With inflation causing food prices and other commodities to go up as much as 20 to 30% in the past quarter the Fed has decided to keep rates at the insanely low 2.25% with some speculation that the October meeting may see increased rates.

The markets seem to be unaffected by the announcement however many industry watchers have been making the point that lowering rates improves the economy  but they do not explain how this works.

Loans from the government are provided to banks at the Fed Rate and then banks issue loans to businesses or individuals at a markup. A 2.25 Fed Rate is at this time generating an average 5.5 to 6% interest rate at the borrowers end but Fed rates are not the only reason for bank rates.

In addition to Fed rates you have banks that use customers investments as leverage against loans. The Fed requires banks to hold a reserve amount but banks have been marking down losses at such a great rate that solvency is now an issue.

To bolster the banking industry the Feds are keeping rates so low that inflation is not even being used as an indicator for target rates anymore.

This is a very dangerous situation where the Fed is actually making it possible for banks to stay alive while they are being eaten away from the inside like termites eating an unprotected home. Eventually all that will be left is the paint on the outside and one strong wind will blow away the investments of their members.

In no other time has this happened. People talk about the falls of the past 30 years and also point to the depression but in those times the infrastructure of the economy did not fail completely.

Today America’s means of production is outsourced if we had catastrophic failure of our banking systems we could not assume control of production because we are too dependent on outside sources. There will be no chance to implement a nationwide new deal policy where government provided work programs acted as a bridge to market stabilization.

Already we have seen major cutbacks within the United States and are now seeing massive layoffs in Asia. When we lose control of production that means goods we buy from those countries will be unavailable. We could easily see lower or lost inventories in a vast number of goods everything from clothing to electronics and that can effect every industry from transportation to defence.

Within the next few years America will need to make some extreme dedicated choices to implement an alternative power source such as wind and to convert transportation from petroleum to electric or hybrid. Homes now dependent on Fuel Oil will need to be converted to Natural Gas and new standards in commercial building will need to require low fuel consumption standards and their own on-site renewable energy supplies.

If we do not take pretty drastic steps we will not be ready when oil consumption of China and India is expected to surpass the US by 2015.

The Fed not understanding that 2.25% rates are harmful and the industry deciding that very short term gains are more important then future needs is scary because their actions place Americans at the will of other countries that do not have our or the worlds best interest at heart.

To understand why this is happening is to also know that the American Banking System has been owned by outside interests for some time and in the past 10 years we have seen external influences implementing policies that have placed us in this risky situation we are faced with today.