Tuesday, December 16, 2008

Zero Interest Rate Policy

If there is any doubt the United States has blown itself into one giant bubble economy, supported only by debt - not jobs - one only has to look as far as the inter-bank lending rate reduction announced today by the US Federal Reserve. The United States has reduced the overnight lending rate again. But this time they agreed to set a RANGE policy (this is new territory, people) of 0% to .25%. We have now officially entered ZIRP, or Zero Interest Rate Policy.

The US is now in a balancing act. To discover what happens if we slip, go do some research on Japan's lost era. They tried zero interest rates when their economy crashed in the 1990s. ZIRP didn't work out very well for them. As you consider this, it would be mindful to also remember that Japan was not the holder of the world's reserve currency at the time.

The Fed's outlook today maintained that the economy will struggle for a sustained period. Yet, despite the bleak outlook, and in a twist to this story, if you are financially secure, or you are a solvent bank, you can now practically get (or borrow) money for nothing.

2 comments:

Aunt Bea said...

Wonder if it's time to refinance my house... maybe in another three months they'll PAY me to take my property?

Sigh. Why do highly paid and highly placed folk always do something like this - and then insist that it is new and cannot fail, even though it has been done before and HAS failed? Do they honestly believe that they can be smarter or better or more swift, or are they just covering their rears, planning to be long gone when this house of cards finally collapses?

TG my credit is primo... and everything is almost paid off...

Brinson / Barrington said...

If you're planning to stay in your home, then yes, refinance. Just make sure the numbers work for you first, and that you will make the appropriate return on your refi investment over the long term. That is the best anyone can do unless you are involved in a Ponzi scheme. ;)

As to why this is all happening...well, some say greed, some say apathy, and some say it was engineered (as in planned). We'd venture to say a little of all of those motivations are at play here and now.

The best metaphor is, "Bread and Circus." As you put it, they'll be long gone.....