I want HIGHER interest rates. "Why, that is un-american" you (and almost anyone else) says. Now do I want to go back to early eighties 12-18% rates? No. But if things continue the way they are going thats where we'll be. We, as a nation, have been conditioned to think that as the Fed drops rates that economic bliss will follow. This time it may be different. Now while I will be the first to say that the phrase "this time it's different" is a misnomer and usually false, sometimes things are different because they are caused by different things ;).
First, as the Fed keeps lowering "interest" rates the dollars value declines and so more dollars are needed to buy something. This is known as inflation. This is what we have now. People hedge against inflation by buying tangible items such as oil, gold, grains, metals, etc. This increased demand drives up the prices of those basic items and also the items derived from those basic things (gasoline, jewelry, bread, steel, etc). So what we basically have now is inflation (and possibly a commodities bubble). Keeping inflation (and bubbles) in check has been the Fed's mantra for close to 30 yrs if not longer and by lowering interest rates further it's driving inflation higher. The Fed needs to keep interest rates level or even raise them 25bp (0.25%) to put a slowdown on the inflation we are all feeling at the pump and grocery store.
Second, as the Fed reduces rates, the Risk-Return equation gets skewed. A higher inflation rate means your real investment returns are less. This leads to more risk taking in that you chase a higher yield to help compensate for the higher inflation rate. Just what the average American needs now is MORE risk, volatility and the stomach ulcers that come with watching their portfolio rise and fall like the proverbial yo-yo. This skewing the the Risk-Return equation also hits the banks. With a low interest rate atmosphere combined with total fear of the unknown unkonwns (see link) lenders are NOT being compensated for their perceived risks.
It will only be a matter of time until we need to cap inflation, strengthen the dollar and return this country to prosperity and as it now stands about the only way to do that will be with some very tough love as in extremely high interest rates to compensate for risk and pop the inevitable bubbles. Or we could all go the way the politicians want us to think we should go and start being paid daily and running to the store to buy normal things before they double the next day (think German women with wheel barrows full of Marks running to the corner store to buy ONE loaf of bread in the 1920's). Of course there would be an upside too. Just think of being able to pay off your home with only one days pay. Your mortgage is priced in dollars isn't it? Maybe thats what all the overextended gamblers, oh I mean home owners, are banking on. :)
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