Interest Rate Is No More Cost Of Borrowing.

I study Economic in University and i have been told many times that interest rate is the cost of borrowing. According to John Maynard Keynes, An interest rate is the price a borrower pays for the use of money he does not own, and the return a lender receives for deferring the use of funds, by lending it to the borrower. Interest rates are normally expressed as a percentage rate over the period of one year. Even Albert Einstein, the most notable theoretical physicist of 20th century realize the importance of interest rate. He once said "compound interest is the most powerful force in the universe"

The time now is 2.45pm in New York and Federal Reserve just came out with a statement that Fed Rate will be cut to between 0 and 0.25%.

Welcome to a new world! We actually have the second developed country in the history of mankind that kept interest rate lower than 0.5%, USA. I have mentioned many times why Japan manage to kept interest rate lower than 0.5% and why US can't so I am not gonna do that again.

We need to rewrite all Economic text book since interest is no more a cost of borrowing if Fed rate is 0%. Banks can borrow money without cost!

Here's a common sense question: if you can borrow money without cost, what will you do?

You will borrow as much money as you can!

So here's another question: who will lend you money since everyone wants to borrow money?

The answer: Federal Reserve since they are the only agency with authority to print money.

Money supply will increase rapidly and out of control that way.

Furthermore, US is the biggest debtor in the world. How can they repay their debt? Who will want to lend them money? Who will invest in their T-bill? Who will invest in their money market?

Imagine this: 1% interest rate in 2003 created this bubble. What will 0-0.25% interest rate now create?

It will create a huge amount of mal-investment greater than dot-com bubble, housing bubble and credit bubble. Money supply will be out of control and Dollar will fall like stone. Inflation rate will shoot up dramatically after this. I won't be surprise if US inflation rate will be as high as Zimbabwe. After that interest rate will shoot to moon just like Zimbabwe and US will no longer become the most powerful country in the world.

One good news though, stock market will keep rising since high inflation rate will push stock price higher but that's not the point. Zimbabwe stock exchange surge from around 33000 point to more than 4,000,000 point from April 2006 to April 2007 but somehow inflation rate rise more than that so investor won't get anything from that rally. What is the point of earning some dollar from investment in stock market when a load of bread cost 200 million dollar?

I am not saying US will become Zimbabwe but they certainly have all the ingredients. Not even Japanese government dare to lower their interest rate lower than 0.3% even though they have the highest saving rate in the world.

Good luck America, you certainly need it to survive!