View Full Version : What are these federal reserve "interest rates"?

3rd April 2010, 04:42 PM
whenever i read or see the financial news i hear about these "interest rates" that the fed sets.

1) what are these federal reserve interest rates for?

2) why does the fed set interest rates? why not set the rates permanently?

3) does the fed print money out of "thin air" or does the bureau of printing & engraving print the money?

please explain it as clearly as possible because i am economically ignorant and please do not post links to other sites explaining it because they don't really explain it as easily.

3rd April 2010, 04:50 PM
My understanding is that the bond market dictated the rate. If no one buys the bonds the rate has to go up to make them attractive.

Hense what has been going on. The Fed had been buying themselves with digital $$ to keep the rate down.

We will at the very best wind up like Japan with 20 years of stagflation.

3rd April 2010, 04:54 PM
ok, but can you also answer the 3 questions i've posted in first post?

10th April 2010, 04:59 PM
no central bank sets interest rates, though the impression is given everywhere that that is the case. the bond market (bonds are sovereign debt, which is never paid off, just keeps getting rolled over for ever, i.e. a govt. owes 10 billion plus interest, when the debt/bond is due - they are sold with various maturies, i.e. with various lengths of time until they are due to be repaid, from a few months to 30 years - they just sell some more bonds to pay the extant debt and the situation goes on for ever, or at least until anyone notices, or the government in question has debts so large that they rival/exceed the size of the national economy, at which point people start to ask questions, see greece now) sets the interest rate; interest rates and bond prices are inversely related, i.e. as bond prices go up, interest rates go down and vice versa, and bond prices are simply a reflection of supply/demand for the bonds. that's why interest rates are starting to go up, there is a glut of bonds as governments have to finance these huge bailout packages, so lots of supply of bonds while demand is perhaps on the wane as bond investors (typically pension funds, which are huge, and other governments, e.g. china for US bonds) wake up to the brewing bond crisis (sovereign debt, national debt, bonds, treasuries, gilts, t bills are all pretty much synonomous terms) means that the price of bonds goes down, and interest rates up. happening now with greece, also australia.

about 1% of money is in the form of paper notes. the rest is electronic digits. watch "money as debt" on youtube. essentially fiat money is a pyramid scheme; when you borrow from a bank, the money is created at that point from nothing, and interest is charged on it. because the interest isn't created at the same time that the money/debt is created (money and debt are essentially the same thing in this system), there is never enough to pay back the debt and the interest. the only way this situation can keep going is if the money/debt supply grows exponentially; when the gradient of the curve reaches vertical, the system collapses. there is no precedent for a fiat money system to not end in collapse, and it's been tried a dozen or more times in recorded history. the opposite system, which has worked, and therefore been shut down at the behest of governemnts/central banks, is called demurrage, like negative interest rates, i.e. money slowly loses value over time, which encourages its circulation. read about the miracle of worgl on wiki.