Interest Rates: What Will the Federal Reserve Do?

The recession appears to have relaxed on us, but more problems are on the way. The dollar is now making up only 37% of new reserve purchases. Worldwide US dollar reserves are at a record low 62.8% (at the end of the 3^rd quarter) as foreign central banks look to the Euro and Yen with more confidence. This is very troublesome as having the world reserve currency is one of the major reasons why the US is still a 'superpower' nation.

Of course this is not surprising considering the Fed's reckless 0% interest rates. Holding interest rates at 0% allows lots more money into the market- a.k.a. inflation.

The interest rates were dropped to nothing last year in an attempt to keep the unsustainable economic growth going. Though it temporarily eased some of the pain but it also has significant consequences for the near future. Inflation means prices for everyday goods such as food, clothing, and fuel will rise. Wages will take longer to rise. It's a rip-off for the average American.

The economy has contracted and the money supply needs to do the same. The easy solution, then, seems to be raising the interest rates.

Unfortunately, this will lead to another major problem. We've racked up a huge national debt; as of mid-October it's near $11,900,000,000,000.00 (Almost $12 Trillion). Not to mention the Congressional Budget Office is projecting another $9 trillion in new debt in the next decade.

A growing slice of the federal budget pie has been interest payments on the national debt. If the Fed raised interest rates it will significantly increase the interest payments we make. All these hundreds of billions we spend in interest does not do Americans any good, it is a true waste of money; but we are obligated to pay it. It's the price of our past excess.

In the 1980's we had to raise short term interest rates to near 20% to arrest the dollar's falling value. (It lost 2/3 of it's value in the 1970's). Doing even just 10% today will mean paying over $1 trillion every year on our national debt. Clearly, this is unsustainable.

It's a lose-lose situation for America. The dollar appears doomed to fall quite a bit and possibly even crash at some point in the near future, as all fiat currencies in history have done. Bankers and politicians cannot be trusted to keep a stable money supply.

We need the discipline of a gold standard; fiat currency has failed us once again, with the dollar having lost over 95% of its purchasing power since 1971. Back in 1966, long before Alan Greenspan became Fed chairman, he said "In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value." Moving back to the gold standard is one of the long term economic solutions we should implement sooner than later.