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Griswold -> RE: Fed intrest rate? (3/22/2007 3:04:03 AM)
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quote:
ORIGINAL: MsParados
I don't know, they could be trying to paint a picture of fiscal stability to create a feeling of well being with the consumer. it's an interesting theory i'm reading into.......
It's understandable that some may believe that....money, economics and fiscal health is a common coffee table topic, and one that is often misunderstood...but, my dear...if anyone is reading into any public declaration by any agency that the American situation is in any way fiscally stable...those people should not be allowed to balance a checkbook.
The (stated) purpose of the federal reserve is to manage the flow of capital within and without our financial system. It is to ensure that there are enough dollars to capitalize our assets, which include both savings and investment. Their purpose (the Federal Reserve) is to make sure that the amount of actual printed dollars equal not only the growth in GDP (Gross Domestic Product...all the things that we as Americans produce in a 12 month period), but as well, the growth in population, as well as known inflation.
A (very) simplified example: If population growth is 2%, GDP is 3.5% and inflation is 2.5%, money supply (the printing of new paper money) needs to grow by 8% to keep everything at existing levels.
If they (the Federal Reserve) want inflation to grow only by 1%, they adjust the money supply (by raising the interest rate until growth in the money supply falls) by only 6.5%.
This will have the result of making you feel poorer (because it's harder for you to obtain dollars) but it really doesn't change the facts, as your assets aren't rising in value as fast (less inflation), and you have fewer dollars to chase those same assets, and in fact in many cases (unless you purchase "hard assets" such as real estate) you're actually poorer by virtue.
Conversely, if they want inflation to grow (because "deflation"...assets growing less valuable is also bad for the economy, but for very different economic reasons), they lower the interest rate (putting more money into the economy because it's now cheaper to obtain those dollar assets), you feel richer, because you have access to more dollars, but because inflation is rising faster, your assets (except for those that purchase hard assets) are growing less valuable each day that you own them.
It's no different than if you eat salads and excercise, you'll stay (more) fit. If you eat ice cream and stay on the couch, you'll be less so.
The people that sell ice cream aren't trying to tell you there's a fat person inside...they're trying to convince you to buy ice cream.
The Federal Reserve doesn't care what you believe about the economy...they care only if the inflation rate is low or high, the money supply is increasing or falling, or that our capital reserves in this and other countries is increasing or falling, and that you "purchase" more (or fewer) dollars by borrowing more (or less) money to achieve the stated goals.
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