The Entrepreneur Forum | Financial Freedom | Starting a Business | Motivation | Money | Success

Welcome to the only entrepreneur forum dedicated to building life-changing wealth.

Build a Fastlane business. Earn real financial freedom. Join free.

Join over 80,000 entrepreneurs who have rejected the paradigm of mediocrity and said "NO!" to underpaid jobs, ascetic frugality, and suffocating savings rituals— learn how to build a Fastlane business that pays both freedom and lifestyle affluence.

Free registration at the forum removes this block.

Are some people really so dense that they don't understand why high taxes for businesses are a bad thing?

Tom H.

Silver Contributor
FASTLANE INSIDER
Read Fastlane!
Read Unscripted!
Speedway Pass
User Power
Value/Post Ratio
210%
Dec 13, 2019
263
552
Jaco, Costa Rica
It would be easier for a church, farmer, or supermarket owner to get a loan in this scenario than in our current system where rates are artificially low and inflation is high. Traditional lenders aren't compensated for their risk to an actual market level. So they REALLY make it difficult to initiate a loan.

As @JScott alluded to, the true equilibrium for interest rates on a lot of this stuff is a LOT higher than bank rates would suggest. This is why I would wish someone good luck trying to get a business loan from Chase or Wells Fargo unless they clearly don't need it.
Thank you for clarifying some of the points I was trying to make. The issue is not about a single lender and debtor, but about the rate that the market will set.

The idea that market rates actually make it easier to get a loan is very analogous to the minimum wage issue.

If minimum wage is $15/hour, then many low skill workers will never be able to get a job because they are truly not worth $15/hour. Just like today you can't get a business loan at 1% if the lender would really need to charge 8% to make the deal work.
 
Dislike ads? Remove them and support the forum: Subscribe to Fastlane Insiders.
Last edited:
G

Guest-5ty5s4

Guest
You're looking at this backwards...

Rates aren't set by what a lender needs to charge. Lenders, in aggregate, have essentially no say whatsoever in the rates they command from borrowers.

Rates are set by THE MARKET. And market rates are defined by two big things:

1. The "risk free" rate of return in the market at the particular time
2. The risk profile/premium of the investment

There's a third thing -- demand -- that drives whether the risk premium expands or contracts, but assuming you surpass a minimum demand hurdle, this doesn't matter very much.

Long story short, using your example above, lenders don't say, "I need 8% to make this deal work..."

Instead, they say, "I have $x to invest, and looking at the various investments available to me and their risk premiums, this is the one I choose."

Lenders will often choose lending, simply because that is their core competency. And that is the risk premium they are experienced at underwriting. (And, if it's a fund, that is what they have promised their investors they'd use the money for and the SEC wouldn't be very happy if they used it for something else. ;) )

Also, keep in mind that if lending rates drop, typically cost of capital for lenders drops as well, keeping the spread to the lender about the same. So, a lender charging 8% in one market is likely going to make the same amount of profit as a lender in a different market charging 5% (or 13%).

If the risk free rate of return is based on something like government bonds, treasury bills, etc. is that really the same as “the free market?”

The Federal Reserve’s rates don’t affect this at all?

If they do, then it’s not a straight-up free market.
 
Last edited by a moderator:
G

Guest-5ty5s4

Guest
Sure. These are free market investments, even if they are offered by the government.

You can buy them, I can buy them, other investors can buy them, businesses can buy them, other governments can buy them, etc. And these aren't investments offered elsewhere, so there is no manipulation against competing investments.



The Fed sets the risk-free rate of return. It's (essentially) the Federal Funds rate (with a bit of premium).



Why not?

If you want to offer a competing investment, you're welcome to. And the Fed won't manipulate their rates to compete with you.

That's free market. Even if it's offered by the government instead of a private entity.

The Fed sets an arbitrary rate.

By setting a price (or a rate, which is kind of the same thing as price), it’s not a free market, by definition.
 

lowtek

Legendary Contributor
FASTLANE INSIDER
EPIC CONTRIBUTOR
Read Fastlane!
Summit Attendee
Speedway Pass
User Power
Value/Post Ratio
332%
Oct 3, 2015
2,164
7,186
42
Phoenix, AZ
The Fed sets an arbitrary rate for the Federal Funds rate -- the rate at which banks can transact with the Fed.

This is NOT the risk free rate of return.

The risk free rate of return is set by supply and demand in the purchase of treasury bonds -- generally it's the 3-month expiration bond that is used to determine this risk free rate.

As you can see here, that rate fluctuates:


It's not set by the Fed.

In fact, if you want to see how much this rate fluctuates around the rate that the Fed sets (the Federal Funds rate), you can look at this:


That is the 3-month treasury rate minus the Fed Funds rate.

If the 3-month treasury rate were set by the Fed, this graph would be a horizontal line. It's not. Those fluctuations are market forces.

The Fed doesn't set the risk-free rate of return.

Starting in about 2009 the 3 month minus the fed rate is approximately zero, plus or minus. The biggest fluctuation, since that time, came in March of this year, when it went to -0.34. The rest of a time, the delta is a tiny fraction of a percent. These fluctuations are obviously outside the historical distribution of a multiple point delta.

If you put on your blinders and only look at the period prior to the 1990s, one could make a reasonable argument that market forces were determining the rate... but the data you provided shows that for the past generation, the fed has been setting the rates.
 
Dislike ads? Remove them and support the forum: Subscribe to Fastlane Insiders.

MJ DeMarco

I followed the science; all I found was money.
Staff member
FASTLANE INSIDER
EPIC CONTRIBUTOR
Read Rat-Race Escape!
Read Fastlane!
Read Unscripted!
Summit Attendee
Speedway Pass
User Power
Value/Post Ratio
445%
Jul 23, 2007
38,083
169,512
Utah
Thank you folks for a rather reasoned discussion ... normally a thread like this would be shut down in hours.
 

Post New Topic

Please SEARCH before posting.
Please select the BEST category.

Post new topic

Guest post submissions offered HERE.

Latest Posts

New Topics

Fastlane Insiders

View the forum AD FREE.
Private, unindexed content
Detailed process/execution threads
Ideas needing execution, more!

Join Fastlane Insiders.

Top