Thursday, 6 December 2007

525 reasons to be positive

Why do people have such faith in interest rate reductions? Take a look at this clown on this US video clip. He claims he has "525 reasons to be positive" - with each reason being a basis point that the US central bank could reduce interest rates.

It seems that easy money is the answer to many problems. People can't pay mortgages; cut rates. House prices falling; cut interest rates. Share prices tanking; cut interest rates. Unemployment increasing; cut interest rates. The external deficit is on the way up; cut interest rates.

Interest rates reductions encourage people to borrow more and save less, and given debt levels that is the last thing we need. Higher demand will push prices up. With rising inflation, long term interest rates begin to rise, and people demand higher rates to compensate for higher prices.

In the long run, easy money delivers exactly what it was supposed to prevent - a recession. The only difference between a recession now and one later is inflation.

Giving credit where it is due, I found this clip on housing panic.

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