From time-to-time, I like to highlight GRS-reader projects. Chett wrote to share an idea he’s trying to get off the ground. 5k5k is a fitness and financial challenge. He’s looking for people to commit to completing a 5,000-meter (3.1-mile) run and saving $5,000 (or paying off $5,000 in debt). As you know, I think personal finance and physical fitness have many parallels. If you’re working on these aspects of your life, I encourage you to visit Chett’s site.
Here are a few other miscellaneous tidbits:
The U.S. Federal Reserve cut the federal funds rate to 1% today, dropping it to a level last seen in 2004 (and before that, 1958!). Officials hope that this will lead to an increase in consumer and business spending. This makes me tense. I realize I’m not an economist, but this seems like the opposite of what they should be doing. Some people — and I’m one of them — believe that low interest rates are partly to blame for the trouble we’re in now.
This hurts savers (high-yield savings accounts will drop their rates again) and encourages inflation. And I have to say: inflation scares me. I feel like it’s one part of this economic crisis that’s being completely ignored, but has potential to cause huge damage. I hope I’m wrong. (Update: Please see the comments for a discussion of this topic. Those who know more about the subject say I’m way off-base — which is why I try to avoid these sorts of rants!)
Last week I wrote about how to compute your real hourly wage. Today Trent at The Simple Dollar explores the connection between time an money in a slightly different way. I’m striving to improve my time management, so I found this article helpful.
Several readers wrote to point out that schools here in Oregon may resurrect mandatory personal finance education. When I was in school, state law required a semester-long class on the subject, but that vanished during the late-nineties “back to the basics” movement.
Finally, Cap from Stop Buying Crap took a break from his cynical ways to share 10 simple ways to feel rich without materialistic means. It’s a short, sweet piece, but I think it gets to the heart of what real wealth is.
GRS is committed to helping our readers save and achieve your financial goals.Savings interest rates may be low, but that’s all the more reason to shop for the best rate.Find the highest savings interest rate from Ally Bank, Capital One 360, Everbank, and more.
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I completely agree with you on the fed dropping their rates. Now is a time to encourage savers, instead the fed is trying to resurrect an economy fueled by debt. Spend your money now, it won’t be worth as much later!
This is why we need to focus on green collar jobs. This can be the new driver for our economy. All the money we spend on energy that goes overseas could be growing our economy here at home. This isn’t the only solution, but it is a good one as it reduces greenhouse gasses and keeps oil money out of the hands of dangerous foreign governments (the middle east, Russia, Venezuela).
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Now is a time to encourage savers, instead the fed is trying to resurrect an economy fueled by debt. Spend your money now, it won’t be worth as much later!
Exactly!
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Fed’s rate cut made Canadian dollar move up more than 4.5 cents to 82.18 cents (U.S.) today. This was the biggest intraday daily gain ever for our Canadian dollar. It broke a record set in the early 1970s(back then the dollar was floated).
Cheers,
A Dawn Journal
http://www.adawnjournal.com
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I think the goal is not to induce spending necessarily, but to encourage people to turn savings into investment. If I have $X, it is going to do work for me invested in a risky business (i.e. stocks, venture capital) as opposed to a riskless bond (i.e. savings account) paying 1%?
Is there any evidence that high interest rates make a meaningful difference on savings rates (versus consumption, not versus investment)?
There’s no question cheap money got us into this mess, but the situation has a few more dimensions than that. Worrying about interest rates being low or high is like being afraid of the ambulance after a car crash; they’re both motor vehicles!
Have you looked at currency markets in general in the last few weeks? They’re in total disarray, now that the Yen carry trade has collapsed, and hedge funds are unwinding enormous positions.
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I see the effects of the rate cut as a combination of the posts made by Kelly and d. Those who have no savings, and living mostly paycheck to paycheck, will immediately spend whatever is left after paying the bills. More financially secure individuals will bypass savings due to fear of inflation, and will view stocks or sundry market investments as the only way to combat inflation.
