January 20, 2009

Negative Interest Rates: Can they be serious?!

There's an absolutely mind-boggling article here which makes some of the most outrageous claims I have ever heard. I couldn't let these claims stand unchallenged, even if my voice is only a squeak.
The article claims that the current Federal Reserve interest rate of ZERO percent is not low enough. In fact, one report from Goldman Sachs actually says that the Fed needs to cut the interest rate to NEGATIVE 6 percent to provide the needed stimulus.
It gets better. The article goes on to claim that inflation will soon be zero percent. What it said next almost made me fall out of my chair:

The solution is obvious: The Fed needs to deliberately raise the rate of inflation — maybe not all the way to 6 percent, but significantly above zero.
One way to do that is to print lots of money. The Fed can create money from thin air by purchasing assets such as Treasuries and mortgage-backed securities and paying for them by crediting the seller with newly created reserves at the central bank.

As if this wasn't good enough to pass as the worst idea in history, the author goes on to explain more:

That way today's zero interest rates would be negative in inflation-adjusted terms and the economy would get the boost it needs. Fed rate-setters would need to swallow hard, since 99.99 percent of the time they try to quell inflation, not raise it. But most of the voters on the Federal Open Market Committee are aware that deflation can be an even greater nemesis than inflation.

Honestly, I am now speechless. Not only is this paragraph full of lies, it deliberately misleads people into thinking that the Fed fights inflation. The Fed is the SOLE CREATOR of inflation. What is there to do in the face of such blatant disregard for sound monetary policy? Can they really believe that inflation is not a problem? If they follow this policy, there is nothing stopping us from becoming the next Zimbabwe.


Marianne said...

All I can really do is tell people "the dollar is going to crash" and their ears perk up and they let me say my two cents. Usually all I get is a "hm" because they don't really understand economics, but maybe the more people I can get the idea across to, the better. I can't believe the writer of that article is really proposing that. I thought secret combinations were a little more...well...secret. I guess we're to the point where they don't even have to hide their evil intentions.

BEN said...

Well, I am not sure I could call them all outright evil. Certainly there are those among them that have less than pure intentions. But honestly, that is just what they have been taught. Those are the theories of mainstream economics for the most part. They are wrong, but that doesn't always mean they are evil.
As far as the dollar goes, there's no way to know WHEN it will happen. All we can tell is that the policies that they are pursuing will lead to it.