Wednesday, October 13, 2010

0% Rates Are Just Not Working

The FED has dropped short-term rates to 0% and is buying Treasuries to keep long-term rates low, yet economic growth is still very weak. Low rates will only spur growth if spending occurs. Unfortunately, no one is spending.

(1) Consumers are saving more and reducing debt. The consumer savings rate was at 5.8% in August 2010. Think about it: It was negative prior to the recession starting.

(2) Businesses are saving more and cutting costs (not hiring). Cash on the balance sheets of many companies is at record highs.

(3) Banks are holding onto cash as opposed to lending, due to uncertainty about potential changes to regulations.

Low rates only work if they cause consumers and businesses to spend. Low rates will not aid economic growth if everyone is just holding onto cash. Until spending picks up, continue to expect a weak economy.

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