PC, >>He signaled this with a wink and a nod, and a proclamation of a neutral basis at the last FOMC meeting. These are the best of times.
It is my opinion that it does not make much difference what Greenspan does. Our interest rates, i.e. cost of money to the public, both individuals and corporations, is tied to the bond rates. This rate will depend on what interest rate the world wants to service our debt. This country is dependent on the rest of the world, i.e. mostly Japan and Europe's willingness to hold our currency/treasuries. These countries will move their money somewhere else if the risk/return ratio is better. As you have seen recently they have been pulling some of their money out of this country and our rates have gone up.
Greenspan can, through short term rates to banks and tightening the money supply, make it more difficult to borrow, i.e. force the banks to obtain higher rates, but the real game is "we are a large debtor nation" and our trading partners must want to hold our debt, or we are in big trouble.
Can you imagine what our rates would be if Japan dumped just 25% of the currency and bonds they own. Anyone care to make a guess?
Joan |
