Stupid Question: Where do we go once the interest rate is cut to ZERO?

[PassingFair]

Inflation MUST follow, right?

Or what?

:shrug:

[xchrom]

1. they are in the process of taking away your ability to borrow. that is what's next. nt

[thereismore]

3. True, credit companies are cutting credit lines. This will further slow down retail. nt

[thereismore]

2. I guess they will just start printing money after that. (=big time inflation) nt

[marketcrazy1]

4. quantitative easing

ala Japan... where the fed buys treasuries on the open market ( long end of the curve ) to keep rates low ( mortgage,retail lending ) worked great for Japan!! (NOT) gave them the "lost decade" of ZERO economic growth!! look at their EFF rate now .3 percent!! thats right LESS than 1/2 of 1 percent! will it help us like it did them???

[PassingFair]

5. So...no inflation...

just stagnation?

Or depression.

Japan still had the US to buy their products.

Who will buy...whatever it is we still have to sell?

[TreasonousBastard]

6. To hell in a handbasket? Or, look up what happened to...

Japan after they reduced interest rates to around zero.

It worked out there, but they didn't have the huge military budget or trade deficit.

[PassingFair]

7. They also had higher household savings and some place...

to sell their stuff to.

Did they have employment?

[TreasonousBastard]

11. I believe they had full employment at the time, but...

a lot of that was due to monstrously large public works budgets.

They built a lot of bridges to nowhere.

[PassingFair]

12. As long as I can keep a roof over our heads...

and (hopefully) put my kids through college...

I will be content.

Oh, we'll need health care, too.

We have a lot of bridge repair to do
before we start building new ones to
nowhere.

[progressive_realist]

20. And fast trains to everywhere.

I wouldn't mind those.

[Citizen Number 9]

8. Inflation?

Isn't inflation essentially too much money chasing too few goods and services?

I don't think we have that right now. Everyone does remember that we are in a Credit Crisis, don't they?

That would seem to be just the opposite.

[PassingFair]

9. But once they hit 0, don't we have no where to go but up?

I'm not being facetious.

I am just basically clueless.

:)

[bananas]

13. No, you can have negative interest rates (as Japan did)

http://www.google.com/search?q=japan+negative+interest

Results 1 - 10 of about 484,000 for japan negative interest. (0.15 seconds)
Search Results

PM - Japanese banks charging negative interest rates
Jul 2, 2003 ... The Reserve Banks decision to keep official interest rates on hold as we reported at the start of the program leaves the cash rate at 4 75% ...
www.abc.net.au/pm/content/2003/s893425.htm - 17k - Cached - Similar pages

INTERNATIONAL BUSINESS; Zen Banking: Japan's Negative Interest ...
But they have: some interest rates are now dancing into negative territory. This week, investors have bought short-term Japanese Government bills that have ...
query.nytimes.com/gst/fullpage.html?res= 9C01E7D9153EF934A35752C1A96E958260 - 43k - Cached - Similar pages

Is America's negative interest rate just like Japan's in 1998? Posted Jan 30th 2008 7:17PM by Peter Cohan Filed under: Market matters, Japan, Economic data, ...
www.bloggingstocks.com/2008/01/30/is-americas-negative-interest-rate-just- like-japans-in-1998/ - 64k - Cached - Similar pages

Negative Interest Rates under the Quantitative Monetary Easing Policy in Japan: The Mechanism of Negative Yen Funding Costs in the FX Swap Market * ...
www.boj.or.jp/en/type/ronbun/ron/wps/wp04e08.htm - 12k - Cached - Similar pages

Japanese banks hit with negative interest rates - Nov. 6, 1998
Nov 6, 1998 ... Western banks are charging Japanese banks for the privilege of holding their yen deposits, in what one economist said was the ...
money.cnn.com/1998/11/06/economy/japan_bank/ - 22k - Cached - Similar pages

<snip>

[PassingFair]

14. How badly does the average consumer get screwed in THIS scenario!

snip> The second example is Japan, which has had negative interest rates in the international markets intermittently since 1998. For most of this time, these were merely negative nominal rates, possible because the Japanese economy has been in deflation through this time as well. If you are borrowing at -1% and your salary contracts at -2%, the real cost of borrowing is still a positive 1%.

However, on January 24, 2003, normal Japanese domestic interest rates went negative. Banks lent money on Friday night and accepted back a smaller amount on Monday morning. Why would they do this? Presumably to reduce their Yen exposure at a time when confidence in the Japanese economy, and the Japanese banking system in particular, are very low. A total of about 15 billion yen ($127 million) was traded in that weekend at a negative rate.

http://everything2.com/e2node/Negative%2520interest%2520rates

:scared:

[maple100]

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[Terry in Austin]

28. The Fed and interest rates

The rate "set" by the Fed is the rate at which banks can borrow reserve money from each other in order to keep their reserves at exactly the legally-required ten percent.

The Fed actually just picks the rate as a target and then adjusts the supply of base money in such a way that the market for reserve loans among banks converges on that target rate. If the Fed wants to lower the rate, it creates more base money, usually by buying US Treasury securities from the public. The increase in money supply makes it "cheaper," so the interest rate goes down. To raise the rate, the process runs in reverse. The Fed refers to this process as "open market operations."

