Negative Interest Rates
Usually, you lend money and you get interest in return. Why do you receive interest? There are a number of reasons, some obvious and some not so obvious. So what happens when you get no interest in return and less than you originally lent? Read more to find the answer.
The Fed raised the discount rate. Did it matter?
Conventional wisdom has it that the Fed is in front of the market with regards to interest rate changes. The financial media wait for the Wizards at the Eccles Building in Washington D.C. to issue a pronouncement about the discount rate, or the rate which member banks can borrow from the Fed to meet reserve requirements. What if we told you that the Fed follows and does not lead the market. Read more in this article.
This site has spent considerable time talking about what deflation is and its ultimate effect on prices. To reiterate, deflation is a monetary and psychological phenomenon. It is monetary since the financial authorities (central banks) have done everything in their power to combat deflation by entering markets and buying financial assets with money created out of thin air. This makes those financial assets command higher prices and accordingly, the interest rates on those assets falls. The theory is that this should stimulate spending by consumers, perk up the economy, and drive prices higher. This is where the psychological part enters. What happens if the extra money created out of thin air does not circulate like the authorities anticipated? The following article, from a writer across the pond, discusses what happens to prices during deflationary periods