Zero Interest Rate Effect on the Potential of US Economic Deflatoir

By : Edmond F. La’lang

             Interest rates are similar to "say with flower" to express love, appreciation and generosity of the lender / creditor to the donor / debtor. If interest rates further lower to zero rate (0 - 1.0%), it is not emerging new flowers or plants grow stronger, but it is increasingly shed their leaves and the flower itself, because of the overdose. This is experiences by farmers if the land had been given instead of excesss fertilizer will produce a lot of grains or fruits, but it will reduce the level of productivity. Because of nutrient fertilizers, particularly inorganic fertilizers can be toxic to plants. Similarly, the zero interest rate will not be able to provide a stimulus for developing business opportunities for the low cost of funds / money,  because of very sluggish economic conditions, frozen and chilled because the purchasing power and low consumption levels will reduce the level of industrial production, sales and services and finally to increased number of layoffs, unemployment and corporate bankruptcies. This condition gives domino effect "deflationary spiral" of increasingly heavy and severe Japan also has experience from 1992 - 2010 and until now the interest rate is still low at between 0.10 - 0.25 % for 18 years. Thats why many speculators come to Japan for Carry Trade and invest this fund on high yield return without making the real sector will be recovery. And now too in US, where the Fed rate is 0.25 % and much more printing money for QE1 - 2 as US$ 1,4 Trillion goes to emerging market and commodities market to speculate and rocketing the stocks and commodities price and finally make US and world peoples being more weak buying power for living. And make emerging market being funerable by bubble and overheating economy to be downturn again if they are not smart to manage their economic growth with wisely economic and monetary policies..

            Progress to December 2008, shows the trend of increasingly aggressive European and world central banks cut rates by 0.5 - 1.0% and will continue to 1.0% and eventually will go Zeo rate as was experienced by Japan, followed by the U.S.(1.0%) Progress to December 2008, shows the trend of increasingly aggressive European and world central banks cut rates by 0.5 - 1.0% and will continue to 1.0% and eventually will go Zero Rate as was experienced by Japan, followed by the U.S.(1.0 %) Will cut by the Fed to 0.25 to 0.50 % as well as other world central banks.  I also predict that BI will ultimately continue to decrease towards zero SBI rate after a contraction of inflationary toward deflatoir in 2010 - 2011 later. Prices will fall dramatically, although like in Indonesia apply a by word that "strong downward price" that we experienced for 30 years, which continued inflationary conditions characterized by permanent high level of SBI since the 1970s.

            U.S. financiail crisis has spread with systemic symptoms and cause a domino effect on all lines of business from banking, manufacturing and other services including the creative industries in the future. Finansil crisis has caused huge losses for investment banking, general banking, securities, insurance, hedge funds and retail investors a liquidity drought caused the banking world by withdrawing U.S. funds in the entire world back to its parent company to cover losses and pay debts and bill customers withdraw funds. This condition also catastroph in world stock markets and commodities that add to the panic of investors around the world and the shift of these funds into speculative forex USD. In addition to U.S. funds which have invested in both developed and emerging markets caused USD getting stronger against the hard currency and currency others, including the rupiah continued to weaken and had penetrated the level of Rp. 13 400 (Indonesia) at the end of November 2008.

          This effect will be make Cenrtal Bank of Indonesia would be difficult to aggressively reduce SBI anticipates his economic weakness due to recession and the threat of deflation for the business world still goes on. The spread between the SBI with inflation for the inflation rate can suppress effectively is about 1.5 - 2.5%, where the rate of inflation in 2008 was around 11.5 - 12.5%, mean SBI is the optimal level of about 9,5 to 10.5%. If the BI tends to follow the decline in interest rates as other central banks in the world, of course, we face the potential weakening of rupiah in the future. But why the Fed in economic recession even make a strange policies to lower the Fed rate with aggressively to zero rate at 0.25 % to anticipated the inflation rate by import inflation, where US$ will be depreciated condition ? And furthermore the Fed after bail out many banking and other financial institution tend to make more US$ depreciation with Quantitative Easing on QE1, QE2 and maybe continued to QE3 – QE6 ? This is make much funerable for healthy of economic growth in sector but advantage for growth in financial sector, where we knows that the Big Four Investment Banking and other Richman will be advantaged,    

but that  impoverish lower and  middle class ? So, how can you calmly the inflation on food, gasoline and raw materials for industries, just by cutting the employment salary ?

         

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