Skip to comments.Keeping Rates Low Until 2014?
Posted on 01/27/2012 1:01:48 PM PST by Razzz42
While the first reaction is for gold to rally and the pundits to come screaming out of the weeds yelling
its inflationary, the harsh reality of this statement is actually DEFLATIONARY and not INFLATIONARY.
The assumption is that the Fed will keep money cheap and that will mean more inflation. However, this
is actually an international demonstration of pure insanity the attempt to keep applying the same
methods and expecting a different result than what was achieved in the past or in Japan. Those
prognosticating INFLATION will be left behind just watching as has been the case all along. They are
actually agreeing with this brain-dead reasoning that keeping rates low will magically inspire people to
borrow more and thus expand the economy. This theory is predicated upon the PRESUMPTION that the
banks will lend and people will be inspired to borrow. Both beliefs have utterly failed.
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Lets set the record straight and send this to EVERY politician around the world. This policy is once again
INDIRECT and presumes that the banks will even lend money cheaply and as easily as they did before.
The inflationists as usual are only looking at one side of the coin what the Fed is charging. Above is the
Prime Interest Rate that banks charged THEIR VERY BEST customers. What has taken place is that while
the Fed has lowered rates to virtually zero and deposits on 3 year CDs pay generally 0.7%, the banks
have NOT lowered the rates they charge and they are marking the largest profit margin (spread) in
history. The prime rate has NOT declined in proportion to the Feds lowering of interest rates. Banks are
only interested in making as much as they can for as long as they can. The idea that by the Fed keeping
rates LOW into 2014 will (1) succeed in stimulating anything, and (2) be inflationary, are just pipe
dreams. There is no evidence that such a policy will work or ever has worked in the past. Capital has lost
its value and as long as the Fed keeps rates as absurdly low as they are, they will ENSURE there will be
absolutely no recovery on a sustainable basis. Capital will be attracted to stocks as time passes as
dividends will offer far better return than banks aside from capital appreciation.
Nonetheless, for now, keeping rates excessively low will NEITHER create inflation nor stimulate the
economy. Look for yields in corporate shares, not banks. Of course you will always need to have liquid
assets. However, forget leaving cash at banks. Look elsewhere for yield. When enough cash leaves the
banks, we will at least see competition and rising interest rates. Until that takes place, there is no such
thing as a standard recovery. Lower rates are indicative of low demand. Interest rates rise with
economic booms and decline with recessions. But as usual, the Fed is only concerned about saving the
banks, not the country nor the people. Low rates are another way to bailout the banks.
—The inflationists as usual are only looking at one side of the coin what the Fed is charging. —
The inflationists are looking at the incentive being given governments to print more money. This will play into it - eventually.
Every inflationist I respect has said hyperinflation will come, but it will be preceded by deflation.
There is no definitive definition of inflation. So you can talk about signals and indications but it is hard to find the turning point when deflation ends and inflation begins and the case for stag-flation could be made just about now as food price on the shelf rise but RE continues downward.
As far as printing money...what if no one wants it?
He is also correct that the Fed's policies are destroying savers. Saving a portion of our wages forms the capital that banks lend to businesses and which creates economic growth.
The Fed's policy of increasing the money supply by lowering interest rates has always been destructive to the economy. It spurs false booms which always end in recessions during which most of the gains are lost.
I disagree, Razzz. The Austrians have the definitive definition of inflation: it is any increase in the money supply. That increase is almost always accompanied by interest rate reductions to spur borrowers to put the new money into circulation.
Deflation is a reduction in the money supply usually [but not always] caused by the Fed's having raised interest rates tamping down the origination of loans and therefore the creation of new money.
it is hard to find the turning point when deflation ends and inflation begins
If you're referring to inflation/deflation as changes in the general price level, it is hard because a general price level is as meaningless and difficult to determine as a global temperature.
Increases in the circulating money supply will result in price increases. They may be disguised, though, because an item that might have dropped in price because of technological improvements in production,say, might remain the same. 0% change, but inflation nonetheless.
You can’t use ‘almost’ or ‘not always’ or maybe or sometimes in a definitive definition, that why you have to give your meaning before discussing inflation/deflation.
Australian economics says if you pump in money the economy with grow with inflation, hasn’t happened here the US. People don’t want the money (less loans) and hoard what they have, the Federal Reserve can inflate the money supply all they want but they can’t force people to spend.
Usually ‘stagflation’ is a name given when assets are falling in price and commodities are going up in price.
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