Tuesday, December 16, 2008

What Does Zero Percent Interest Mean to You?

The U.S. Federal Reserve set their key interest rate to "a range between 0 and .25%" today. What will that mean for the average person in the U.S.?

US Federal Reserve 13390

It may mean the interest you might be paying on any credit card balances will go down. There is a small chance your mortgage payment will drop slightly. If you own or work for a business that requires loans at certain times, that cost of borrowing money may be reduced.

Do not count on any of that happening soon, if ever.

Remember, after the U.S. government bailed out many major banks this past fall those banks still refused to loan money to all but those that really do not need loans. Banks and credit card firms do not have to do anything they are afraid to do, even if the U.S. taxpayer is giving some of them the money required to stay in business. There may be a slight improvement in that situation when the Federal Reserve decides on new rules for credit card issuers on Thursday.

Credit card firms recently rolled out rather large interest rate increases on credit card balances. They are unlikely to reduce those rates anytime soon. You can also expect them to keep reducing credit limits.

If you really need a car and try to get a loan to buy that car, new or used, you still probably will not qualify for that loan. Banks simply do not want any more loans on their already cooked books. They are still afraid that many loans will not be paid back.

Businesses that need loans to expand will still not be able to get those loans. Therefore you can expect layoffs and job losses to continue where you work.

What you can expect is that prices at the gas stations, grocery stores, and many other places will stay low or even go lower. Zero interest-rate policy or Zirp usually puts the brakes on price inflation. However, low, low prices is not necessarily a good thing. It means that the U.S. economy will take longer to recover. That would mean you or someone you know that really needs to get a job will have to wait longer for that important phone call.

U.S. firms and wealthy investors have no incentive to make new investments or hire people if those actions will not result in greater profits. Foreign firms and other countries, whether you like them or not, may decide to invest elsewhere if the return on their investments in the U.S. is 0%. Foreign investment may be our only hope if so many U.S. financial firms remain on the brink of collapse.

The Federal Reserve's move did stimulate the stock market today. Investors may think they are seeing a glimmer of hope that their stock portfolios will rebound. In all liklihood the hedge funds will just wait for this brief rally to sputter out and then return to selling in order to pay off their investors that want out. After all, it will be the common citizen that pays for Bernard Madoff's 50 billion dollar theft just like we were made to pay $4 per gallon for the oil speculator's profits this summer.

The only thing set to go up next year is the pay of all federal government workers, by an average of 3.9%.


Washington Post story
Government Central
Reuters article

1 comment:

TH Williams said...

That's quite a mighty reply there, Anonymous

I agree with many of your major points. I also agree that ordinary consumers hold the power to change the current situation. Consumer spending constitutes 70% of the U.S. economy. So decisions made by ordinary consumers can have an impact on almost 3/4 of what goes on.

The richest 1% have plainly made some of the worst decisions recently. Just look at Lehman Brothers and Bernard Madoff. And they impose the consequences on everyone by going to the government for a bailout.

It may take time and some sort of awakening by Obama or else a whole lot of regular people making new choices in their lives. I'm not waiting for the former and responsible for very little of the latter but I will always shop local and avoid the pseudo-culture pawned off on us by Hollywood and Park Avenue types.

My Pontiac runs just fine and I gave away my TV sets quite some time ago. The real world has enough characters and so-called reality shows to satisfy anyone's curiosity. Once you turn off the boob tube you become a more critical thinker as well as more in tune with the people around you, in my humble opinion.