About interest rate hikes

Recently, the US Federal Reserve increased interest rates by 0.25% (CNBC). It may not seem like much, but it heralds further increases in interest rates, and it basically represents the failure of Trump policy. Let’s talk about it.

What are interest rates?

FYI, this is all stuff that you can learn about from more politically impartial sources, such as Wikipedia, or websites promoting financial literacy. I’m not saying anything new.

“Interest rates” is a generic term that describes how expensive it is to maintain debt, e.g. if you have a mortgage or credit card debt, you have to pay interest on that debt. But in this context, I’m referring to the Effective Federal Funds Rate (EFFR), which is a matter of US economic policy. The EFFR represents the interest rates that US banks pay on their debts to the US Federal Reserve. The EFFR is not identical to the interest rates that you pay on your own debts, but they’re strongly connected via market mechanisms.

Okay, but why are banks borrowing money?

When you deposit money in a bank, they don’t hold all that money in a vault, they turn around and invest the money. But you still need to be able to withdraw money when you need it, so banks maintain a certain amount of money on hand (aka liquidity). In fact, banks are strictly required to maintain a minimum amount of liquidity. If banks ever have too little liquidity, they borrow money from other banks that have too much. Or, they borrow money from the US Federal Reserve Bank.

So by setting the EFFR, the US Federal Reserve is basically setting the price of liquidity. And that affects the entire financial system.

If interest rates are low, then liquidity is cheap. You can borrow money to buy a house at relatively low interest rates. You can borrow money to start a new business. You can even invest in businesses that produce relatively little value to society, such as cryptocurrency or Twitter.

If interest rates are high, then liquidity is expensive. Starting a business is harder. Investors demand companies produce immediate profit, even if that means enshittifying their product. Even the US national debt becomes more of a concern, because the government, too, pays a higher interest rate.

Depending on your financial position, you may stand to personally gain or lose from higher interest rates. For example, if you have a fixed interest mortgage, lucky you, you’re protected. But the purpose of adjusting interest rates is obviously not to benefit some individuals and punish others, it’s for the health of the entire economy.  In case of a recession or financial panic (e.g. the 2008 financial crisis), the Feds will lower interest rates to inject more money into the system. In case of supply shocks or inflationary spiral (e.g. recent years), the Feds will raise interest rates, basically discouraging spending and tamping down inflation.

The current hikes

So, here’s the EFFR over the last 10 years.

EFFR over the past 10 years

Source: FRED. The graph doesn’t reflect the latest increase in EFFR this month.

In 2020, the Feds suddenly cut rates in response to the pandemic, basically financial relief in the face of hard times. But it couldn’t last. In 2022, inflation started going up, attributed to pandemic stimulus checks, supply chain disruptions, and the Russian invasion of Ukraine. So the Feds responded by increasing interest rates. Under Biden, the economy was recovering and interest rates were slowly turning around. But Biden also took the blame, and this is probably the biggest reason why Democrats lost the election in 2024.

Trump put the brakes on economic recovery, as I’ve already discussed. He promised tariffs and immigration enforcement. So the Feds, conservative though they are, were concerned he’d make good on those promises, and slowed down interest rate cuts over the next few years.

The latest interest rate hike is pretty strongly related to another Trump policy: war with Iran. It turns out that if you take 20% of the world’s oil supply, and lock it behind the Strait of Hormuz, things get more expensive. Inflation goes up, and the Feds increase interest rates to tamp it down.

Trump, for his part, has been demanding that the Feds cut interest rates. He demanded it in 2025, and is demanding it today. He even installed Kevin Warsh as chair of the Federal Open Markets Committee (which decides interest rates), in an effort to pressure interest rate cuts.  But the latest vote was unanimous, with even Warsh voting to raise interest rates.

Why has Trump been demanding interest rate cuts? It’s nonsensical. The interest rate hikes are easily attributable to his own damn policies.  He’s openly advocating a policy of runaway inflation.

I’ve wondered if maybe Trump stands to personally benefit from lower interest rates. For instance, if he personally holds variable-rate loans. I found a source saying that he did, as of 2019. So basically, he’s advocating a nonsensical policy because of personal corruption. Unforgivable.

But another source argues that he’s demanding interest rate cuts in order to deflect blame onto the Feds. Hard to tell who exactly this would fool, as it requires you to simultaneously understand federal interest rates, and not understand federal interest rates. In any case, also unforgivable.

This has been your periodic reminder that the Nazis do not make the trains run on time. They just blame immigrants when they themselves screw up the trains.

Red vs blue button

The internet has been talking about this red vs blue button problem. Since I’ve been talking about game theory lately, why not talk about this one too? You know, as a treat?

Here’s the problem. Everyone in the world is presented with a choice between a red button and a blue button. If the majority of people press the blue button, then everyone lives. If the majority of people press the red button, then only people who pressed red live, while all the people who pressed the blue button die. Which do you press?

