The Federal Reserve System(FRS) was instituted to provide a safeguard against inflation or deflation! Banks also pass checks through the FRS from one bank to another! Does this help you if you are an average citizen? No! Why? By adjusting the interest rates downward during economic decline as is the current condition, what banks charge on mortgages and lending is reduced. What is wrong with that approach? Given the FRS interest rates are lowered, what you are paid for your savings is reduced! The average interest paid on savings today is so low, people are not able to keep up with their expenses! How is this since you may buy a home at lower interest rates? Well, your 30 year mortage gives the bank four times the amount in interest charges with your principle, so a home mortage at 100,000 at 8% costs you $400,000! So the bank makes $300,000 on the loan and you lose that amount! Consider the interest paid on your savings of .5%. Does this amount pay you expenses even at reduced interest rates of the FRS. The answer is no!
Consider eliminating the FRS and let the banks compete with each other in a safeguarded free economy! What about inflation? Place automatic caps on interest rates as they climb to prevent runaway inflation! Also if deflation occurs let the free market compete for payment of interest on savings, mortgage rates and other loans. This creates competition among banks to provide the best rates thereby helping home mortgages, loans and savings! Why should the FRS determine what the banks pay customers? Why should savings accounts suffer when money is dear as currently?
Do you see the picture now! Given the banks suck in a trillion dollar float during the time it takes to process checks through the Fed. they are not hurting during the current deflation. They are making money during both inflation and deflation! So who does the Fed. help then? Is it you or the banks!
The new economics is based upon the principle of competition. When businesses compete rather than administer prices the consumers wins! When administration of prices occur the consumer loses! The unique concept works when applied to banks! Consider the new proposal by Greenspan to reduce Social Security Benefits to compensate for overspending by the government! This proves that the Fed has no real power during deflation! Only the interest paid to savings accounts and what it charges the banks for lending is reduced! What does this do? Well you know about the savings accounts. The banks are helped while the consumer loses again!
In summary with the safeguards that are triggered by higher inflation are in place interest rates will climb in proportion to inflation. How do we determine this? Recall the law of supply and demand. When the supply exceeds the demand prices drop. When demand exceeds the supply the prices increase thereby inflation increases! This simple equation may be employed to trigger inflationary safeguards to prevent runaway inflation!
Given this is a discussion group, New Millennium Software encourages different opinions concerning the relative importance of the Federal Reserve System. How does it help during deflation? How does reduction in interest rates help prevent deflation? How does the Fed benefit the average person?