Posted on 06/26/2005 11:12:49 PM PDT by RWR8189
WASHINGTON, June 26 - Federal Reserve officials, who meet this week, are beginning to suspect that the perplexing decline in long-term interest rates is more than a temporary aberration.
The possibility has major implications for the economy, and it creates new puzzles for Fed officials on how they should respond.
On Thursday, the Fed is all but certain to raise the federal funds rate on overnight loans between banks by another quarter point, to 3.25 percent. That would be the ninth increase in the last year, and the central bank is expected to signal that it will continue to raise overnight rates at a "measured" pace.
But the real debate at the meeting is expected to be about the unexpected decline of long-term interest rates, which have kept mortgage rates at their lowest level in decades and fueled what many analysts fear is a bubble in housing prices.
Alan Greenspan, chairman of the Federal Reserve, said in February that the low long-term rates were a "conundrum" but might simply be a "short-term aberration."
But Mr. Greenspan and other senior officials are now suggesting that the change is more enduring. The debate is over why the change has occurred, and different theories lead to sharply disparate conclusions about the best way to respond.
"My sense is that people think this could be the new reality, that this could be fundamental, that it could be long-lasting," said Laurence H. Meyer, a former Fed governor and now vice chairman of Macroeconomic Advisers, a forecasting firm.
(Excerpt) Read more at nytimes.com ...
The US, being the predominant economy, does not import inflation or deflation from anywhere. We create these things and we export them in some measure. So long as the Chinese economy is expanding, it is soaking up our excess dollars. When that economy hits a wall, as is likely soon to happen with the general insolvency of Chinese banks, China will not be importing our excess dollars anymore and we will be stuck with them and will experience a sharp rise in prices throughout our economy. It gives one a bit of a sour taste to think that keeping prices down (except for housing and oil) depends on keeping the main commie economie booming.
If you came up with some actual numbers and percentages then we can judge. Otherwise, you're just stirring up fear and prejudice by mentioning China.
Governments are never able to manipulate markets sucessfully, unless the goal is purely disruption. The political horizon is always much shorter than than the economic one. When the Fed twiddles a rate the results of the twiddling don't show up economically for perhaps three quarters or maybe not for a couple of years. The functionaries trying to make "corrections" need results in six months or less.
It is like a large ship at sea piloted by an advertising executive. You put the helm over and nothing happens immediately. You put it over a bit more and still the vessel appears to be maintaining a straight course so you spin the wheel over hard to make it do something. Then the ship begins slowly to turn. When it is facing the proper direction you center the rudder in momentary satisfaction but the damn thing keeps turning back so you panic a bit and turn back the other way and then turn back some more, etc. and you have the great ship running in ever wilder "S" curves until it hits the reef.
I think someone should point out to the Fed that the SUPPLY of long-term government bonds is "low", by historical standards.
This limited supply has the effect of keeping bond prices "high", by historical standards. And THIS has the effect of keeping long term interest rates "low", by historical standards.
If the Fed REALLY wanted higher long term rates, it could simply ask the Treasury to issue more long-term bonds. (Why that has NOT happened is a question for another day...)
Now...
Where do I go to pick up my "Nobel"?
Another factor is corporate debt. There isn't as much of that either. Corporations are flush with cash.
It's hard to disagree with a statement like that. The government's goal I believe is to make itself look useful, but when things go wrong as a result, blame someone else: Martha Stewart for example.
This econ major says that it is NOT a bad thing. It is a GOOD thing for the economy. People have a better opportunity for the Good Life when rates are low. When rates are high they are telling you that a major problem exists generally high inflation rates or lack of capital for investment.
Low rates does not necessarily negatively impact the lenders. They make their money on the spread between the money they borrow and the money they lend. Hence low rates could even mean their profits go up since there will be more loans granted.
In the short term, 1-3 yrs, you could easily get caught in one of the fluctuations. The market is also telling Mr. Greenspan to take his manipulation and @#$% it. It is not his job to protect people from "bubbles". If rates are low, higher prices will follow as the cost of capital is low. That's not a bubble. His job is to control inflation and provide adequate amounts of liquidity. Last time I checked inflation was in check, even with the higher prices of oil, and while there may be some overbuilding in real estate - let the market work it out.
It is not odd when you realize that the willingness of the Fed to increase rates indicates that it will not allow inflation to get out of control. Thus, investors are not demanding a large "inflation premium" to lend money and rates fall. This paradox is nothing new and can be observed frequently when rates are increased.
BTW increasing the rates is a sure way to attract MORE money to the country countrary to the foolish last sentence you quoted not less. And since foreign money does not come into this country as foreign currency it must purchase dollars which are already part of the Money Supply it is not a factor in inflation under a Floating Exchange Rate regime. The writer of this article gets a D in economics.
That statement is so wrong it is hard to no where to start.
But you can't seriously believe that having high interest rates HELP the middle class.
Care to explain how high interest rates (meaning high inflation) which lowers investment, lowers job creation, makes housing much more difficult to buy, makes financing of anything much more expensive, rations loans to the most credit-worthy etc. could help the middle class?
A tv that cost $1000 ten years ago costs about $300 now. A computer which costs $3000 ten years ago costs about $300 now. Your example is not that definitive.
After your first three sentences your analysis falls apart.
If oil futures are any indication, current prices are near peak. http://www.nymex.com/jsp/markets/lsco_fut_csf.jsp
Problem is, the strongly increasing prices are only in a few select regions. Where I'm at, prices (real estate) are in some cases declining.
Someone already did that this morning.
Long term I think this is not good.
The price of real estate across the country is rising in aggregate, and rapidly.Your area might be a good investment or it might be a relative backwater.
Your examples provide evidence that increasing efficiency and scale can lower the cost of production, and the results are shown in the market place.
You have failed to show what these items would of sold for in un-inflated dollars.
It does not promote savings when a quarter drops to a couple of cents, in 25 years or so. Inflation promotes borrowing, with the intention of paying back the loan with inflated, or less valuable money.
Inflation is a theoretic calculation using flexible yardsticks. Nothing is inflation proof or constant not the Mark, not the dollar not gold not oil not grain. The point I was making was that your candy example can be countered by those products whose prices have fallen. Your candy price was also in nominal dollars so it is hard to see what relevance your objection to my use of current dollar prices has to do otherwise only makes my point stronger. But within the last ten years inflation has been low, 2% or less, so the price of the $1000 tv would be maybe $230-40 in 1995 dollars and the computer the same.
Borrowing and profitting from inflation is only possible when the banks have not put an inflation premium in the interest rate. Hence only UNANTICIPATED inflation allows the borrower to profit. Those days were ended by the inflation of the 1970s and now the banks are fully protected.
Low interest rates hurt only the wealthy who may be trying to live off interest. The other 99% of the population are helped by them.
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