Saturday, March 8, 2008

McFalation and a 0% interest rate

Back in one of the Republican debates focusing on the economy McCain said "I'm glad whenever they cut interest rates, I wish interest rates were 0." Here's one such Youtube video that shows that statement.When I heard him say this I laughed because I assumed he simply didn't know what he was saying. I'm beginning to believe that he actually does want 0% interest rates and all the disaster that would bring.

Here's a great link put out by our own Fed reserve that makes things very clear:

I would recommend that you first click on the "Money Creation" link and then click the "Buy" button. This shows how the Fed "creates" money. No need to click on the "Sell" button as the Federal Reserve hasn't done this in many years anyway. Next I would suggest you click the "Interest Rates" link and then the "Decrease" button. This shows how the Federal Reserve manipulates the securities market to try and control interest rates.

If only McFlation would watch these two demos he would begin to understand that in order to sustain a 0% interest Rate the Federal Reserve would have to create new money to essentially buy up any available securities. Now think a moment how this might affect inflation...

Lastly if you watched the demos you'll notice that the Fed does their magic by manipulating the securities market. One of the largest forces generating upwards pressure on interest rates is our own government's monumental federal debt. So in essence much of this new money being created to try and artificially lower interest rates is actually buying up the federal debt.

Politicians have learned its much easier to cover their out of control spending by creating money (and debt/inflation) rather than raising taxes. The people (especially Republicans) get angry when talk of raising taxes occurs, but we are oblivious to the effect that their monetization of our federal debt has on our purchasing power.

This is why I believe that McFlation suggests that everyone wants 0% interest rates. By everyone he's talking about all politicians. They can finally make good on their promises of unlimited spending and no taxes.

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