J.D., I’m sure I speak for many other readers when saying thanks for the high quality, thoroughly informative site.
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I disagree, the fed rate has nothing to do with irresponsible spending. It doesn’t lower credit card rates at all, for example. It does lower rates for investment in corporate infrastructure, new facilities, etc.
The only way that the low interest rates are partly to blame is that “the giant pool of money” started looking elsewhere (other than government bonds) to make money and chose the housing industry that also was being encouraged to make loans to those that couldn’t afford it (and also provided protection from loss of money from the government)
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I’m new to all this money stuff, so I’m sorry if this is a stupid question. How will this lower interest rate affect student loans? (I mean loans already taken, not ones to be given out in the next year). I know that consolidated loans are fixed, but what about non-consolidated loans?
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J.D.
I really like your blog and I personally think this is a great service you’re doing to those who read it (like me).
But, as an economist, I urge you from making harsh judgments on the topics that may not be within your area of expertise. The rate cut is something that Fed should have done, and inflation should really be one of the last things to care about for now.
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Why is an interest rate drop good for the Average Joe? Because, the cost of your variable home loan (you SHOULD have fixed the rate, but got sucked in t those ‘sweet’ honeymoon variable rates, didn’t you?) drops … if you can refinance & fix, do so now!
And, if you can stump up the deposit on a rental (and, cover any shortfalls or contingencies as the rental market starts to climb) do so … again, LOCK IN THE RATE.
These are the times when even cautious investors BEGIN to move into the market (look at what Warren Buffett is doing), and is the time when real wealth is generated.
Low interest rates grease these wheels and, surprisingly, reasonable inflation (circa 5%) actually helps!
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Konstantin wrote: But, as an economist, I urge you from making harsh judgments on the topics that may not be within your area of expertise.
Point well-taken.
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time management is something that is thrust upon you when you find yourself needing to accomplish THAT MUCH WORK. i can’t do work without first considering if that’s the most efficient way to do it.
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Personally, I have no use for the Fed and wish it did not exist. However, I think you have to look at the rate from a debt investment standpoint.
I have business LOCs, and I think they are all tied to the Prime Rate. Some have offers like Prime for Life or Prime +0.99%, and so on. Now, I don’t want to get into debt either. However if I have a business idea that needs funding and a bank offers me 4% or 4.9% money it could be useful for my business and me personally ( hey even Dave Ramsey’s company uses credit on the business side)if my business does well. If things don’t go well. Well, I pay for it. And that’s the way it should be. No BK or Bailouts here. If it goes well, I create wealth, possibly jobs, and so on.
Business ( and personal investment) in general is risky. And that is perfectly fine as long as the risk-takers are personally responsible and held accountable for their actions. That’s where the problems start..
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Konstantin, I disagree. Inflation should be a key consideration especially when experiencing economic slowdown in conjunction with increased inflation with a strong liklihood of leading to stagflation. Honestly, I do not see reducing interest rates to make much of an impact on spending and I would rather control inflation instead. That said, not living in the US makes my view a bit removed from the situation…
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I doubt that this cut will affect inflation. Typically, rate cuts lower the value of the dollar, which in turn causes inflation. However, because of the global crisis, the dollar and the yen have gained a lot of ground against other currencies. Inflation has slowed down a lot due to the security found in the dollar in the past month.
On top of that, Trichet had indicated just last week that the ECB may cut rates soon, which should increase the value of the dollar against the Euro even more. Today, the euro was trading at 1.29 after the fed rate cut, but it was as low as 1.24 on Monday.
Economists forecast the Euro to be floating at around 1.20 for some time, which is something that should slow down the inflation and help stabilize our prices. I think the rate cut by the FED was necessary.
The japanese are not interested in seeing a strong yen either. They were ready to intervene to keep the yen from rising. A weaker yen may protect us from inflation as well.
