Tuesday, July 8, 2014
Federal Reserve Interest Rate Goes to Zero. What it Means Now and Later
Federal Reserve Interest Rate Goes to Zero. What it Means Now and Later The Sky Might as Well Be Falling Up Lex Loeb Contributor Network . Zero interest rates are not going to make your 24 percent interest credit card rates go down necessarily. It is not necessarily going to give us the 1 or 2 percent mortgage. It did not exactly do any such things when it last happened in Japan. The Horrible thing about it is that it is not an over reaction by the fed. The United States economy practically ground to a halt. Trains are being parked. International markets shut down . These are weird times. For the Federal Reserve to start pretending it is heroic one only has to recall how it started with the no bank too big to fail doctrine and ended with some banks are big and good to fail and then flipped back after Lehman went under causing the investing public to have a panic attack. Then the Fed and the Treasury joined the panic and congress joined in to. By the time banks like Indy Mac and Washington Mutual were failing because of unnecessary runs, the damage had already been done, That is how we got here and now to zero interest rates. Don't get too excited. Japan had low interest rates and we all know they stopped saving their cash at home and started creating US government debt with those funds in the trillions of yen dollars because getting zero interest on one's savings money is like thowing money away. It is not as if prices did not remain rather high in supposedly "deflationary japan". Americans are not like the Japanese. We are not very well disiplined as a people. When interests fall we go into an other bubble mode immediately. There is no doubt that when mortage and other retail interest rates do or might fall to a low level , say under 3% , that the US economy will flip back into over drive and the bubble will be bigger than ever. We don't see 10 more 5000 room colosal casinos getting built in Vegas in this country because the American people are adverse to gambling risk. It is true that the Chinese maybe bigger risk takers yet than Americans judging from long term charts showing volatility in the Hong Kong Market and some initial data from vegas style casinos on the rise in Macow. The first beneficiary of the zero interest rates are fed window participants who have access to that kind of loan. It is hard to imagine banks not getting a little greedy with money like that available. Imagine borrowing money for nothing and lending it out between 5 and 32% on the very worst of credit card deals., The problem is that banks are instantly liquid with such low rates that they might as well go out on a buying spree in depressed equities themselves before bothering to lend out the cash at all. It is a total give away for someone. Not a bad idea to own banks and broker banks with access to those funds. If Morgan Stanley is the last remaining brokerage bank or it and GS are just imagine their sudden power as instant trillionaires in a market of distressed and depressed equities. That says that it is unlikely for zero interest rates to last very long. Things have come to a stop or a crawl with little momentum but that can really change quickly. Foreigners are not going to want to hold us debt in any way shape or form it it yields nothing. The dollars selling has begun. The federal reserve might think this is the better alternative. Dollars need to be spent not sold to get the economy functioning again. That could be the disparity. One investor who has a great long term record succenly got into export goods related to defense and aerospace companies . I sense that this is the reason why. Foreigners will probably decide it is better to spend their dollars than to just go out and make a currency swap and end up with what ever foreign country they put the cash into local currency where interest rates are also likely to decline and then there is reason to devalue agains the devaluing dollar or be unable to compete with US commerical interests. There can be a lag time. It is a grand experiment but there are lots of variables. A war breaks out somewhere on earth again like in Georgia or in India or Pakistan and the dollar will just go on surging in spite of zero interest rates. Gold is impractical for most people because gold hoarders do not tend to mint coins that are generally affordible. I looked in the window of a pawn shop with gold coins today and immediately saw the price shock problem. Small $800 coins just are not going to bring gold back as the medium of exchange. If an experiment was set up with a shopping cart filled with 27,000 dollars bills which I found the price of a 1000 gram pure gold bar to be on ebay and another one with that single bar of gold in it. Most Shoppers would chose the loose bills. The space between the buy and sell price for spot gold at the pawn shop is so big that it alone would scare a number of people away from the gold money game. Gold is dominated by dealers and the paper us dollar is dominated by the retail class. Oil may reinflate because of OPEC supply production cuts. If the dollar really falls hard and the opec rate cut occurs say hello to the worst economy imaginable. .