To assist my many readers, I would like to present a very short review of economics. It is extremely readable and 100% factual. It is easily understood.
The central bank of the U.S. is known as the Federal Reserve or more simply the Fed. The duty of the Fed is to set monetary policies in the U.S. that protects and promotes the welfare of the U.S. and all Americans who use the U.S. Banking system. The Fed has a Board of Governors who are appointed by the President and approved by the U.S. Senate. Each Governor on the Fed serves a 14 year term. There are seven governors on the Fed.
The wisdom in the U.S. is that one governor’s term ends every two years. This is very wise because when a new president is elected he/she does not have the right to remove the Board and appoint a new one. One governor’s term ends every two years on February o1 of each even year. So a one term President could appoint, at most, two governors to the Fed unless a member dies or resigns from the Fed. This keeps a President from appointing an extremely liberal or an extremely conservative Fed all at one time.
The Board of Governors has the control of three aspects of monetary policy. They are: 1) Open Market Operations, 2) The regulation of the discount rate, and 3) Reserve requirements of banks. In this short article, the focus will be only upon the discount rate. All three are important, but the regulation of the discount rate is the most important.
The federal funds rate is often confused with the discount rate. THE FEDERAL FUNDS RATE is the interest rate banks charge each other on loans used to meet reserve requirements. The DISCOUNT RATE is the interest rate the Fed charges banks for a loan from the Fed. The discount rate is the rate that is set by the Fed. The Fed can increase or decrease the discount rate.
I have five college and university degrees. My first three degrees specialized in psychology, mathematics, and the natural sciences. After working for a number of years, I finally developed enough common sense to admit that I knew almost nothing about business and decided to work toward an MBA Degree. After 2.5 years of working during the day and completing graduate work at night, I earned an MBA degree in business. I am glad I did because it opened up a totally new world of academic understanding for me.
Today, I am retired. However, I try to complete two tasks each and every day. I try to do something kind for a deserving individual every day. Secondly, I try to learn new things each and every day. Since I have a modest amount of funds invested in the stock market, I have studied economics, international economics, finance, and international finance for many years. I study on my own and I would estimate that I have increased my knowledge in business by at least by twenty fold since I obtained my MBA degree.
There are a number of countries around the world that each have their own national debt just like the U.S. has a National Debt. In order to finance a national debt, each country must pay interest to individuals, corporations, hedge funds, and other entities that buy some of the debt. When world interest rates are high, a country must pay more money in interest to finance their debt.
Banks also pay individuals interest on some or all of the funds deposited by individuals. Banks make money by paying little interest to depositors and then lend out some of their reserves at a higher interest rate. Also, there are many federal laws that regulate banks in the U.S. and other countries have their own set of rules.
Now here is the issue and the main purpose of this article. Some countries allow NEGATIVE INTEREST RATES. The definition of a NEGATIVE INTEREST RATE exists when a central bank sets the overnight interest rate to a number LESS THAN ZERO. In essence banks are charging their depositors money just to deposit funds in a bank.
In my view, negative interest rates indicate a failure of a country’s central banking system to correctly manage the money supply and also to seriously damage the operations of a free market.
President Trump published the following tweet on 9/11/2019: ” … The USA should always be paying the lowest rate. No inflation ! It is only the naivete of Jay Powell and the Federal Reserve that doesn’t allow us to do what other countries are doing. A once in a lifetime opportunity that we are missing because of “Boneheads.”
I admire many things that President Trump has done for the U.S. However, President Trump is not always correct. This tweet is in effect giving the nod to negative interest rates in the U.S. If President Trump continues to encourage the concept of negative interest rates in the U.S., I believe that it will destroy President Trump politically and undo many of his achievements. Also, I would remind my President that he appointed Jay Powell to the Fed. Yes, lowering interest rates to 0% would save a great deal of money in interest payments on our national debt, but it would damage the economy of the U.S. in at least six other areas and could bring on a world depression.
If the President truly believes in his tweet, I believe that he should speak directly to the American People using television time that a president can request. I would respectfully remind the President that just because other countries are mismanaging their economies that does not empower the U.S. to make the same mistakes.
R. Van Conoley ( Editor’s Note: 1) The members of the Fed are designed to work directly for the American People and it is not within the President’s authority to attempt to intimidate the Fed. 2) Solid banking laws that have proved very efficient for decades since FDR was president have been foolishly modified by George W. Bush with assistance from Barack Obama. 3) Also, cryptocurrencies have come into existence and they are weapons of financial destruction and the laws that regulate our economy do not adequately address cryptocurrency.)