Yesterday, the Fed dropped the Federal funds rate to 1%. In effect, it’s like lowering your credit card interest rate in the hopes that you’ll spend more money. However, dropping the interest rate won’t do anything. Why do I say this? First off, it’s already dropped it 8 times since last year and it hasn’t done anything. But more fundamentally, there is nothing more to drive our debt driven society. Since 1980, the interest rate has been on a downward trend. This has caused increased lending and asset bubbles. But, now there are no more places where the consumer can tap more borrowed money. Credit cards have saturated the public. Home equity loans are practically gone. Brokerage margin accounts are lowered with stock prices falling. Corporations have to pay a higher premium for loans and the Commercial Paper market has dried out. The only thing left holding everything up is the Treasury borrowing money from foreigners. And so only the Treasury can bail out all these failing institutions. And nothing will be done for the consumers. Ultimately, the end of musical chairs will come, and the American taxpayers will be left holding the bag.
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