What's an interest rate? Depends. Are we talking real rate or nominal rate? Because the real interest rate is the nominal rate + inflation, or i = N + I. What's this mean folks? When the fed lowers interest rates, it really takes a chance on causing inflation to rise. Look at that equation. When the fed drops N by something insane like 75 basis points or 0.75%, do you really think real interest rates make the same drop? Guess gain folks. Look at the t-bill. Yeah, do some Googling, I'm not going to do all the work.
So let's say i drops by, I dunno, 40 basis points. But guess what? There's still 35 basis points to be made up. Guess who's butt that comes out of? I! That is, inflation.
With interest rates already being soooo low, dropping the interest rates are not our ultimate solution.
Enter taxes. And the God-awful tax rebate in the economic stimulus package. Want people to spend? Give them more to spend by cutting taxes! Or give them instant gratification by giving a tax rebate! This is fine and will generate a small sputter. Here's the problem ladies and gentlemen. It's an election year. You think Bush isn't playing politics? He wants a republican in the white house after him! The Dems are also making their points on this.
So we spend $150 billion on this package and get a bit of a sputter. Lower-income families will probably spend it. I bet the majority of the middle class pays down some debt! You know middle class Americans are averaging something nuts like $15,000 in "crap debt" (aka credit cards). That doesn't stimulate the economy.
This $150B is not new money! It's government money. We already have quite the debt (Bush's 2012 proposal is laugable but that's a different writeup). We'll either have to issue more debt or raise taxes to pay for the $150B. Sure the tax raise won't happen right away. But it will happen within the next 3 years. Dem or Rep in the White House, it will happen in 3 years.
Toss in some dreary economic data received today and we have ourselves one heck of a CF!
But guess what? GO BUY STOCKS! Yes! They have no doubt gone down in price which means they are now a better value. I do not see them dropping too much more. But don't freak out. You'll buy a stock and it WILL drop a bit. No biggie. You're an investor right? That means long-haul.
Guess what else? GO BUY REAL ESTATE! It's a bargain! Can you afford a second property maybe to rent out? Go buy it! No? Buy REITs!
It sucks now. We're probably in a recession. If not it will hit soon. But I think we're ready for it. I don't think it will be here very long. Just expect to pay more for stuff on the other side of it.
Lessons for today?
1) Inflation will happen. Don't even get me started on gasoline and its economic effects.
2) The stimulus package won't work in the long run.
3) Taxes will go up within the next 3 years.
4) Stocks and real estate are good values now. (See: Contrarian Investing)
5) Recession will happen. Shouldn't last long. The end result? See #1