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.

The aspiration of homeownership

In my last post, I was talking about our search for a new apartment. For the record, my motivation was that I hadn’t written much lately, so why not write about what I’ve been doing? I was not specifically trying to comment on the politics of housing.

But the politics of housing are surely relevant, and worth talking about–at the risk of repeating myself.

As I’ve said many times by now, my household is relatively wealthy. Plainly stated, we are millionaires. That’s not a brag, I simply think you deserve my honesty. Since around 2020, my husband and I have become tech workers without any dependents, debt, or expensive tastes–it’s a recipe for wealth. In our position, some people expect that we would buy a house. But we don’t want to become homeowners, and we are ideologically opposed to the expectation that we should.

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Our “luxury” apartment

For the past few weeks, my husband and I have been apartment searching.  That’s right, we’re renters!  Not sure if readers find that surprising.  But when I talk to coworkers, who are of similar economic class, they’re usually shocked to hear that we’re not homeowners.

So why rent, when we’re wealthy enough to afford a house?  One major reason: we hate cars.  We use public transit.  (This is also a shock to coworkers.)

So if you take transit time, and multiply it by our hourly wage, getting anywhere is very expensive.  We can afford it, it’s just time.  But it’s easily worth thousands of dollars per month to live in precisely the right location.  We want a place next to a grocery store, a train stop, and our workplace.  The typical suburban hellscape of single-family residences doesn’t work for us.  When you consider the economics of it, what we want is a good apartment complex.  In other words, we want what they call a “luxury” apartment.

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That indie game money

If a game is on Steam, it’s possible for a public observer to estimate how much money it made. The thing to look at is the number of reviews. There’s a fairly predictable ratio between the number of sales to the number of Steam reviews, about 30:1. Then you can multiply by the game price (accounting for discounts). Subtract 30% for Steam’s cut (or a smaller cut if the game was profitable enough). And if the game made under $1000, subtract $100 for Steam’s listing fee.

Let’s go through an example. Hollow Knight: Silksong currently has 394,000 reviews. That implies about 12M sales on Steam alone. Each sale is $20, and we’ll assume an average discount of 15%. In total that’s $200M revenue. For such a large game, Steam only takes a 20% cut, leaving the developers with $160M. Now, divide that among three developers over the course of 7 years of development, and the implied annual salary of each dev is $7.7M.

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Selling out as a game dev

Moon Garden Optimizer is now listed on Steam. You can still play the game in browser for free on Itch.io, but the Steam version will be paid and have expanded content.

Moon Garden Optimizer is a puzzle strategy game about growing a garden while conserving water. It’s the only strategy game I’ve seen that lets you undo as much as you like. Wishlist on Steam!

Moon Garden Optimizer capsule

Ahem.

So I’d like to discuss the decision to put the game on Steam, and also sell it for money. Selling out, as it were.

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Why loans cost money

Boots theory

Boots theory is the idea that being poor is expensive. It comes from a Discworld novel, where a character observes that being poor, he can’t afford a good pair of boots. Instead he buys cheap boots that don’t last nearly as long. The cheap boots cost less money upfront, but are ultimately more expensive since they frequently need replacement.

Taken literally, I’m not sure how accurate the story is. Is it really true that cheap boots are less efficient in durability than expensive boots? It could be, but the cost of boots might also be driven by characteristics besides durability, such as comfort or appearance. Hard to say, since I don’t wear boots.

But if we forget about the boots, then boots theory is obviously true. The boots represent capital. Capital is anything that costs resources now, and provides value later. Capital costs money. If you can’t afford to buy capital, then you ultimately lose out on the value of capital. Being unable to afford capital is therefore expensive.

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FIRE

Sorry if this is obnoxious, but I have some rich people thoughts. I think a lot about retiring early. I figure it’s a ways off, but it seems eventually correct. I’m a tech worker, married to a tech worker, no kids, with fairly frugal interests and habits. I live a very savings-positive lifestyle.

On the internet, this often goes under the heading FIRE (Financial Independence / Retire Early). I’ve read a bit about it, although a lot of it is financial advice, which I haven’t found too helpful. My biggest concerns are not financial.

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