The media is screaming RECESSION from the rooftops. The President is digging America further into debt to give "tax breaks" to American families in the hopes of staving off the coming doom. Market analysts and financial talking heads argue on all major news networks if the recession is coming or is already here. And the American people watch closely, wondering if it is finally time to panic or if it is just a slow news day and CNN and FOX News need something to fill the time between commercial breaks. There is nothing to fear, however, as the Federal Reserve has met today and plans to cut interest rates again to save us all from sure financial disaster! The stock market rebounds with its first gain in two weeks and the American people breathe a collective sigh of relief at knowing they once again can go back to their regularly scheduled programming with nothing to worry about.
But why? What has happened here? Why did the Federal Reserve cut interest rates? What interest rates? Is my credit card going to start charging me lower interest? What is a recession? Are we in one already? Should I be worried? Should I buy canned food and dry cereals? Should I stock up on water and stuff my money under my mattress? Is this the end of the world? It it?! IS IT!??!?
Firstly: no. Your credit card company is not going to start charging you lower interest. I mean, maybe, if you have a really good credit card, but that is not the kind of interest rates we are talking about here. And, come on, when was the last time a corporation did something for its customers that was not really just a pretty PR spin on something bad they did to their customers? Secondly: calm down. This is going to be a lot easier to explain if you are calm and not stuffing valueless green papers under the covers of-- I'm just kidding! Of course the green papers have value! It was just a harmless joke--
If we are really going to see through this situation, however, let's start by looking at why the Federal Reserve has been lowering interest rates as of late, then we will move on to what affect it has on people like you and me.
The Federal Reserve admits, and it is all the talk of the nation, that is lowering interest rates because the economy is slowing down. I know that sounds scary and all, but please stop filling your cellar with dry cereal. Instead, let us look at what that means. A slowing economy is, obviously, an economy that is not growing as fast as it has been. That means that, yes, the economy is still growing, but just not as fast as people would like it to. But let's get rid of this clumsy word "economy" and figure out who these people are that want this economy to grow.
There are a bunch of people in the United States who own businesses. Lots of people own business, in fact -- or at least small pieces of businesses. Some do this through normal channels, by owning a business, but this is usually only the case for small businesses in America. Most people who own parts (or even majorities) of businesses do so through the stock market and other investment systems throughout the country. But who are these people who own businesses and pieces of businesses through the stock market and other investment systems? According to studies in 2001, the richest ten percent of the people in the United States own eighty-five percent of all stocks and ninety percent of all business equity (1).
Knowing that, let's get back to figuring out what a "slowing economy" means, seeing through this funny "economy" word. The American "economy" is basically made up of all financial transactions that happen in the United States (I swear I'm not talking down to you, I'm just trying to break this down so we can all understand it, myself included). If people are spending money, then the economy is active, and the people who own these businesses -- the rich people we discussed above -- are making money. However, if the economy is "slowing," that means people aren't spending as much money and these rich people are not making money as fast as they would like to be making money. So, yes, the economy is still growing, but these rich people are not making as much more money as they have decided they need to make. Because of the stock market and investment nature of the American economy, which will be discussed later, it is not simply enough for the "economy" to be doing well. For these rich people to see ever increasing gains off their investments, the economy has to constantly grow faster and faster.
That, basically, is our "slowing economy," and that is what the Federal Reserve is reacting to when it decides to lower interest rates. The Federal Reserve does this because it sees a slowing economy as a warning sign for a coming recession -- which is a period when, on average, these rich people are not making any money at all. This essay isn't about recession, so if you want to learn more about that, I suggest educating yourself elsewhere.
So we have a bunch of rich people who are not making as much more money as fast as they would like to be making more more money and the Federal Reserve reacts to this by doing something they call "lowering interest rates." These interest rates that are being lowered do not have anything to do with you and me, however. These interest rates are the regulated rate at which banks loan money to each other. Yes, you will notice that that rate is always lower than the rate at which the bank is willing to loan you money. The bank does not like you as much as the bank likes other banks. This might seem like a strange thing between two institutions performing the same function in a society based on competition, but that should just go to show that thinking about things is ridiculous and should not be attempted.
Anyways. We will not get into the sticky points of why, but this lowering interest rate has magical powers to add more coal to the American economic fire and keep it growing at a rate to appease the gods of incessant need for more making more money (at least for a little while, gods are known for never being appeased for long). This is when everybody cheers, lets out a soothing sigh and turns on the television to see what is on Must See TV.
End of essay, right? If only it were-- but we still have not discussed how this action of the Federal Reserve affects people like you and me. I know, normally you think that the economy has been saved from frightening-recession and that is enough affect for you to worry about. But, remember, we are trying to see through these actions, not just go along with the uneducated viewpoint these more-more-money-wanters would be quite happy if we forever have. Don't worry, this won't take long.
There is one well known effect of the Federal Reserve lowering interest rates that people rarely talk about, and I think that to the average American it might be the most important effect of all. Remember how earlier I told you I wasn't going to get into all the "sticky points" of how the Federal Reserve lowering interest rates magically puts more coal into the American economic fire? Well, I lied. Not really lied so much as just -- I wanted to save it until now! The Federal Reserve lowering interest rates basically means that the they are releasing more money into the American economy, which obviously has the direct result of making the money that we do have worth less than it was before this fictional money was created -- inflation. This is basic economics. So -- milk, bread, gas, everything costs more money. This might be evident by the continually lowering of interest rates by the Federal Reserve in 2007, and the 7.5% increase in inflation we experienced last year (and who among us received a 7.5% pay increase in the last year?)! It is a direct and predictable result of the Federal Reserve lowering interest rates.
So, we have the rich who demand to make more and more money as fast as they can, and when that reality is threatened the Federal Reserve reacts by making the rest of us pay for it with rising costs of the necessities of life while these same corporations use this looming recession as an excuse to freeze wages. The rich aren't concerned, of course, as they will be making more more money fast enough that this inflation will never truly effect them. This is just one more way that the United States government, serving the interests of large corporations and the rich, abuses the people it so crassly claims to protect and defend for the gain of a few people at the very tip-top of the economic ladder. This is the very thing we can no longer put up with as a people, as a nation.
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The answer to this is, however, is a little complicated, and could be an essay unto itself. I will attempt to address it in short here, though. The answer is not so much to change the actions of the Federal Reserve -- as it is simply playing within the rules of our economy, though this in no way makes them any less innocent of their actions -- but to change the very basic rules of our economy -- rules that our economy has only adopted in the past few decades. It is only in recent times that a company simply making money and steadily, though slowly growing has become not good enough. In modern times a company must not only grow, but grow faster than every other company and grow increasingly faster as compared to its previous self. This has become our way of life because those who control our economy -- the rich, once again -- no longer earn money by producing sellable products, but through investing in companies that may or may not produce products. Thus, to make money themselves, the rich must force these companies to continually grow faster and faster, to see greater and greater returns on their investments into these companies. It is obviously an unreasonable thing to expect every company, or even every "important" company in our economy to continually grow at ever increasing speeds, as their is only so much demand for any given businesses sector out there. This need for ever increasing growth has also been the cause of such moral catastrophes as the Enron debacle and the exploitation of the Latin Third World by way of NAFTA.
Sources:
1. Power in America: Wealth, Income and Power, G. William Domhoff, December 2006 (Table 2: Wealth Distribution by Type of Asset, 2001) available at http://sociology.ucsc.edu/whorulesamerica/power/wealth.html