interest rates
2005-10-18 12:10 a.m.

so heres how the deal goes. the chairman of the federal reserve, lets say alan grinshpan, decided what the monetary interest rate is. what does that mean? everyday, at the end of the day, every bank cannot end the day in a cash deficit, "overdraft". so if lets say a bank needs 200 million dollars at the end of a day in order to even out, the bank will loan the money either from other banks or from the federal reserve. the interest rate for these kind of loans is the monetary interest.

the monetary interest rate affects the prime interest rate and all the interest rates that the banks issue to the public. so if the monetary interest rate goes down, so will the interest rate i get from the savings i have in the bank, and so will the interest rate a company "nir kelim ltd" will need to pay on loans it is taking.

so how does this affect the market? once interest rates go down, money becomes more accessible to people/companies and thus the market recieves new "energy" - since the blood of the market arteries is none else then - money!

when money becomes more accessible, people/companies wish to buy more things, and the demand for products rises. according to basic rules of supply and demand, demand rises - prices rise. when prices rise - inflation.

so you might think, oh hey inflation is a good thing cause it goes to show that there is money to spend, and people want to buy stuff. but there are down sides. here are 2 examples:

if the inflation high , it means that prices are rising constantly . this makes business transactions very hard to negotiate. lets say i want to sell a house at the value of x, and the inflation rate is 10 percent. im aware of the fact that if i sell the house at x, in a years time the value of my money will lose 10 percent. so i will sell the house at a higher price. but the buyers dont have enough money to pay the higher price.......

another example - lets take the normal poor john doe who has a certain (small) amount of money in his savings. the inflation is high, things cost more. the price of milk rises as a result of inflation , but the amount of the money he has doesnt! so suddenly he wakes up one day realising that he is even poorer than he was yesterday, even though he is saving every nickel and dime.....

inflation has its downsides. next time you want to play with the monetary interest rate, these are some of the things you should have in mind!