"Interest is the price you pay for money."
The Fed, our banker's bank, has kept the Fed Funds Target Rate at 0.25% which puts most banks at a prime rate of 3.25%, which is the Fed rate plus 3%. If interest is the price you pay for money, how can the Fed only charge one-quarter of a percent? Just to be clear, the answer is not "volume."
Every 6 weeks, the Fed committee meets to debate and discuss the rate. Conventional wisdom suggests that Janet Yellen and her compatriots will be raising the rate sometime before the Fall. Why? Because the Fed has always been like the Wizard of Oz, a man (or woman) behind the curtain pulling levers and trying to make things happen. Remember, the Wizard didn't give the scarecrow a brain. He gave him a diploma. The Tin Man got a watch not a heart and the Lion got a medal instead of courage.
The Fed feels they have to "do something" in order to "manage the economy." And do something they did. They have lowered the interest rate to the point where they cannot lower it any more.
Supposedly, the lower interest rates will "stimulate" the economy and thus create jobs. Under "normal" conditions, that would be true, but not every time frame is "normal." Increased government regulations, increased pressures on wages from politicians and not markets along with uncertainty of health care related costs all drive businesses into hibernation and not growth. First quarter GDP for 2015 actually shrank. The stimulus didn't stimulate and the long-term economic prognosis is lackluster at best. Why then the potential for a rate hike?
Declare victory and go home. By raising rates a little, it gives the illusion that the former policy of lowering rates "worked" and now it's time to get back to "normal" business. The crisis is over.
The problem is that interest is the price you pay for money. If the Fed is lending money, it needs to get it from somewhere. In theory, another bank. For that bank to be willing to lend the Fed some money, it needs to compare the price the Fed is paying to the price it could earn elsewhere.
But the truth is, the Fed is not borrowing money to lend to others. It's printing. And that is a grave threat to our civilization. Sound like hyperbole? Yet whomever controls the money supply controls the economy. The Weimar Republic is a famous example. So is today's Zimbabwe. Or how about the Argentine peso?
In 2012 the peso was trading 4.5 pesos for 1 dollar on the official market. Now, 3 years later, the official rate is 9.1 pesos per American dollar. The government controls a large segment of the work force - 21% - and purchasing power parity has decreased. In layman's terms, there has been inflation and they can buy less with what little they have.
The US economy has avoided the inflationary meltdown predicted by many at the start of the Obama administration with their fiscal pork “stimulus” combined with the bank bailouts left over from the Bush administration. The question often asked is: Is the meltdown delayed or not coming at all? Most economists know the real question is "how much negative impact does the Fed have?"
Why so cynical? Because corrections happen within the context of an open, free market. The Fed can guess the price of money no better than they can guess the market price for goose eggs. When you fix the price low enough, demand cannot be satisfied. With normal goods, that means a shortage. With money, it just means printing more.
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