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I would suggest a reading of Austrian Economics at http://www.mises.org or http://www.fee.org to find out about the reality of the coming inflation. “Economists” also once said that stagflation, high unemployment + high inflation, was not possible, but the Austrian school predicted stagflation. Anyone who is saying that inflation is not something to consider or worry about should be questioned. Not to say it could go the other way, a severe deflation, but regardless, the currency is not stable.
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@J.D.
I so agree about the interest rate cuts. I would love to see higher interest rates!
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I disagree with Konstantin on the grounds that the Federal Reserve is creating an artificial inflation by tampering with monetary policy instead of letting the free market control the monetary flux. Without interjecting my personal political views, anyone that reads or follows Ron Paul or the writings of Milton Friedman, one of the greatest economists of all time, would realize that having a Federal Reserve System is pointless, debasing the value of the dollar by going away from the gold standard by Richard Nixon destroyed the world presence of the value of US currency and interjecting too much government control by the use of tariffs and subsidies truly destroys the free market economy.
http://housingdoom.com/2007/12/28/paul-and-cramer-on-youtube/
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From what I’ve read, inflation is kept artificially low due to tinkering with the Consumer Price Index. Even though inflation is low according to the CPI the price of gas, heating oil and food is still high.
It seem to me a rate cut would cause these prices to tick upward again.
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J.D., with all due respect, stick to your opinion on the Fed Funds rate. While some people commenting disagree, others agree… and there are many economists who agree with you as well, so don’t let one economist tell you you’re wrong.
And for the record, I agree with you (though I’m no economist either, I have done a LOT of reading on the subject and took a fantastic Money and Banking course a few years back that opened my eyes).
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I like the 5K/5K idea.
As for the fed rate you know I’m trying to save but at the same time I’m paying down student loan debt with an interest rate tied to the fed rate. Instead of complaining about what the fed is doing to my savings I just shift my money to pay down debt.
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Paul said: “I disagree with Konstantin on the grounds that the Federal Reserve is creating an artificial inflation by tampering with monetary policy instead of letting the free market control the monetary flux.”
Completely agree.
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I think they also need to teach common etiquette in school. Why don’t people know what RSVP means?!
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Instead of lowering the interest rates to encourage more borrowing, we need to have higher interest rates to encourage saving. We do not have any real wealth to be giving out these loans. The market needs to be able to reset. By not allowing the corporations that are “too big to fail” to go bankrupt, the government has entered into one of the biggest socialist moves in our nation’s history.
The Federal Reserve has been creating boom-bust business cycles for decades by artificially lowering the interest rates instead of allowing the market to set these rates for us. If a free market was allowed to set the rates, we would save when we needed to save and borrow when we had the necessary wealth to borrow from.
As nexalacer pointed out, visit http://www.mises.org/ to learn about sound economics.
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I’m no expert in this either, but the only way the lowered rate will cause the consumer to spend more is if that rate is passed on to them or if credit limits are increased. The federal funds rate is a rate banks may borrow money and I think they will continue to keep their rates high to the consumer in order to recoup the money they have lost.
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It seems to me, from what I’ve been hearing, that the main purpose of lowering the rates was to encourage banks to start lending out the money they got from the $700 bailout. If rates are low, more people or more specifically businesses will be interested in loans. The government wants to prevent the downward spiral of businesses reducing the amount they invest in growth (potentially reducing run time of manufacturing lines therefore reducing employee salaries), which leads to less money in the economy for people to spend on the goods/services produced, which leads to the company further reducing. Inflation is certainly a risk, but I guess the Fed fears massive unemployment more.
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Aimee wrote: It seems to me, from what I’ve been hearing, that the main purpose of lowering the rates was to encourage banks to start lending out the money they got from the $700 bailout.
Aha! Now this makes a little sense to me. I’ve been hearing how the banks took the bail-out money and then just held onto it. It didn’t free up lending at all. But if this is a move to try to encourage them to let the money flow, I can understand it a little more.
But I still worry about inflation.
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Contrary to what many economists say, Economics isn’t a hard science, it’s an human science, thus subject to the same drawbacks (and strengths, let’s not be judgmental) of other human sciences. Consequently, you’ll find Economic schools of thought who diverge tremendously on what they think is the correct approach to each, every and any problem.
