PIE, INTEREST RATES and INFLATION

So, I graduated college about 3 months ago, and already my education exposure is dwindling. My productive life is hidden somewhere between facebook and my macbook hardrive, and needless to say, it's pretty pathetic. Whatever. Main reason why I'm creating this blog is because I've tired of the mainstream media and how it focuses less on what's going on in the world (more specifically, the financial world) than on Jessica Simpson's breaking news: love advice (which is on CNN's website's front page. if you really care: link).

Obviously my ADD hasn't subsided since graduating. Back on topic: the financial markets. I want to start at a neo-base to educate and inform everyone why we are in this current economical cluster. Here it goes:

PIE, INTEREST RATES and INFLATION:

The best comparison I can think of to tie inflation and the value of money is the following: if I have 10 hungry friends over and 1 piece of pie for sale, that piece of pie is desirable by many and therefore more valuable. However, if I have 30 pieces of pie and 10 hungry friends over, everyone can eat excessively, so therefore, the value of the pie is much less. It's best to spend money on the pie when the pie is abundant and cheaper so that when there are less, you have more. When the government wants more pie buyers (spending), they bake more pie so that people eat. In other words, they make money more accessible by lowering interest rates.

A few things you should know:

If there is high inflation, it means that money is less valuable (more pie) and interest rates are probably extremely low (easy to get a loan). When interest rates are low, returns on investments like bonds, savings accounts, CCD's, etc. are low, so saving money isn't the best option and spending is more attractive.

Now, let's look at interest rates and how it shapes investments. Interest rates (more specifically the fed fund rate, or the rate at which the federal reserve loans money to banks) are essentially the rates that are charged for the use of money. Most importantly, the federal fund rate is used to control inflation. When the rate is high, inflation is low because money becomes harder to obtain (paying back loaned money at higher interest rates makes money more valuable, or very little pie for sale with many hungry people). When the Federal Reserve has low interest rates, borrowing money is very attractive because it is very cheap to pay back.

Interest rates are a major part of the current and future value of our economy. When rates are low, people spend more because money is easily accessible. However, when rates are high, more people save because spending and loaning money is much harder on the pocket.