Interest rates

[danielf]

The fed has slashed interest rates from 3% to 2.25% down from 5.25% in September. .75% is a whopping reduction seeing that the base rate of 3% was quite low, and it leaves little room for further cuts. My economically challenged mind wonders how low interest rates can actually go? I've heard of negative interest, but I'm having a hard time imagining its ramifications.

Informed responses only please. This means that blaming Blair, Brown or Darling as well as references to 'poodle', and 'pc brigade' are off limits. If you cross the line, Mick will ban you*.

* That's a joke Mick, if you're wondering...

[BBKing]

The closer it gets to zero the less incentive people have to lend money to each other and more to invest in things like commodities, which are already sky-high. In other words, no, it's not a great idea. I don't think there's anything they can do.

[papa smurf]

saw something about this on the news last night ..aparently it can allso affect house prices . in the states house prices have doubled recently[in recent years] but in the uk prices have trippled, [ prices may plumet] and analists say what hurts the usa hurts the uk,also theres a hell of a lot of credit card debt out there ,and banks are gona want it back.

[Osem]

This particular bubble had to burst sooner or later and those with more than an ounce of common sense knew it. At the root of all this is 'confidence' - it's a tricky thing and sadly it often overcomes logic when it comes to finance. Politicians like Brown have been happy to take the kudos for a sound economy for years but it has been based on nothing of any substance. Of course they don't like bad news - they tend to bury their heads in the sand, with the result that we are all now going to pay for the madness in the housing and credit sectors which has been going on for the last few years. Reducing interest rates isn't going to change confidence and the fact that markets usually bounce after a major trauma has more to do with City speculation than faith in the fundamentals. I think we're all in for a rough ride but hopefully those whose actions drive the markets will exercise some responsibility sooner rather than later.

[danielf]

Originally Posted by BBKing

The closer it gets to zero the less incentive people have to lend money to each other and more to invest in things like commodities, which are already sky-high. In other words, no, it's not a great idea. I don't think there's anything they can do.

That's an interesting point. Presumably, it also means that it becomes attractive for lenders that operate globally to move funds to areas where interest rates are higher, thus lowering the amount of money available in the US economy?

[lostandconfused]

I think the economies of both the US and the UK are heading for a crash or if not a severe downturn. Anything that the government is doing now is just delaying this. We have had a long time of good fortune, with low interest rates and plenty of credit available, this cant go on forever and needs a market correction. The longer it is put off the worse it will become IMO

[Osem]

Originally Posted by danielf

That's an interesting point. Presumably, it also means that it becomes attractive for lenders that operate globally to move funds to areas where interest rates are higher, thus lowering the amount of money available in the US economy?

That's what being a currency dealer/speculator is all about. George Soros did it very profitably in relation to Sterling during the ERM crisis.

[Wicked_and_Crazy]

The issue the US will now have in the short term is that interest rates are now lower than the rate of inflation, therefore the incentive is to spend and not save. Given that he banks are reigning in on lending there will be no money to spend so prices will have to drop which will cause companies to make less money and jobs will be lost.

[Osem]

Even now it's being reported that false rumours concerning certain UK banks and the BoE are being circulated in an organised attempt to influence the markets. The result has been a major share price fall in one insitution apparently which triggered automatic share suspension. It's just this sort of thing that could bring the whole house of cards crashing down!

http://news.bbc.co.uk/1/hi/business/7304142.stm

[keithwalton]

The Japanese economy runs on really low interest rates and it survives just fine. (currently 0.5% has been 0% in the past)

From the consumers point of view low interest rates is an incentive to spend money, and borrow money you don't have and not to save it up for a rainy day. As you'll get very little return on your money.

Constant spending is good as long as it can be maintained. As spending means tax revenue, it also means jobs so people get paid better etc.

The west has alot to learn from the east on this front

[Osem]

The Japanese also have a very different cultural background and attitude which explains why a lot of things which go on there don't work here. Not that I'm saying we can't learn from them at all - I think we could learn quite a lot.

[Xaccers]

I thought they had low interest rates to try and stop the Japanese economy collapsing.
I seem to recall a few years ago several Japanese banks going under and a major financial problem for them.