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Chapter 12 Interest Rate: The Financial Magic Wand That Turns All Beings Upside Down (1)
Greenspan's magic wand

There is such a scene story:
One day in early 1993, shortly after Mr. Clinton took office.Clinton summons Greenspan on the economy.

Clinton: "Old man, the economy is in such a downturn now, look, what should we do next?"

Greenspan: "It's nothing, I just wave the magic wand in my hand, and those people will drive the market." The old man dealt with this handsome young man who had just taken office like a charade.

Clinton: "Really? What magic wand? Which people? How to promote the market?" Mr. President seemed very anxious.He got up from his seat and walked around the room with a pen in his hand.Both eyes kept looking at Greenspan.

Greenspan: "It's the financial tycoons on Wall Street, my old acquaintances, old friends, they all have to listen to me."

"Listen to you, not mine?" Clinton was a little unconvinced.

"Of course you listen to me. If you don't believe me, look!" Greenspan said in an indisputable tone.

"I'm interested in that magic wand in your hand, what is it?"

"interest rate."

October 1987, 10 was an unforgettable "Black Monday" for Wall Street investors.On this day, the Dow Jones Index plummeted 19% in three hours, and the stock market value shrank by more than 22.6 billion U.S. dollars in six and a half hours.On the same day, 5000 rich people bid farewell to the "Forbes" rich list, and then billionaire Arthur Kane committed suicide at home.The next morning, Greenspan, who had just been Fed chairman for two months, ordered a cut in the federal funds rate, and long-term market rates followed suit.After several months of adjustments, Wall Street investors have gradually gained investment returns and confidence, and the United States survived the catastrophe of an economic bubble burst without any risk.From this, Greenspan waved the magic wand of "interest rate" and started his brilliant and legendary life.

In the following 18 years, Greenspan changed the tools of U.S. monetary policy, making the federal funds rate an indicator connecting the market and policy. The interest rate tool was like a "magic wand" in his hands, guiding the U.S. economic and world economic trends.During the Greenspan era, the U.S. economy maintained a new economic growth for more than ten years, creating a century-old legend.

Why is the interest rate so magical?Because the interest rate is the price of funds, its rise and fall is related to the pockets of residents, enterprises, and the government. Can it not make people nervous?

Interest rate, also known as interest rate, expresses the ratio of interest amount to principal within a certain period of time, usually expressed as a percentage, and is called annual interest rate when calculated on an annual basis.The calculation formula is: interest rate = interest amount / principal / time × 100%
Interest rate, in terms of its form, refers to the ratio of the amount of interest to the total amount of loaned capital within a certain period of time.Interest rate is the interest level of unit currency in unit time, indicating the amount of interest.Economists have been working for years to find a theory that fully explains the structure and changes in interest rates. The "classical school" believes that interest rate is the price of capital, and the supply and demand of capital determine the change of interest rate; Keynes regards interest rate as "the price of using money".According to Marx, the interest rate is a part of the surplus value, and it is a manifestation of the participation of loan capitalists in the distribution of surplus value.Interest rates are usually controlled by the country's central bank and, in the United States, by the Federal Reserve Board.Now, all countries regard interest rates as one of the important tools of macroeconomic regulation and control.When the economy is overheated and inflation rises, interest rates will be raised and credit will be tightened; when the overheated economy and inflation are under control, interest rates will be appropriately lowered.Therefore, the interest rate is one of the important fundamental economic factors.

Interest rate is an important financial variable in economics. Almost all financial phenomena and financial assets are more or less related to interest rate.At present, countries around the world frequently use interest rate levers to implement macro-control. Interest rate policy has become the main means for the central banks of various countries to regulate the supply and demand of money, and then regulate the economy. The position of interest rate policy in the central bank's monetary policy is becoming more and more important.A reasonable interest rate is of great significance to the economic leverage of social credit and interest rates, and the calculation method of a reasonable interest rate is our concern.

The story of an interest rate table: how interest rates come into being

Mr. Liu has worked in banks for many years.For many years, under the glass plate of his desk, there was always a table of savings deposit interest rates.In his suit pocket there is always a bill clip, and there is a savings deposit interest rate table hidden in the bill clip.Saving deposit interest rates have gone up and down, up and down, up and down, down and down again, and it is difficult to remember the changes in interest rates over the years, so Mr. Liu keeps interest rate tables everywhere for the convenience of others and himself.

Once, a middle-aged woman did not leave after withdrawing money at the savings counter, thinking that the bank had miscalculated the interest on her deposit.Mr. Liu copied the interest rate that had changed several times to her line by line, and she told her the method of calculating the interest rate, which dispelled her doubts.

