You know by now that the Federal reserve has moved the country as close as it can to Zero interest rates. The assumption is that zero interest rates will motivate the economy and leave more money in your pocket.
There is a huge problem. Zero interest rates mean that no one is making any money on their money or your money.
You give your money to the insurance company to cover any unexpected healthcare costs. The insurance company puts your money into investments which will give a return so that a. they can cover their costs, b. they can pay your medical bills, and c. pay their stockholders for investing in them (if they are a shareholder-owned company). If there is zero interest rates, they are not making any money on your money.There is only a few ways to make money a. cut services, b. reduce reimbursements to providers, c. raise their rates which is why healthcare rates rose 9% in an economy with zero growth.
This scenario is what is driving banks to charge more fees. They are not making any interest (or a very low rate of interest) on your deposits so they have to find other ways to pay their costs.
Some will argue you have to control interest rates or you have inflation. Actually supply and demand drives interest inflation more than interest rates. If you only have 4 widgets and there are 3 buyers, the price of widgets stay low; if you have 4 widgets and 10 buyers you can raise the price because the demand is outstripping the supply. While it is true that interest rates are a "pass along" cost, they are also a "pass along" engine in the economy. Retirees today who are seeing less than a 1% return on their certificates of deposit are not spending money to encourage the local economy.
My prediction: the debate about how the Federal Reserve is managing the economy is going to heat up a lot in the next 12 months.
There is a huge problem. Zero interest rates mean that no one is making any money on their money or your money.
You give your money to the insurance company to cover any unexpected healthcare costs. The insurance company puts your money into investments which will give a return so that a. they can cover their costs, b. they can pay your medical bills, and c. pay their stockholders for investing in them (if they are a shareholder-owned company). If there is zero interest rates, they are not making any money on your money.There is only a few ways to make money a. cut services, b. reduce reimbursements to providers, c. raise their rates which is why healthcare rates rose 9% in an economy with zero growth.
This scenario is what is driving banks to charge more fees. They are not making any interest (or a very low rate of interest) on your deposits so they have to find other ways to pay their costs.
Some will argue you have to control interest rates or you have inflation. Actually supply and demand drives interest inflation more than interest rates. If you only have 4 widgets and there are 3 buyers, the price of widgets stay low; if you have 4 widgets and 10 buyers you can raise the price because the demand is outstripping the supply. While it is true that interest rates are a "pass along" cost, they are also a "pass along" engine in the economy. Retirees today who are seeing less than a 1% return on their certificates of deposit are not spending money to encourage the local economy.
My prediction: the debate about how the Federal Reserve is managing the economy is going to heat up a lot in the next 12 months.
It's way complicated. Way. The overarching fear of people with tons of cash, like my friend who sold his company for 50 million, is inflation. He has predicted since the 08 election that Obama would allow inflation to run wild, making his 50 worth a mere 45 or something devastating like that, dooming him to roam the hiways picking up cans. The feds have mashed the interest rates down to try to stimulate people to borrow since it cost's little to do so. But, lenders have done little to approve small borrowers, and big borrowers have ask for little of it either as they are sitting on record stashes and are more likely to buy their own stock and source offshore than order machinery for the shop. Those banks not making money on interest don't need any tears, their profit is not on the interest rate of the loan but on the spread over what they pay on deposit, they do just fine on the spread, and the other charges, which combined are at record levels.
ReplyDeleteAnd, there are way more other complications going on to keep interest rates down, way, just one is China continues to buy our bonds, maintaing the abundance of supply to the buyer (US gov.), if they would stop buying at these rates, rates would shoot up to bring in replacement buyers, and those insurance companies profits would soar higher than the very healthy rates they are at now.
Sorry I can't get to Seattle, would be interesting to attend. By the way, more scientist agree with the science of global warming 98%+ than do with Newtons law of gravity and motion. The trick here is true scientist educated and active in the field they pontificate in, not TV weathermen, PR firms, oil men.
Cheers.
YF, Thanks for reading. I think you have highlighted a number of other issues here which I forgot to point out.
ReplyDeletePreachersan,
ReplyDeleteThe banks took in in the shorts when that bad paper they bought from HSBC, Country-Wide, and the others went bad.
All this is about is the Fed allowing then time to recoup their loses.
Sarge
Sarge:
ReplyDeleteHow about the Fed allowing us savers to recoup our losses!
Whit, That is a good idea... and you seniors vote too...
ReplyDeleteThe Fed doesn't have any say about their fee structure.
ReplyDeleteGood point, and true. Interest rates are also down to pump up stocks and Wall St.
ReplyDelete