Keynesian economics, for example, of which Konstantin is an example, believe economy can be improved by government turning macroeconomic switches here and there: increase this output of paper, decrease that rate, change such tax, distribute this or that according to this formula, and so on and so forth, and voilà, economy works again. Let the market do the whole work, however, and it’ll downgrade to chaos.
Austrian economics, which nexalacer and I favor, goes the opposite direction. We believe that government turning those switches is what causes economic cycles, thus the breakage the market experiences on recessions. Stop messing with the market, let it do the whole work, and everything will smooth out and work in the end.
And you still have other approaches with very differing opinions: the Marxian school, the German Historical school, the Chicago school, the Monetarist school… the list goes on and on.
Thus, you can be almost certain that, no matter which opinion you have on economics, there’s some school out there that believes exactly like you and has a whole developed theoretical framework in defense of it, as well as many schools that think it’s utter nonsense.
So, I’d suggest you to not worry about expressing economic opinions unless you specifically prefer avoiding economics discussions on your comments section. Because, no matter what you say, you’ll always find some economists (and layman alike) agreeing with you, other disagreeing with you, and a majority reading the discussion and wondering what’s going on.
Anyway, down to the subject. Since I follow the Austrian school, here’s its position on what you said: Austrian economists agree with you in that the government shouldn’t have lowered the rate. They go one step further however and think the government shouldn’t try changing whatever the “natural” rate is. That’s because they believe that any macro economical rate, whatever it is, expresses a reality, that it’s the *result* of a multitude of factors over which the government has no control whatsoever (how many goods and services exist in the economy, the culture, objectives and goals of all individuals who live in a country, the entrepreneurship of the industry, luck in doing good prediction about the future, the amount of savings etc.), not the *cause* of any of these factors. When you change them by decree, all you create is an illusion which people will follow but won’t change anything at all in reality itself. Thus, once reality hits back, they’ll be unprepared to deal with it, as they placed all of their faith into something that from the beginning couldn’t and wouldn’t work.
The Austrian solution to economics? Save, spend wisely, save, work hard, save, run from debit, save, invest only on what’s really worth investing, save, only take a loan after all other alternatives are exhausted, focusing on paying it back as soon as possible, then save, save, and save a little more. This is what ensures that what matters (goods and services, not paper) stays strong and driving economic prosperity. In other words, it’s basically your blog, but applied to companies, markets, countries and whole continents.
My guess is that you’d love to know more about it. nexalacer’s links are a good starting point. Take the time to read some of the ebooks available on those, beginning by Ludwig von Mises’ “Human Action”. You won’t regret it.
But if you decide to know more about economics, be it Austrian or not, please make a point of studying things from the other schools too. Nothing is better for either developing a good amount of skepticism or further strengthening our convictions than knowing all the sides of a discussion. I did and ended up “choosing” Austrian. Your mileage, of course, may vary.
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I agree with Alexander Gieg, post 27, the Austrian way makes so much more sense.
An excellent article from Mises’ site praising bankruptcy over bailouts: http://mises.org/story/3154 and there’s even an audio download too.
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I don’t see how an interest rate cut is going to encourage banks to lend money. I work in a new business that is making money, but is short on cash. We have a lot of collectibles. We are trying to get a business line of credit. The owner doesn’t really care what the rate is, because it is going to be short term. He is having a hard time finding anybody to lend at any rate. I don’t see how a lower interest rate will solve that problem.
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done and done. In fact, one could say I’ve done a 5k10k (5k run, 10k debt) in the past 3 mos.
