Sense on Cents

Can you imagine putting money into a bank and agreeing to accept a minus 5% rate of interest? Well, the Federal Reserve believes the appropriate rate of interest for this economy is in fact -5%. The FT reports, “Fed Study Puts Ideal U.S. Interest Rate at -5%.”

The world is awash in a sea of debt. The debt is piled highest in Europe on a relative basis while in actual terms the debt in the United States outpaces all other parts of the world. As the deleveraging process continues, the demand for new money to spur growth is anemic. The paradox of thrift (excessive savings inhibits growth) is keeping our economy in a state of stagnation. The Fed and U.S. Treasury are utilizing all tools in their box to restructure debt and promote lending without risking default. Ultimately, all the Fed and Treasury programs will devalue the debt via inflation. Inflation, in which future dollars are worth less than current dollars, is akin to paying a negative rate of interest on money. (more…)