As always, I find it funny that these questions posit life or death stakes. What if instead of dying, people were just mildly inconvenienced? Like, if they were forced to do nothing for five minutes, would that change how we approach the problem? I guess if it were framed that way, then it would be obvious that it’s not worth arguing about for more than five minutes. But anyways…

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Newcomb’s Paradox occurs in real life

Newcomb’s paradox is a philosophical thought experiment. There is an entity called Omega, who can predict your choices. Omega presents you with two boxes; you may open one or both boxes, and take whatever you find. The first box contains $1k, guaranteed. The second box contains $1M if and only if Omega predicts that you will leave the first box alone. So the dilemma is between “one-boxing” (taking only the $1M), or “two-boxing” (taking both boxes, finding a total of $1k).

When I put it that way, it seems obvious that $1M is more than $1k, so therefore you should open only one box. The two-boxer argument is that Omega has already decided whether the box contains $1M or not. So whatever’s in the second box is a constant, and it’s only rational to take the free $1k. Omega may have chosen to arbitrarily punish players who behave rationally, but what’s done is done, might as well collect the $1k consolation prize.

Do we care about Newcomb’s paradox?

Newcomb’s paradox has received a great deal of discussion from Rationalists, i.e. the community popularized by Eliezer Yudkowsky. That’s how I know about the paradox. But I’m an outsider, and it appears to me like Rationalists stared at this paradox for so long that they went mad. Yudkowsky is a dedicated one-boxer, and has attempted to construct elaborate theories to justify it. Some of these ideas were crucial in the construction of Roko’s Basilisk.

I believe the reason Yudkowsky and others are so obsessed with Newcomb’s paradox, is because they’re transhumanists. They believe the future will contain a super powerful AI. To most people Omega sounds fantastical—how can any entity make perfect predictions about our actions? But to a transhumanist, a super powerful AI could easily step into the role of Omega.  Additionally, we can think about what happens when AI steps into the role of the player. If the AI is deterministic, then of course we can predict what the AI will choose. So Yudkowsky’s interest is ensuring that an AI will choose correctly in this situation.

But for the rest of us folks who aren’t transhumanists, does Newcomb’s paradox make sense? Is this a problem we even need to think about?

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Rock Paper Scissors and variants

Rock Paper Scissors is a game where two players simultaneously pick one of the three things in the title. Rock beats Scissors, Scissors beats Paper, Paper beats Rock, and if both players pick the same thing they tie.  Rock Paper Scissors is important in game theory, because it is a toy model that helps understand a much broader class of games.

To understand the correct strategy in Rock Paper Scissors, we must understand the difference between pure strategies and mixed strategies. A pure strategy is deterministic, where a mixed strategy is random. There are only three possible pure strategies: pick Rock, pick Paper, and pick Scissors. There are infinitely many mixed strategies available, for example assigning 50% probability to Rock, 25% to Paper, and 25% to Scissors.

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Macroeconomics with Peter Navarro

Back when I started working in finance in 2020, I remarked to a colleague that I felt pretty ignorant about all this finance stuff. So they suggested a basic online course in macroeconomics. That course: “The Power of Macroeconomics: Economic Principles in the Real World” taught by Dr. Peter Navarro.

In case the name doesn’t ring a bell, Dr. Navarro is currently the senior counselor for trade and manufacturing, in the Trump administration. He is seemingly the only economist in the world who thinks universal tariffs are a good idea. That guy. Even at the time I took the course, Navarro had been the director of the White House National Trade Council during the first Trump administration. But I swear, I didn’t realize who he was until 2022, when he was arrested in relation to the conspiracy to overturn the 2020 election.

No deep dive here–I’m not going back through the course to sift for oddities. This is just storytime, recalling what I can about Dr. Peter Navarro from several years ago.

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It’s the economy

When playing the blame game for the 2024 presidential election, a lot of people point towards social issues. Not to dispute the importance of white identity politics, but polling suggests that the largest concern among voters was the economy, so let’s at least give that issue the time of day.

The funny thing about the economy is that it tends to lag behind economic policy, or just do its own thing based on external factors. During elections, people blame current economic conditions on the current president, even though those economic conditions might have little to do with the president’s actions, or could even be blamed on the previous president. The nightmare scenario is people blaming Biden for the consequences Trump’s bad policies, and then later crediting Trump for the consequences of Biden’s good policies.

This is why it might help to understand what good or bad economic policy looks like. In general, this is hard. But Trump makes it easy, with his very obviously bad economic proposals.

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My economic simulation of spacefaring kittens

Kittens Game is a clicker game that you can play in your browser. It makes a strong first impression, as it tempts you into choices that will kill off your kittens within twelve minutes. But I’m not here to review the game, I’m here to talk about spreadsheets!

Clicker games often support passive gameplay (e.g. leave it running overnight), active gameplay, or any combination of the above. On the very active end, you could try to optimize it, setting up spreadsheets to run calculations. So, I spent a thousand years tinkering with spreadsheets, and I liked it. There’s a story there, a mathematical story.

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