All this lending among banks doesn't have any direct bearing on what we think of as loans, to build houses or buy cars or whatever. The rate for these starts with the prime rate, which is the rate banks will lend at for their most credit-worthy corporate customers. It's basically a consensus among the big banks as to what the market will bear. It's currently at about 2%.

The banks are looking to lend profitably at an acceptable risk level, and will do so -- or not -- regardless of how cheap the Fed makes reserve money. In fact, the less a bank lends, the less it "dilutes" its loans-to-reserves ratio, and therefore the less it needs to go out for more reserve money.

A little bit of http://wfhummel.cnchost.com/moneybasics.html">background:

"Reserve money," aka "base money" is money on deposit at the Fed. Banks are required to have ten percent of their assets in reserve, either cash in the vault or deposited at the Fed. Deposits there earn no interest, so banks like to keep this amount to a minimum.

Reserve money is created by the Fed, basically out of thin air. When it buys a US Treasury bond from someone, it simply credits the seller's account for the amount. This is known as "monetizing the debt."

Banks also create money, aka "bank money." There's roughly nine times more bank money than base money. When a bank lends you twenty grand for a car, it simply credits your account with that figure. Type-ity type, a two and some zeroes; that's it, just as long as the total amount of their loans don't exceed the reserve requirement. And they get to charge you interest.

[marketcrazy1]

10. the FEDS liquidity

measures to date are HIGHLY inflationary but this is being offset by MASSIVE asset and commodity deflation wich is ongoing.. this is all about attempting to avoid a deflationary depression, wether or not it will work has yet to be determined, if it does not, we crash HARD think DOW 4000! or lower! ( disaster ) if it works and credit stabilizes prices will begin to rise and the FED will need to start "draining the swamp" ( if they can ) this is a very dangerous game as it has never been tried quite this way. we have been in uncharted waters for some time.. cross your fingers and PRAY!!

[sendero]

26. We are in a deflationary period right now..

.... but many wonder that with all the bailouts whether we'll have to print so much money that inflation will result.

Most folks whose opinion I respect think that inflation a year or two down the road is a definite possibility.

[Warpy]

15. When all the monetarist bullshit is tried and failed

we will finally be able to resurrect and rehabilitate Keynes.

That's where we will go and it's likely how we will get there.

I would love to see the Chicago School of Economics razed and the ground sown with plutonium as a glowing reminder to coming generations not to buy the supply side bullshit, but I doubt we'll ever get that far.

Undoubtedly, Friedman will be resurrected and rehabilitated by coming generations and the whole mess will reoccur.

[westerebus]

16. Think of it this way.

Lend me $20. You only have $15. No problem, you can owe me the rest. Now I'll give you $5 back and you owe me $5 that makes $10. So I'll keep this $10 and we're even.

[PassingFair]

18. Haven't I seen this somewhere before?

[westerebus]

23. Abbot and Costello. n/t

[screembloodymurder]

22. I love it!

I'm using this at my next poker game.

[westerebus]

24. Please do.

It helps if you put $5 on the table first, then ask for the twenty.

[etharmon]

17. Stop the Economic Outrage

What happened to the World Economy was pure evil. What the few did to the many was wrong. It’s time to place the blame where it belongs and get angry. Go to www.stoptheoutrage,org and help us compile and put together the pieces of this puzzle. We are also working to write “The Peoples Amendment to HR 1424.” As one voice we can right the wrongs of the past to save our future.
In Solidarity,
Evvie Harmon
www.stoptheoutrage.org

[marketcrazy1]

19. I went to your link

and although I applaud your efforts I could not possibly support your petition as it is convoluted and vague and makes many unsupportable assumptions. there are so many flaws in this "plan" I cannot even begin to count them! ( I did read the whole thing ) something must be done and I am thrilled that you are at least trying to make your voice heard.. I suggest you do some further research on the problems in our financial system and rethink your petition.. I can see where you are going with it and some of it has merit however on the whole it lacks clarity. I apologies for sounding harsh or critical, please do not feel offended by this post.. again I applaud your efforts, that you are concerned enough to be a part of this effort speaks highly to your character, we need more people to get involved in this debate and no effort is wasted in making our elected representatives aware of our opinions. look here - http://www.FedUpUSA.org - this site has much useful info and links to like minded citizens who are outraged at what is happening in America.. you can learn alot from these guys!

[HamdenRice]

21. Sadly, no. Instead you might get a liquidity trap

That's what happened to Japan in the 90s and seems to be happening to us. Under such circumstances, moderate inflation would be a good thing, but it looks like it might not happen.

[notesdev]

25. "Quantitative Easing"

No kidding. That's actually what they're doing. Look it up to find out what that deliberately vague phrase means to folks like Ben Bernanke.

[roamer65]

29. Debt monetization...for which the buzzword is "Quantitative Easing".

The Federal Reserve is already converting mortgage paper, Treasury notes and bills into cash. Reflation is a very dangerous and risk laden tactic. If they don't "thread the needle", they will over shoot and we'll turn a deflationary depression into a hyperinflationary one.