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Edited on Fri Jan-27-06 01:36 PM by Yavin4
Normally, when things get slow, the Fed cuts interest rates to boost consumption. Increased consumption leads to more hiring because producers need to re-stock and re-build inventory to meet the demand. This, in turn leads to more consumption as the newly hired workers get more money to buy more, etc. When hiring reaches a certain level, the Fed raises interest rates to cool off the economy. That's how it's supposed to work.
It's not working this time because the economy never saw the increased hiring. Due to globalization, offshoring, and outsourcing, the job growth following a huge consumption boom happened overseas, mostly in India and China. These nations manufacture the products and design the information technology processes now. The only jobs that this latest consumption boom created were the low-level, temporary customer service like jobs.
For example, homeowners took advantage of the low rates by taking out equity from their homes for say a home improvement project. They'd buy the materials at Home Depot. Home Depot would then have to order more products to re-fill inventories.
For example, the factory making hammers would hire more workers because Home Depot has had a run on hammers. However, in this last cycle, the factory making the Home Depot hammers is in China, and the only domestic job that the low interest rates created was for the Home Depot customer service rep and cashier that rung up the purchase.
Now, the Fed has to raise interest rates because inflation is over-heating the economy, but there's been no big job growth that normally follows lowered interest rates. In sum, we entered into a recession in 2001, from which we never really recovered. All that's happened to our economy since 2001 is that whole lot people borrowed a whole lot of money at very low rates, spent it, and created jobs overseas.
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