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June 30, 2005
Why are long term interest rates falling while short term rates are rising?
The Federal Open Market Committee, lead by Alan Greenspan, has been methodically ratcheting up the short term Fed funds rate for the past year. Today, the Fed increased the rate another 0.25%, to 3.25%, while stating that they intended to keep increasing it to keep inflation in check.
However, long term interest rates are right where they were one year ago when the Fed funds rate was only 1.00%. That's not how it usually works - as short term rates rise, long term rates come up as well.
Why are rates actually falling on long term Treasury bonds? As this article describes, it's "clearly without recent precedent," Alan Greenspan said and it's causing some economists to worry since, if short-term rates rise higher than long term rates, crazy things can start happening to the economy.
Posted by brian at June 30, 2005 07:33 PM
Comments
I have a question: How does a bank (credit card) offer you $15,000 at 0% for 15 months and still make money?
How can it afford to do this 100 times, 1000 times or 1,000,000 times?
My guess: the "money" is worthless to begin with and we are all simply swapping "tulips" or in our modern era, "simply making journal entries into a computer" and call it money.
Fortunately, there are still many people that take the pieces of paper we call money and exchange them for goods and services.
Posted by: guest at July 1, 2005 08:25 AM
The "M" thing sounds kind of scary. How do you know when it is the "right" time?
Posted by: j.premium at July 1, 2005 08:38 PM
Credit card companies offer 0% to gain customers. Then those customers either mess up and forget to pay a bill thus incuring a fee, or they use other services of the same bank/credit card company. That is how they make money.
But paper money has no value. The only purpose of money is to facilitate exchange of goods and serivces. It evolved from the days of people haggeling at a market and tradding 2 cows for 100 apples. Imagine how hard it would be to buy ANYTHING if you were paid in apples and I was paid in shoes. It sounds silly but it is exactly the point of money. That is why it is cometimes called a "lubricant." It makes the economy move more easily.
Posted by: brad at August 9, 2005 08:20 AM