Here’s a nice video that explains the the current U.S. condition in a simplified and clear manner.

Question: Why are interest rates in the banks so low? Will it go up anytime soon and what are the alternatives so my money can earn better?—Dennis Poliquit, Radio DJ

Answer: Dennis, your question is one that you can call a ‘loaded’ question, so to speak (pun intended). Let me try to simplify my answers because the way most people explain it can cause many a nosebleed, me included. In economic terms, interest rates are largely a function of the government’s monetary policy with the central bank as its chief implementor. The government, through the central bank, tries to influence the economy by manipulating interest rates according to the direction of its economic managers. When the government wants money to circulate in the economy, it tries to keep interest rates low with the belief that money will be spent and invested in businesses that drive economic growth. When interest rates are low, people are discouraged from keeping their money with the government, which is the safest and largest borrower through the sale of government securities (debt instruments).

When the government wants to control the cash circulating in the economy, it increases interest rates and you can expect the market to start putting more money in government debt paper because of its low risk. The interest of government securities, also called treasuries (bills, notes and bonds), is also the basis…

To read full column, visit http://business.inquirer.net/7863/why-are-interest-rates-so-low

You would often hear about the term ‘pump-priming’ whenever economic topics are being discussed or written about. What is pump-priming? It is the action taken to stimulate an economy, usually during a recessionary period, through government spending, and interest rate and tax reductions. The term ‘pump priming’ is derived from the operation of older pumps; a suction valve had to be primed with water so that the pump would function properly. As with these pumps, pump priming assumes that the economy must be primed to function properly once again. In this regard, government spending is assumed to stimulate private spending, which in turn should lead to economic expansion.

A good combination of monetary and fiscal policy should be able to provide stimulus for economic growth. In theory, a properly executed ‘pump-priming’ will stimulate growth in the economy and push it towards recovery. Well at least in principle.

There are mixed results from ‘pump-priming’ efforts in many governments, including ours. In today’s global environment, ‘pump-priming’ activities can be a case of scale issue… like using an eye dropper to fill a pail. Further, the inter-dependencies of economies is proving to be a daunting task to influence the economy more and more.

While pumping and priming the economy may bring in some results, sustainability can only be achieved with sound fundamentals. An economy that is freer seems to result to better performances. Further, too much government intervention often results to havoc or at least, breeds inefficiencies. I believe that government intervention in the economy should be limited to ensuring fair play, regulations against excesses/abuses and ensuring a level playing field. Our government has way too many corporations and agencies that compete with private ones and yet said government corporations are severely inefficient and some are carrying huge losses. Further, the size of the government should be small relative to the size of the economy. While many administrations have announced privatization efforts, it seems that we are taking forever in privatizing them. Seriously, will it take 50 years just to privatize government corporations & agencies? Will Noynoy’s regime be any better? I pray so.

Up until we thoroughly work on our economic fundamentals which include, political & social concerns, no amount of pumping and priming will result to any sustainable economic performance.

My 2 cents.