What Does 0.75 Percent Mean?

In the note below you can read about the historic decision by the Federal Reserve in its meeting today to DECREASE the interest rate 3/4 percentage points below of its previous value.

What does this mean?

I assiduously read Paul Krugman's analyses on fundamental economic events in the New York Times. But today I prefer to put my mind around this historic event.

If you look at the chart the NYT presents with these news, the interest rate went down faster than it went up from 2004 to 2006. Collapses are almost always faster than climaxes in coming. This must be a law of economics. It is harder to build than to destroy.

At the risk of sounding like a Monday morning sport analyst, here is my assessment:

I will try a physicist analysis, even economists have tried this method in the past. In my view, money is like heat, and public confidence like information or negative entropy. Energy is more akin to an ounce of gold in this analogy, or nowadays a barrel of oil. This first take on the problem assumes that there is little gold coming into the system, or oil for that matter. That is, we have a closed system.

As you can see here today the price of gold went down. It was already at $1000.00 per ounce, now it is at $976.00.

According to the Second law of Thermodynamics, for a closed system, all thermodynamic processes increase entropy.

In my analogy, or metaphor, I take this to mean that most of the time agents loose credibility. An increase in entropy is equivalent to a loss of credibility. The graph I refer to above, can be taken as a measure of public confidence in the economic management team of the Bush administration. It took them a lot of time, two years, to achieve what they just lost in a few months. One can request more money from investors, if they trust the team selling the product, in this case loans in American dollars. The US seems to be in an out of business sale!

In real dollars, taking inflation into account, the US rate is negative. The US government is paying customers to get its product. Customers would not even have it for free, the US has to pay them to borrow dollars!

As I see this rate drop, this marks the beginning of the decline of the US Empire.

I predict that today's movement in the gold market is going to reverse itself when the Bush Administration runs out of gimmicks to save the day.