When is the price of some marketable good or service at or near zero? When either the supply of it is so plentiful that virtually any demand, no matter how great, can be satisfied or when no matter how large or small the supply of it may be, people's demand for it is so low that nobody is willing to practically pay anything for it.
On Thursday, September 17, 2015, Federal Reserve Chair Janet Yellen announced that, once again, America's central bank was leaving a key interest rate – the Federal Funds rate at which banks lend money to each other overnight – at barely above zero. The Federal Reserve has manipulated and maintained this interest rate near zero for almost seven years, now.
Fed Policy Has Created Zero and Negative Interest Rates
When adjusted for inflation, the Federal Funds rate and the yield on one-year U.S. Treasury securities have been negative for almost all of the time since 2009. In real buying terms borrowed money has been either costless or actually given away with a positive real return to the borrower!
In other words, imagine that you borrowed $100 from someone with the promise that in one year you would return the $100 plus $2, or a two percent return on the lender's money. But suppose that in a year's time, you pay back the lender only $98.
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1 comment:
There is plenty of demand for interest free money. The problem is that the only access to interest free money is given to the banks. They use it to buy bonds, virtually guaranteeing profits, and stocks, where there is almost no downside risk because they can take forever to pay it back if things go wrong. They also use it to fund credit products, at interest up to 30%. The Fed's policy is really meant to recapitalize banks, and it's also causing bankers to make huge bonuses.
If the private Federal Reserve gave the people 0% interest loans, the economy would get a huge boost. Imagine 0% interest mortgages (that's way better than deducting all that interest), or refinancing your personal debt at 0%.
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