EconAir

  The Red Queen's Race TWO DEFINITIONS   Fed funds rate .    The Fed funds rate is the interest rate banks charge other banks that borrow their excess reserves. It is a very short-term (overnight) rate. An increase in the Fed funds rate increases the cost of capital of large banks (net borrowers) and puts pressure on these banks to raise their lending rates. A change in the rate also changes the rate charged by other sources of short-term funds.   The Fed funds rate is the most watched interest rate in the United States and probably the world. It is not set by supply and demand in financial markets. It is set (fixed) by the Federal Reserve Bank (the Fed), America’s central bank.    The Fed funds rate determines or heavily influences almost all other short-term interest rates in financial markets. It also indirectly influences many other longer term interest rates. It summarizes how the Fed views the economy and near-term changes. It is at the heart of ...

There is a story, possibly true, that when the British surrendered to American and French forces at Yorktown, effectively ending British rule of America, someone in the British army sang or played an old English folk song, “The World Turned Upside Down.”    (See https://en.wikipedia.org/wiki/The_World_Turned_Upside_Down ) I think I know how the British felt.   Many of the assumptions economists have made about economic reality and economic policies now seem out-of-date or even reversed. UNITED STATES The Fed fought inflation; now it sets inflation targets when there is no inflation. The Fed worries about deflation even though the major source is a fall in energy and commodity prices. Another source is the fall in the prices of technology products. There is a large increase in the money supply, large government deficits, a large trade deficit, and a large decrease in the unemployment rate. Economic theory and past experience says that there should...

Janet in Wonderland Anyone who believes that financial markets are rational is not looking at the current government bond markets.    The U.S. 10-year government bond is paying around 2.5%.    Believe it or not, the 10-year Spanish government bond is paying less.   The German 10-year government bond is paying a little over 1%, less than a 2-year U.S. bond. If you were not a finance major, skip this paragraph.   The yield curve is incredibly flat.   It is only this way because the Fed hasn’t realized yet the Great Recession has been over for five years.   More sinister explanations rely on conspiracy theories.   When given the choice, I always go with stupidity. According to CNBC (yes, I’m still addicted to my financial soap opera), the interest rates on German and Spanish 10-year bonds are at a 200-year low.   I don’t know how they know that.   Germany didn’t exist 200 years ago but Prussian war bonds probably did. ...