true that the consequences of raising interest rates is all much more complicated than the naive first year economics analysis that is typically used would suggest. However, you say: “...bonds goes down but all the money that was in those bonds doesn't just disappear it's got to go somewhere...” I'm not sure what you mean. If the price of a bond in a a secondary market falls the value of the bond that has disappeared has disappeared and that money hasn't gone anywhere. It just is a disappearance. A reduction in the amount of money you can get for selling that bond. Similarly, people talk about money flowing out of one asset into another asset. But this isn't correct either. All that happens is the value of assets changes because of the willingness of people to buy and sell at a different value than they were willing to buy and sell at previously. Money isn't flowing out of anything and into other things. When you buy an asset, the other person gets the money. No money has flowed into anything. It simply passed through. The change in values has nothing to do with money flowing in or out. It doesn't stay in the asset. People frequently use this language of money flowing in and out but that's not what happens. All that happens is asset values change. Nothing else. And if you have a portfolio full of different assets, the proportion of value in a particular type of asset changes as the relative value of the different assets change. Nothing is flowing into or out of anything. The only flowing in or out could be, for example, if new shares are issued or new bonds are issued. But when assets change hands on secondary markets, nothing. Nothing flowing into and nothing flowing out of, or at least what flows in equals what flows out. So back to what you said: “...bonds goes down but all the money that was in those bonds doesn't just disappear it's got to go somewhere...” What happens is that superannuation funds for example are getting net money every week that they have to park somewhere. As far as putting it in bonds goes, they may be concerned that the central bank will raise interest rates further causing the bond prices to fall. So the relative attractiveness of the places they can put the money changes and they put a larger proportion elsewhere. Now if everything was secondary markets anything they would put this money into the money would flow out to some some seller on the other side of the transaction. So when super funds and others preferences change and they switch to wanting more of let's say shares relative to let's say bonds, what happens is the relative values of the assets change to balance everything. The relative price of shares go up. So you are quite right that you get this counterintuitive result or at least counterintuitive if you base your expectations on the naive economic analysis that many people do. But some people in finance do base their analysis on how the flow of funds going into the market, for example, through compulsory or quasi-compulsory superannuation, investments and so on, has to flow out the other side and the only way this can happen will be if the value of the assets, the prices they are transacted at, go up. Here are a few references that I got Llama 3.1 to cough up. Some specific studies that examine the impact of fund flows on stock prices include: - "Does Fund Size Matter? Evidence from Mutual Fund Flows" by Jonathan B. Berk and Richard C. Green (Journal of Financial Economics, 2004) - "The Impact of Mutual Fund Flows on Stock Prices" by Paul A. Gompers and Andrew Metrick (Journal of Financial Economics, 2001) - "Institutional Trading and Stock Prices" by John M. Griffin, Jeffrey H. Harris, and Selim Topaloglu (Journal of Financial Economics, 2003) And quite right, a lot of the assumptions used in economics are quite ridiculous and do not provide a useful guide for what happens in the real world.

[@bpdlr]

I see the bots have started targetting this channel now... but hey, anyone who wants to take financial afvice from a YT comment deserves exactly what they get

[@winthorpe2560]

What about deficit spending? If the only area of job growth is govt jobs and 40% of that goes to the stock market via pensions, not to mention the social care budgets being cut to fund local govt pension deficits, that must have a material impact?

[@tropics8407]

So government regulatory reporting rules cause bonds to sell into stocks ? 🤦‍♂️ geez 🙄

[@andrewdavis8137]

Correlation does not equal causation.

[@RickProcterLane]

You say you can’t see another explanation of the inflated share prices other than high interest rates - and yet you literally give another explanation in the form of the AI bubble. Don’t get me wrong, this is a great video with a lot of ground covered in quite substantial depth - but it seems to me there could be an element of undermining yourself with your own explanations, if you catch my drift…?

[@easterntechartists]

A fancy voice doesnt mean you know anything about how the real world works.

[@RichardJMurphy]

But 45 years’ real world experience certainly does

[@jasonaris5316]

They are normal interest rates (the past 14 years were the aberration it’s the low interest rates have wrecked the economy)

[@boptah7489]

If you have a Central Bank. you have automatically entered the 'boom, bust' cycle. Because the currency needed to pay the interest of the previous currency borrowed has not been created yet. ( borrowed) So the entire system needs to borrow ( create) more currency to fill the shortfall and so the CB creates a 'Bubble' to achieve that.

[@incikeleher8947]

Absolute nonsense comment.

[@nickhbt]

@@boptah7489 I would say, 'Yes but no but.' See Steve Keen's recent explanation of the relationship between Credit/Debt and Boom/Bust cycles. kzbin.info/www/bejne/l17Qgpqkg91-grMsi=l50hCsStyHYiIRu0 Whether the credit comes from private lending or central banks is nothing like as important as who commands the balifs.

[@nickhbt]

@@incikeleher8947 pithy!

[@andyinsuffolk]

It's the state fiat currency that is the root problem, the Central Bank is just the 'Office of Toy-town Money'. Having a financial system designed so that government is free of spending constraints is tyranny.

[@nickhbt]

@@boptah7489 I would say "Yes but no but.". For a good explanation of the Credit/Debt Boom/Bust cycles, it's worth watching Steve Keen kzbin.info/www/bejne/l17Qgpqkg91-grM Whether the lender is a central bank or not, it isn't as important as who has to repay the debt and who controls the bailiffs. I would also recommend the work of Michael Hudson, who again explains that debts are a huge problem and have been for much longer than there have been central banks. KZbin.com/watch?v=sJBi7sfTZuY

[@andyinsuffolk]

So big state, centralised money & banking disrupts free exchange and probably makes us all massively less prosperous? -- this is another poss explanation of how the Mafia State disrupts prosperity -- but what about an answer -- can I suggest pluralism & free markets?

[@thpark8189]

Nope. You are completely wrong. You’re cherry-picking dates, for one thing. The point is that the health of the economy has a large bearing on the profitability of companies. If economists are forecasting a recession, which they are in the US, then companies have a reduced prospect of profitability.

[@GhostOnTheHalfShell]

This mirrors the sorts of conclusions AppliedMMT (Douglas MMT). They use ML applying mmt to forecast US markets and publicly post their data.