Interest rates go lower, committing economic suicide? (legal, Harkin, companies)

[pghquest]

Isnt this helping cause part of our problems? Lower cost = higher borrowing

Fed cuts interest rate 3/4 of a point - Yahoo! News (broken link)

The surprise reduction in the federal funds rate from 4.25 down to 3.5 percent marked the biggest one-day rate move by the central bank since it cuts its discount rate by a full percentage point in December 1991, a period when the country was struggling to get out of a recession.

[evilnewbie]

The more people are in debt, the better the economy because the people in debt are paying "interest" to foreign and domestic investors of the debt. I think I posted a thread about this. Our economy is basically a debt game. Money is sometimes made from stuff that has no physical value (i.e. labor) and paid in some form (i.e. interest). With galls me is that interest rates drop but guess what? Student interest rates are still fixed at 6.8%... talk about legalized loan sharking..

[Marodi]

Well, it increases money supply, thus causing an increase in proper borrowing which will allow banks that are dieing lend out some money to make a little bit more profit. Not to mention if I recall correctly, that rate also reduces the amount in which is charged for lending between banks.

Our problem right now isn't neccessarily inflation as much as it is slowing growth, thus making rate cuts the best choice.

[KantLockeMeIn]

Originally Posted by Marodi

Well, it increases money supply, thus causing an increase in proper borrowing which will allow banks that are dieing lend out some money to make a little bit more profit. Not to mention if I recall correctly, that rate also reduces the amount in which is charged for lending between banks.

Our problem right now isn't neccessarily inflation as much as it is slowing growth, thus making rate cuts the best choice.

If you believe the new CPI numbers are real, then yes. But from talking to many people the actual inflation rate can't be 2-3%... it's gotta be closer to 5-6% which is a much bigger deal.

[Lincolnian]

Originally Posted by twojciac

If you believe the new CPI numbers are real, then yes. But from talking to many people the actual inflation rate can't be 2-3%... it's gotta be closer to 5-6% which is a much bigger deal.

True! For years we hear the inflation rate ex food and energy. The cost of food alone has increased substantially in the past 3 years if pure price increases are combined with package-size reductions.

Energy costs have risen substantially as well. The falling price of the dollar has especially negatively affected the cost of food and energy thus resulting in an inflated end cost with a deflated dollar. A double whammy!

Even Greenspan expressed recently that perhaps he was wrong in not considering food and energy in inflation figures.

[NewToCA]

Seems like the Consumer Price Index used to compute inflation includes food (item #7):

Frequently Asked Questions

[truthhurts]

Originally Posted by twojciac

If you believe the new CPI numbers are real, then yes. But from talking to many people the actual inflation rate can't be 2-3%... it's gotta be closer to 5-6% which is a much bigger deal.

Yea, but if the economy is slowing down, that means demand for goods, services, and worldwide demand for energy will slowdown as the US is the biggest consumer next to China. While inflation is a concern it is currently not a concern when we are headed into a recession, because it will take care of itself. We currently have a lending issue, that is the most pressing so lowering rates lowers the cost of capital, which makes it a lot easier for companies to continue operating businesses and employing workers.

A lot of stock market mavens prefer lower rates due strictly to the way wall street values companies. Lower rates leads to lower capital structures. The cost of capital weighs heavily in financial modeling and since coming up with a lot of these values is heavily tied to treasuries such as the 10yr the lower it goes the higher stocks will go.

The cost of capital is the reason Jimmy Cramer was yelling for a rate cut. It's the most important thing to stocks. If you lower the "hurdle rate" for companies to take on new projects they are more likely to take them on and create more value for shareholders, which is their sole responsibility as publicly traded companies.

Note-hurdle rate and cost of capital are synonomous *also note it makes companies less risky, because it lowers the rate on both equity and debt.

Last Example

A lower cost of capital plays heavily in determining value due to discounting cash flows back to present values, which is how most firmrs come up with a price value for a stock.

The lower the discount rate the higher the value.

hehe not sure if i'm way off topic, but as an investor i'm more concerned with them lowering rates than I am with inflation.

This is possibly part of the reason we had such a steep recovery. I can bet you Asia closes in the green tonight based on what our markets did today. Hell, did you notice Europe went green the minute the Fed announced the cut. I think we are due for another 25 to 50 basis points in anothter week, in fact i'd be surprised if we do not get it.

[Lincolnian]

You're right. However, the CPI has different ways it is reported. Greenspan frequently talked about inflation minus food and energy. He has stated recently that perhaps that was a mistake to discount the importance of food and energy.

The weighting of the individual factors is important too. Each administration has played with the way the weights work.

The fact of the matter is that savings account rates that pay less than 1 percent are below the annual rate of inflation. A condition that did not occur until the recent past.
For the unsophisticated saver they are losing their money as they save.

[NewToCA]

Savers in low paying savings accounts are guilty of accepting this situation, plenty of banks offer variable rate savings accounts paying at least 4%, some quite a bit greater.

I agree that many folks are taken advantage of in this economy, but significantly it is somewhat due to their own failures to actively manage their money.

[truthhurts]

Originally Posted by NewToCA

Savers in low paying savings accounts are guilty of accepting this situation, plenty of banks offer variable rate savings accounts paying at least 4%, some quite a bit greater.

I agree that many folks are taken advantage of in this economy, but significantly it is somewhat due to their own failures to actively manage their money.

You're 100% correct with the advent of the internet and new cheaper ways to bring bricks and mortar services to consumers, most online banks like ING Direct etc offer higher savings rates, because they are strictly automated and do not have the high cost associated with the free standing brick and mortar banks. Its amazing how many people lack so many financial skills that could keep them ahead of the crub. This is why we need to move our retirement from a pay as you go to a manage as you pay system. We need to give people the incentive to look out for themselves financially. If this ever were to happen i'd jump hard and heavy into the financial do it yourself publications business. Che-Ching! lol