Another acquaintance once asked Mr. Liu to help her calculate the interest.He said that he borrowed 12000 yuan from his brother-in-law three years ago. At that time, there was no agreement on the repayment time, nor did he agree on the amount of interest to be added when repaying the loan.Mr. Liu handed over the interest rate table that he carried with him, and told her clearly the method of interest calculation and the time period of value preservation and subsidy, and she would calculate the interest according to her actual situation and commitment.In addition, Mr. Liu's family has had several loan relationships with relatives' families. When repaying, they also refer to the interest rate of savings deposits. Both parties are willing to accept it, and the interest rate table has played the role of a middleman.

In life, there are often private loans, some with promises and some without promises, and the repayment must be compared with the savings deposit interest of the same period.In stock trading, it is often necessary to calculate one's own stocks or funds, and it is natural to think of comparing it with the interest rate of the same period.Saving deposit interest rates have changed again and again, involving thousands of households, and thousands of households have to talk about savings deposit interest rates.What is puzzling is why interest rates have different changes in different periods?What does this mean?What determines the level of interest rates?

In the modern economy, the interest rate, as the price of capital, is not only restricted by many factors in the economy and society, but also, the change of the interest rate will have a significant impact on the entire economy.Therefore, when modern economists study the determination of interest rates, they pay special attention to the relationship between various variables and the balance of the entire economy. Analysis and evolution of contemporary dynamic interest rate models, development process.

Keynes believed that saving and investment are two interdependent variables rather than two independent variables.In his theory, the money supply is controlled by the central bank and is an exogenous variable with no interest rate elasticity.At this time, the demand for money depends on people's psychological "liquidity preference".The later theory of loanable funds interest rate is the interest rate theory of the neoclassical school, which was proposed to revise Keynes's "liquidity preference" interest rate theory.To some extent, the loanable funds rate theory can actually be regarded as a synthesis of classical interest rate theory and Keynesian theory.

Famous British economist Hicks and others believed that the above two theories did not consider income factors, so they could not determine the interest rate level, so they proposed the IS-LM model based on the general equilibrium theory in 1937.Thus, a theory is established that the interest rate and income are determined simultaneously under the interaction of the four factors of saving and investment, money supply and money demand.

According to this model, the determination of interest rates depends on four factors: savings supply, investment demand, money supply, and money demand. Factors that lead to changes in savings investment and money supply and demand will all affect the interest rate level.This theory is characterized by general equilibrium analysis.Under a relatively rigorous theoretical framework, this theory organically unifies the commodity market equilibrium of classical theory and the money market equilibrium of Keynesian theory.

Marx's interest rate determination theory is an interest rate theory that considers the role of institutional factors in interest rate determination from the perspective of the source and substance of interest. The core of the theory is that interest rate is determined by the average profit rate.Marx believed that under the capitalist system, interest is a part of profit and a form of conversion of surplus value.The independence of interest is of positive significance for truly showing the active role played by fund users in the reproduction process.

Generally speaking, the trend of interest rates in a period is closely related to economic growth and currency strength.

This is because the interest rate level has a very important impact on the foreign exchange rate.When people choose whether to hold their own currency or a certain foreign currency, they first consider which currency they hold can bring them greater benefits.The rate of return of each country's currency is first measured by the interest rate in its financial market.If the interest rate of a certain currency rises, the interest income of holding the currency will increase, which will attract investors to buy the currency. Therefore, it will be good (good) support for the currency; The income will be reduced, and the attractiveness of the currency will be weakened.Therefore, it can be said that "when interest rates rise, the currency is strong; when interest rates fall, the currency is weak".

Present Value and Yield to Maturity: Measurement of Interest Rates

The concept of present value, or present-day discounted value, is based on the common knowledge that a dollar of your income a year from now is not worth as much as the dollar you have now.Because you can put the $1 you have now in a savings account and earn interest, you will have more than $1 in a year.The concept of present value is most widely used in ordinary loans.

Suppose you extend a loan to Jenny for $1000 and ask for additional interest payments.You ask her to pay back the $1000 principal and $100 in interest after one year.In this example, the interest rate is 0.1, calculated by dividing the payment information by the payment amount.You can get $1100 at the end of that year.If you keep sending the money out at that rate for the next year, you'll have $1210 at the end of the second year.So it can be said that your $1000 today is actually equal to $1100 in one year or $1210 in two years.This is the concept of present value, which also means that the present value can be reversed from future earnings.For example, 1210 yuan two years later is equivalent to 1000 US dollars today, indicating the value of future income today. This calculation process is called discounting the future.According to the concept of present value, if someone promises to pay you $10 in 1000 years, then regardless of other factors, this $1000 is far less valuable than your current $1000.Because you can invest $1000 today, and you will get much more than $10 in 1000 years.

(End of this chapter)