DJIA Recession Great Depression Interest Rates Banking Banks Question Credit?
Posted on September 14th, 2009 by admin
Banking
In the recession of 1980 during which President Reagan was serving his term, the government raised Interest Rates to try to keep down inflation. This backfired and instead led to the recession of the 80’s. My question is: WHY does raising the interest rate in theory keep down inflation? In the current recession we are in, interest rates are being cut cut cut, so wouldn’t this only help inflation to get worse? Somebody please clarify because I am confused on this topic.
In the recession of 1980 during which President Reagan was serving his term, the government raised Interest Rates to try to keep down inflation. This backfired and instead led to the recession of the 80’s. My question is: WHY does raising the interest rate in theory keep down inflation? In the current recession we are in, interest rates are being cut cut cut, so wouldn’t this only help inflation to get worse? Somebody please clarify because I am confused on this topic.
Filed under: Corporations
MateMediaSoft
1) Interest rates go up because of strong borrowing demand.
2) Interest rates go down because of weak borrowing demand.
3) During the early 1980’s, interest rates had to reach a “high” enough level such that borrowing would slow down.
4) Now, because of the weak economy, interest rates have been pushed to zero to help banks, not bank customers. That’s a deflationary condition. Inflation can’t happen because money isn’t being spent nor loaned.
5) It’s a myth to believe that the Fed has any “control” over the economy and interest rates. The Fed merely responds to what the market has already discounted.
6) Raising interest rates does not keep down inflation. It’s better to focus on the fact that the market “will go where it’s going to go, with or without the Fed”.
7) Inflation won’t return until there is a restoration of confidence and THEN, an increase in borrowing and lending so the cycle can repeat itself in the other direction.