Saturday, December 20, 2008

Low Interest Rates DESTROY - Financial Sense Article

Article from Financial Sense that can be found here:
Low Interest rates DESTROY

by Ceri Shepherd, | December 17, 2008

Where do these Wall Street MBA,s and so called “economic experts” get their degrees from? A kinder surprise egg? A Christmas Cracker?
Dropping interest rates is never good it is always bad. It is the sign of a weak economy and it always leads to a weak currency. What does that do for wealth preservation? Import Costs? and eventually inflation?

Imagine Mr or Mrs Average on Main street earning an average wage and lets assume they have $10,000 a year that they can spend on a MORT = Death GAGE = Loan.

If interest rates are set at 10% they can afford $100,000 worth of death loan, if the wonderful, helpful, and above all caring central bank the privately owned Federal Reserve which is neither Federal or a Reserve “help” by lowering interest rates to 1% then with the same $10,000 they can now afford a $1,000,000 loan.

One very simple question? Would you rather for yourself, OR YOUR CHILDREN a $100,000 debt or would you rather if you, OR THEY were “helped” into $1,000,000 of debt? Over time you can attack and pay off the $100,000 debt it will be impossible to get out of the $1,000,000 debt, without hyperinflation.

The Federal Reserve now control you lock stock and barrel you have effectively become an indentured debt serf. A bank tenant in a highly leveraged property as the implicit leverage built into a $1,000,000 debt with $10,000 available to pay is vast. Any slight increase in interest rates for whatever reason and you are foreclosed. They hold and control your financial destiny.

This is the whole essence of the American Economy over the last 20 years a gradually decreasing interest rate that has led to a perpetual debt production machine. We now have insane and unsustainable levels of debt apparent in every aspect of the so called economy, Private, Corporate and Government.

What message does all this devaluation send to savers that highly unfashionable breed of people who put off current consumption for a future income stream and some financial security? When savers interest rates are now not only derisory but below the true inflation rate and have been for a considerable period of time. Saving is not only a virtue, it is very necessary to provide the capital for productive investment and work. Saving is now treated as a cardinal sin by Government, consumption is King, I guess next they will use the “Patriot Act” against savers in the name of “Homeland Security”, consume or you are a terrorist!

The only reason they dropped interest rates yesterday is to try and “stimulate the economy” with the production of NEW DEBT which they hope will then be spent in the economy. That is the only reason! THEY DESPERATLY NEED YOU IN MORE DEBT. It is like a prostitute dropping her price to hopefully attract more punters. You will hopefully take up this offer of new debt at the “attractive new low interest rate”. This new debt will be denominated in freshly produced new dollars and will therefore devalue the purchasing power of all the existing dollars whether physical or electronic already in circulation. Because of the inevitable currency depreciation everything that America now imports has become more expensive, but everything that America exports now becomes cheaper. However America imports a lot more than it exports, so it’s not a good trade.

My advice to Obama is to immediately close the fashionable MBA “production line” factories and university economic departments as they are frankly producing people who are not only clueless but dangerously clueless. The books they read and the curriculum followed is simply WRONG. It never made any logical sense and is on a daily basis being exposed for the rubbish it always was.

For example, We had the Greenspan “Tech boom” whereby web sites with no earnings whatsoever were achieving stratospheric valuations IT INEVITABLY BUST, IT WAS A SCAM so Greenspan panicked and dropped interest rates RATHER THAN TAKE THE PAIN.

So we then have a much bigger and destructive “housing boom” where houses were sold to anybody who was warm and breathing. Guess what? IT WENT BUST, IT WAS ANOTHER SCAM!. So now they drop interest rates again RATHER THAN TAKE THE PAIN, they are looking desperately for the next bubble to try and inflate.

This is called “modern” or “structured” Finance and Economics and you can actually pay to get a degree in this stuff. Bizarre? I would describe it as completely wacko; I mean you cannot make this stuff up. If printing money, and constantly dropping interest rates, as well as bailing out everybody was some kind of economic Nirvana. I suggest that every society in history would have done this? Many of them have and it always ends in the same predictable way RUINATION.

The mantra taught and repeated of perpetual debt production by always easing interest rates until you end at 0% , Leveraged balance sheets and constant deficit spending wrecks real economies and peoples lives. How much more mayhem and destruction needs to be wrought on what is left of the real economy until this fact becomes plainly obvious to all.