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0% interest rates are too high

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  • #1

    0% interest rates are too high

    Can an interest rate of zero be too high? Unfortunately, yes. A new analysis by Goldman Sachs (GS) concludes that the Federal Reserve's cut in the federal funds rate to a record low of zero to 0.25% on Dec. 16 isn't going to be nearly enough to get the economy going again. The report says the Fed would need to reduce the federal funds rate to negative 6% by the end of 2010 to supply the needed amount of monetary stimulus.

    The problem: It's literally impossible to cut interest rates below zero. As a result, "we are entering a world with interest rates that are far too high for the economy's good," Goldman Chief U.S. Economist Jan Hatzius wrote in a Jan. 16 research note.

    That's a big negative for a U.S. economy that's already in a deep slump, with retail sales, industrial production, and exports all plummeting. Citigroup (C), Bank of America (BAC), General Motors (GM), and Chrysler, among others, are struggling to keep their heads above water. Circuit City, the second-biggest U.S. electronics retailer, announced on Jan. 16 that it was going out of business and closing all its stores by the end of March. Meanwhile, homebuilders like Lennar (LEN) and D.R. Horton (DHI) are getting squeezed by a record decline in home prices...

    Rates: When Zero Is Way Too High - BusinessWeek
    Tags: None
  • #2
    DH and I were casually chatting about our next car. I told him maybe we'd need to learn Cuban style auto mechanics as there may not exist a next car to be bought.

    Edit: I made the above remark before reading the article, the opening of which caused instant adrenaline flow: " Washington needs to engender more inflation so "real" rates turn substantially negative." Oh my god.
    "There is some ontological doubt as to whether it may even be possible in principle to nail down these things in the universe we're given to study." --text msg from my kid

    "It is easier to build strong children than to repair broken men." --Frederick Douglass

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    • #3
      Yeah, I read this article earlier from elsewhere. Quite the sensational story, but sadly... it's also possible. On the bright side, this is something that I believe Bernanke and Paulson is well-aware of. That's why they've already mentioned about other options that they're entertaining when they first dropped the rate down to 0%.

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      • #4
        Scary stuff and the really scary part is that the guys in charge don't really know how to fix it!

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        • #5
          Interesting read, but very concerning.

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