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JD,
I saw the rate cut on the news before I left the house this morning. I cursed the government for continuing its practice of penalizing responsible participants of the economy. I majored in history in college and am now working towards a certificate in personal finance. I get the idea of not raising rates during an economic downturn as Hoover tried to do during the early years of the Depression, but I don’t agree that we should cut rates lower than what they already were. The market needed a correction, we are not out of the woods and our economy needs to take its medicine. Economists have actually found that more government intervention in a capitalist system does more harm than good. So what? What should we do about it? I will be contacting my elected officials and asking them to please allow this economy to function as it was built to and scale back on the government interventions.
http://www.senate.gov/general/contact_information/senators_cfm.cfm
https://writerep.house.gov/writerep/welcome.shtml
Thank you for mentioning the 5k5k project I hope to see you on the site.
Chett
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I’d reiterate the other comments that having opinions on federal economic policy is exactly what you should do, as a responsible citizen. Konstantin, if you have a reason to oppose his logic, perhaps you could explain it?
I’ve been thinking a lot about inflation recently, myself. My father was just making the argument that essentially, the idea that we need some level of inflation all of the time functions primarily as a hidden “tax” of sorts on those who save, for the benefit of those who borrow/risk their money. His argument seems reasonable to me.
As best I can see it, overall, our real problem is how to shift from an economy that depends in shockingly large part on people buying lots of crap they don’t need, and sending half of that money overseas where the products were made, while half of it stays here and is skimmed of at every transaction point… and to transition to an economy where the excess time allowed by our decreased real labor needs is employed in service fields and actual free time, for those who want it. This is painful, because those who have trained in industries that are shrinking will have to retrain / cut their incomes. But I don’t see how a rate cut will help us do this. It’s just trying to preserve the same consumer-based system we currently have.
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Comment 18 is spot on. Our government attempts to mask the true value of inflation from official press releases by filtering “volatile” items from the CPI. Removing energy and food from the CPI is simply academic dishonesty in my opinion. I also suspect that the unemployment rate calculation is more than a little suspect, based upon what I have read.
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Great links. I think they should make personal finance classes mandatory for all high school students. Wish I had learned this stuff way before I got out into the real world.
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I feel the way #34 Calvin feels about this. Growing up in the California public school system, I didn’t learn one ounce of finance and money management. 12 years later, I’m working on playing catch-up after years of debit (medical and bad divorce).
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It’s a been a while, but in lowering the fed funds rate, did the Fed also lower the discount rate? It is the second, I think, that we should consider in terms of what it means for banks…
and I have no opinion on inflation. Frankly, everything we know we learn after the fact, so anyone who can claim any knowledge about what is going on ought to consider a new career as a psychic.
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Y’all who are worried about inflation, need to chill out.
Mugabe is going to help us out:
“Robert Mugabe, freshly re-elected leader of the free world, heroically stepped forward yesterday and announced that he is going to provide cash and credit out of his personal funds, sufficient to bring the world economy back on track.”
http://uncyclopedia.wikia.com/wiki/UnNews:Robert_Mugabe_bails_out_world_financial_system_out-of-pocket
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Comment 37 – Lol, David.
J.D. – you are too nice.
Cheers,
A Dawn Journal
http://www.adawnjournal.com
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You’re not wrong about the inflation stuff. Economics isn’t as hard as most people think. The government is printing off piles of money 24hours a day to meet up with the amount of money that is being injected into the economy.
There will be severe inflation. They talk about it on CNBC. They know it’s coming – they just think it’s necessary to solve this credit problem.
Lowering interest rates just makes it easier to raise capital and during calmer economic times this “might” help to boost the economy, but that isn’t always the case. The government has repeatedly been shown to fail at beating market laws. Just look at Japan… They cut their interest rates to zero and it did nothing.
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I have an issue with people thinking that money in savings accounts isn’t being “put to work.” If you put money into a savings account or a CD, that money is being put to work by the bank (which is why they pay you a small sum to lock it up), either to give out loans to others (at a profit), or to invest by the bank. The only difference is the bank reaps most of the rewards of the investment, but also all of the risk.
So money being saved by consumers actually does get into the economy and help push it along. It’s not just being shoved under a mattress somewhere. But it’s also not being spent frivolously on Madison Avenue-driven goods nobody needs. (which seems to be what our economy is based on these days)
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