Any of us who use caffeine as our stimulant of choice,
The Fed has been confident in their ability to micro-manage
whether we’re trying to jump start our Monday morning or the economy that they have almost gotten to the point
navigate the last 60 miles of our trip, know about the law
where they think it’s a permanent solution. My concern is
of diminishing returns. That first shot of caffeine delivers
that, at some point, the whole process could run out of
a pretty good kick. The next infusion, not so much. By the
steam, and Fed policy may not be able to stimulate the
end of the day, even a pot of coffee can’t raise the dead.
Our bodies become used to artificial stimulation. Over
A case in point
time, whatever we’re using tends to lose its effect. Could
The Japanese economy since the late ’80s might be able
this principle also be true for the economy?
to teach us about the potential perils of artificial market
stimulation. Driven by very low discount rates (their equiva-
Here’s what I’m thinking. When the Feds adjust interest
lent of the FFR), the Japanese economy exploded between
rates, the key rate that they tinker with is the Federal Funds 1987 and 1989. The Nikkei stock exchange climbed from
Rate (FFR). Banks and thrifts have to keep funds reserved
10,000 in 1985 to almost 40,000 in 1989.3
in non-interest-bearing accounts at the Fed. In order to
stay as close as possible to their minimum required reserve
When the central bank began raising the discount rate to
level, financial institutions with excess funds deposited at
rein in the growth, the bubble burst. When the discount
the Fed often lend money to other institutions overnight.
rates finally were lowered again in 1991, the economy
The weighted average rate at which these overnight loans
failed to recover. In fact, interest rates have been at, or
near, 0% since that time, yet without any lasting positive
effect on the economy. The Nikkei has also struggled,
currently standing in the mid-13,000 range.
The last time the Fed started lowering interest rates, there
was a 2½-year period from 2002 to 2004 where the FFR
Considering the fact that Japan is a major financial
sunk to 2% or lower.1 Rates that low for that long feel
and economic power, you might ask if the same thing
about as close as you can come to the point where the
will happen in the U.S. We don’t know. The important
whole pot of coffee doesn’t work anymore.
question is, could it happen here? And the lesson we may
be learning might be the same one we figured out when
Since last August, the FFR has dropped from 5.25%
we were cramming for finals—caffeine will only take us so
to 2.25%—a big drop in a short period of time.2 A few
months ago, the Fed also injected a couple of hundred
billion dollars of liquidity into the system. These are all
attempts to stimulate the economy. But as is the case with
humans, stimulants can lose their effectiveness.
SOURCeS:1 http://library.hsh.com/?row_id=88
A free economy, like ours, should be allowed to fluctuate.
It shouldn’t be constantly micro-managed. We are
governed, in a sense, by financial physics. If you keep
something artificially elevated for a long period of time,
http://www.stock-market-crash.net/nikkei.htm
eventually you will have an equivalent opposite reaction.
http://www.geocities.com/heartland/estates/1411/mac/xmas.htm
4 Meet With Your Advisers. 6 Have a Backup. Let’s box owner dies. becomes an additional When you have six feet face it. You may not be concern. If you want an of water in your living able to escape with your 7 Evaluate Storage electronic copy of your room is not the time to important paperwork. Solutions Carefully. Your documents, consider discover you don’t have To protect yourself, store primary focus should be on scanning them and burning flood insurance. Take the backup copies of important keeping your information them to a CD or storing time to schedule meetings documents in a safe-de- secure. If your computer is them on an external hard with each of your advisers posit box or with a trusted your main storage vault, drive or a USB flash drive, and let them know you are friend, relative, or adviser. make sure it has up-to-date portable devices that hold trying to fill in the gaps and As a general rule, don’t firewall and anti-virus pro- a lot of data. For photos, disaster-proof your affairs. keep anything in a safe- tection. Use of a reputable consider one of the many deposit box that may be online storage service may online storage sites. Update Your Plans. Change needed in an emergency, be a good option for those is the one constant in life. such as powers of attor- comfortable with the tech- None of us can prevent the Make sure to review and ney—a safe-deposit box unexpected, but putting update your affairs at least may not be accessible 24 your life back together annually. hours a day and may be Keep in mind that in an again is much easier if you sealed temporarily after the emergency, portability have all the pieces. ~
Student Injury and Sickness Insurance Plan for Niagara University 2012-2013 Niagara University is pleased to offer an Injury and Sickness Insurance Plan underwritten byUnitedHealthcare Insurance Company of New York. Eligibility Statement: All studentsregistered and attending classes are eligible to enroll in the plan on a voluntary basis. International students are required to participat