Will Lower Interest Rates make you spend more right now?

I sometimes think the Federal Reserve needs to read about King Canute who showed his courtiers he was no God when he could not hold back the sea. He is reputed to have said;

Let all men know how empty and worthless is the power of kings. For there is none worthy of the name but God, whom heaven, earth and sea obey”.

This could be applied to the Federal Reserve boards too as they sit in judgment on the economy.

In Australia our Reserve Bank has just lowered interest rates by 0.25%. It seems their reason for doing this is that they believe that the economy has taken a big hit with increased interest rates and the turmoil in the world economy.

By lowering interest rates using the Chinese water torture methods (doing it slowly) they hope to avoid sending the Australian economy into recession.

It seems inflation has been put on the back burner due to the fear of a recession being greater right now.

This article “Banking on Growth” in January 1996 is after interest rates were lowered by 1/2%. It makes interesting (no pun intended) reading.

I can see how raising interest rates can slow down an economy but with such a negative sentiment out there I fail to see how lowering them will stimulate the economy at least in the short term.

Raising interest rates hurts people and that’s why they stop spending. Lowering them does not encourage them to go out and spend the country out of a recession, necessarily.

If the public spending is a prime mover in turning an economy around then, unless an act of parliament orders them to go and spend the interest savings, how does this get the economy going just when the Reserve wants it to start?

After several years of rising interest rates it makes no sense that the mortgage belt would rush to the shops and spend Australia out of a potential recession after a 0.25% rate cut.

Only a fool would go and spend the interest money saved on something other than their mortgage or other debts, especially if they have fallen behind in their payments thanks to the previous interest rate hikes.

The US lowered interest rates after the DotCom crash and kept them there. That fed the credit boom. But right now interest rates are at 2% and the public and business are now tightening their belts.

Haven’t the Japanese been trying to stimulate their economy for over a decade and may actually be paying people to borrow money? They used up their interest rate weapon long ago.

This may well mean we Baby Boomers are in for some lean times as we try to grow or maintain our nest egg in retirement. So I’d suggest you ensure you have money put by for 3-5 years to pay you a pension to avoid selling any depressed assets you may have in managed funds right now.

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