interest rates are a problem.
when you have next to zero rates you are encouraging consumption and as someone above me said, devaluing savings. Try to open a CD now and tell me what kind of rates youre getting.
The fed has 3 tools at its disposal. Reserve requirements (imposing capital requirements on banks), setting the federal funds rate (which determines the rate at which banks can borrow from the fed) , and open market operations (the purchase or sale of government bonds).
A great portion of the problem in the fractional reserve system is that with a relatively intertwined corporate banking system and the federal reserve, you get too big to fail banks.
These banks care less about capital requirements when the federal funds rate is low, because they can then cheaply borrow money from the fed. See how easily paulson and geithner crossed between major investment banks and government positions and you will see the nepitism involved in this situation.
Purchasing government bonds in essence is akin to printing money.
These are the monetary tools to “stimulate to economy” . Theoretically, these are supposed to work in tandem with fiscal policy such as reduced taxes, or increased government expenditures to grow aggregate demand. This keynesian model assumes however that dollars will have a perfect velocity and transfer from the government/fed to intermediate lenders, then to main street. The current problem, evidenced by the TARP bailout is that these lenders (the banks) are shoring up their balance sheets and cash to compensate from over hedging in bad investments primarily driven by the same monetary policies of low interest rates and low capital requirements. Thus, businesses are not getting loans, and if they are it is at very high interest rates which make growth and increasing employment in the private sector unprofitable for the most part.
A real world example is my best friends step dad, a doctor who owns his own practice. He has impeccable business credit and was refused loans by major banks in my area. Not until a friend of his got in contact with the president of the bank did he get his loan. Extrapolate that out into the whole economy. Then you have the climate of uncertainty which prevails regarding government laws on healthcare requirements, tax rates on s-corporations and individuals such as doctors, dentists etc that have their own practice and they simply will not hire because of feared induced costs or fines. A great portion of the GDP growth was not real growth per se, but simply cost cutting measures of reducing the payrolls and working the remaining employees harder.
We are running into a similar situation as Japan where despite the increase in monetary supply, inflation is a long term concern, but deflation is a very worriesome short term concern. Simply put, with our budget exceedences combined with more fiscal stimulus, the dollar is losing value, combined with low rates of interest…peoples savings are being wiped out.
The ramifications will most likely excacerbate the income gap in the future. Compare purchasing power parity earlier in the 20th century to now. When the value of the dollar is falling people that rely on lesser income can purchase less goods with their money. Couple that with their meager savings being eroded and you have a real problem.
Certain REITS are using the period of extremely low interest rates to purchase prime property, real tangible assets being sold at fire sale prices. This is common among wealther individuals and entities that have the disposable income to do this. When inflation does finally kick off again, they will profit ahead of it and leave a great majority of the populace behind in the dust. They are not evil for doing this, they are simply reacting to the nonsense imposed by washington and the fed.
The chinese own so many dollars that they have a vested interest in keeping it afloat to a degree. A strong dollar would be good for the american consumer and the global economy. Most ideas to stimulate the economy are fairly farcical and short sighted on both ends of the politcal spectrum as well. Sure cutting taxes would help, but we have a spending problem from the government first and foremost. A great deal of that comes from our lovely military industrial complex and the no bid contracts within that. This is rapidly becoming a nation of serfs and corporate fascist kings, and the interest rate is directly intertwined within that.