Q: When interest rates are at zero and you want to lower them to stimulate the economy, what do you do?
Hmmm .... Can you *pay* banks to borrow money from the Fed? The situation is typically described as "pushing on a string". This just in from the Wall Street Journal: > Dec. 16, 2008 > > U.S. Federal Reserve officials on Tuesday slashed official interest > rates to a historic low range to combat a deepening recession and > signaled they will keep rates "exceptionally low" for some time amid > rapidly waning price pressures. The Federal Open Market Committee > voted unanimously to reduce the target fed funds rate for interbank > lending from 1% to a range of zero to 0.25%, the lowest since the Fed > started publishing the funds target in 1990. The market-determined > effective fed funds rate already has already hit record lows in > recent weeks. Dig that number: *Zero* to 0.25% !! Here's a related link: http://en.wikipedia.org/wiki/Liquidity_trap NB -- Something like a third (or was it 2/3?) of the money supply disappeared at the start of the Great Depression, with accompanying rapid deflation. Deflation, it has been said, is *far* more destructive than inflation, because it stops people from buying -- if you put off a purchase, the thing you want to buy will get cheaper! The result is total freeze-up of the economy. FWIW, the CPI dropped for the second month in a row in November.
