Federal Prime what now?

[asterroc]

There's this Federal Prime Interest Rate sorta thing. And the Feds change it. And somehow it makes all other interest rates change and whether people can get mortgages and stuff.

Explain.

Comments

[galbinus-caeli.livejournal.com]

Banks loan each other money at the prime interest rate. They then loan that money to people and businesses at a some fixed amount above that. When the fed lowers the rate the banks can borrow more and loan more putting more money into circulation. This means businesses and people can buy more stuff from each other. Raising the rate causes banks to hold onto their money more reducing the amounts they loan and reducing the amount of money in circulation so people and businesses buy less.

It is all a shell game.

[seekingferret.livejournal.com]

I think it's overly simplistic to dismiss the entire economy as a shell game. Yet at the same time, it sometimes seems frighteningly apt. Since the country went off the gold standard, our economy seems to be primarily founded on our own faith in it, a massive trade deficit, and a massive budget deficit. In other words, the only reason why our economy doesn't collapse is that we'd take the entire world with it, and we (and other financial powers) have made the semi-conscious decision not to let that happen.

[galbinus-caeli.livejournal.com]

Well, it might be a bit dismissive. But the entire banking system is based on the movement of intrinsically valueless instruments, 90% of which don't even exist. If that is not a shell game, I don't know what is.

The fact that that system is supported by the single most powerful entity in the history of the world does make this shell game a fairly reliable method of regulating and enhancing the economic structure of six billion people.

[tiurin.livejournal.com]

It's definitely a shell game to a large extent, but it's not like anything has intrinsic value- things have value to humans because humans want them. It's just that we've moved to a type of money/thing which has fewer physical restraints than previous types...which leads to the potential of "Helicopter Ben" dropping greenbacks from the sky.

Currencies are a lot like a bunch of people all falling towards each other, holding each other up with outstretched arms. It's fine if everyone cooperates. But when people start defecting...

Like I said, everyone should have 10% of their non-housing assets in gold to hedge against the slow devaluation of the dollar.

[galbinus-caeli.livejournal.com]

Ah, but gold has no more intrinsic value than any other means of exchange. (Well not entirely, it is pretty and conducts well.) Gold is only valued because other people value it.

Skills might be a more eternal currency. Well, unless you can build your own gene bank.

[seekingferret.livejournal.com]

A genetic economy would be awesome. Make it so.

[galbinus-caeli.livejournal.com]

To some extent a genetic economy exists. Sales of hybrid crop seeds are effectively a lease of genes for one growing season. To grow the same crop again the farmer has to buy a new set of seeds each year.

[tiurin.livejournal.com]

Oh, I am well aware that gold has no intrinsic value- it amuses me greatly when gold bugs argue that it does. However, the sheer quantity of people who believe that it has great value, along with the thousands of years of cultural weight, makes it a phenomenal hedge against currency crises. There's 2.5 billion people in China and India who want the shiny.

There's plenty of black comedy to go around- an expensive war or two and the fiat money printing press will trigger massive inflation. Go to a gold standard, and it sets the country up for some really ugly deflation.

[zandperl.livejournal.com]

I feel like diamonds have a bit more inherent value, as they are used as tools more readily than gold is. But then again, with synthetic diamonds out there, maybe their monetary value is less stable than the monetary value of gold.

[dirkcjelli.livejournal.com]

That value is quite low, and backed on slaves.

[dirkcjelli.livejournal.com]

Skills might be a more eternal currency. Well, unless you can build your own gene bank.

Trotskyist's would agree... then would probably point out that the Capitalists own and exploit the labor of their little proles.

[galbinus-caeli.livejournal.com]

Well, I don't want to get into political philosophy here, but unconstrained capital will trump labor almost every time.

[gemini6ice.livejournal.com]

No, in canned food and fresh water. In an economic collapse, gold will have no value. Only survival items will.

[tiurin.livejournal.com]

Notice that I said _slow_ devaluation. Though even in a rapid devaluation and/or hyperinflation, it is highly probable that gold will still be able to act as a store of value.

In the case of a devaluation or hyperinflation so complete it results in total economic collapse, gold may or may be viable as a store of value. However, you forgot arguably the most important item necessary besides canned food and fresh water- weaponry.

As for whether I have a cache for those items as well is left as an exercise to the reader.

[galbinus-caeli.livejournal.com]

Those run out.

Learn to be a blacksmith or a midwife if you want to survive total economic collapse.

[gemini6ice.livejournal.com]

or a blacksmith midwife for all those robot deliveries out there

[zandperl.livejournal.com]

I don't get the part about banks loaning money to each other. If they're all loaning money to each other, isn't there a net zero amount of loans? That is, A loans $100k to B, who loans $100k to C, who loans $100k to A. Interest rate is irrelevant.

[galbinus-caeli.livejournal.com]

Different sizes and types of banks. Investment banks and Commercial banks, and especially National banks (like the US Federal Reserve Bank)serve as bankers to the banks (and somewhat to large financial customers in some cases.

You or I cannot get an account with these guys, just the retail banks (like Bank of America or WAMU). When these banks ease up on their interest rates it allows the retail banks to keep more funds in circulation (and hold less in reserve)

Retail banks are required to keep enough money on hand to instantly pay out about ten percent of the money that savings account holders keep in their accounts(in aggregate).

So if they can borrow another $100 from an investment bank, they can issue another $1000 worth of loans.

[zandperl.livejournal.com]

Oh! That makes more sense now. Thanks! I didn't realize that there were different "levels" of banks like that.

[galbinus-caeli.livejournal.com]

I won't try to explain thrifts and finance companies.

[seekingferret.livejournal.com]

Yeah, what the Fed controls is the liquidity of the American money supply. The lower the interest rates, the easier it is to pump more money into the system, because banks can borrow from the Fed (and other similar lenders) more cheaply. This, in theory, fuels spending and accelerates the economy. Of course, as people above have discussed, the more money in the system, the less any individual dollar is worth- the Dreaded Inflation. So the Fed has to balance those two basic conflicting goals- minimizing inflation while keeping the economy expanding, along with a lot of other issues that play into the performance of the economy.

I find it funny that as we seem to be having a national referendum on the Greenspan era, with many economists coming out of the woodworks to condemn Greenspan's decision-making, the Bank of England is apparently coming under fire for not being Greenspan-ian enough. Or at least that's what I heard at 2am last night on the BBC World Report.

Personally my conviction is that the economy is too complicated a beast for anyone to accurately assess the economic implications of a given rate change, even after the fact. The Fed and its chairman have the sticky job of muddling along, trying to divine the right move from thin air- and all the while, their most important job is to exude faith in the American economy and their pretended control over it. Consumer confidence and investor confidence are two of the most crucial elements of the American economy and who has been better than Greenspan at boosting that confidence whenever it was necessary? After all, the catchphrase i most associate with Greenspan is "irrational exuberance".

This clip will explain.

[dirkcjelli.livejournal.com]

http://onegoodmove.org/1gm/1gmarchive/2007/09/alan_greenspan.html

... and Dr. Graffin's 'reply'

[dirkcjelli.livejournal.com]

...
I saw a man on my big blue screen
he ruled the world economy
he said the rich would never concede
but some day soon he'll be put to sleep
...