Interest As Backbone of Modern Economy - Part 5
Posted: Saturday, November 14, 2009
by Shafi Farooq
http://mywebsiteworkout.com/personal-finances/
In modern world, especially the Western world and Japan, interest rate is considered the backbone of modern finances and that includes your family finances as well. It affects and impacts us all in every walk of life. Individuals and families ought to understand its importance.
The interest comes into play when we borrow money or lend money. Everyone is affected when the interest rate goes up or when it comes down. This backbone of the economy is controlled by the central bank of a country. In the U.S., it is called Federal Reserve Bank, commonly know as the Fed.
When you borrow money, you, in essence - in effect, "rent" money for a period of time. You don't outright own the money. You use it to your advantage but you have to give it back to the lender at the end of a specified, mutually agreed upon, period. The longer the period, the more rent you have to pay.
That, in simple terms, is why longer-term loans usually come with higher interest rates. For example, you borrow $10,000 from the bank for 10 years at the interest rate of 10%. After 10 years, your total accumulated interest plus principal will be more than if you borrowed that $10,000 for 5 years at the same interest rate of 10%.
However, it so happens, that sometimes long-term rates are less than short-term rates. This is, then, known as an "inverted yield curve." What does it mean? Who knows? Even the experts are divided. They cannot agree on the definition of it, let alone explain it to us folks.
Some economists say it warns us that an economic recession is on the horizon and we better be ready for it. That means someone responsible sitting in the high chair must do something at the very first signs of a recession.
There are those who disagree. They say that this phenomenon - inverted yield curve- is a unique combination of certain economic circumstances. When I hear something like this, it reminds me that these so called experts don't understand it. They don't get it.
They don't have a complete grasp of the situation. So they say that these circumstances are unlikely to prove harmful to the economy. They wait and wait and in the process, close their eyes to the coming bad times.
I don't know about you but I have a strong feeling that the second type of experts are in control of the economy. It looks that way and that probably is the reason we are in this mess altogether.
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