When I took my first finance course (it was actually 303, not 101), the interest rate had two major components, the federal rate (or prime lending rate which is tied to the federal rate) and the Beta.

The Beta is the risk that the lender was incurring to earn interest from this investment.

In economies with tight monetary policies, lowering the federal (prime) rate would put money into the economy, by making more dollars available for borrowing to people.

However, noone ever seems to look at the Beta, the risk. Even though the 30 year federal rate is at a 40 year low, mortgage rates are climbing. In fact, I walk by the Bank of America in my building every morning where the rates are posted for 30 and 15 year fixed loans. The rates have steadily climbed since June. Why? One word. Risk.

The factors that make home loans a low risk proposition are rapidly becoming risky. First, there's talk of a price "bubble", basically stating that most home are overvalued by some percentage. When this overvaluation exceeds 20%, then they become risky because banks historically have required 20% downpayments to cover the downside. Many banks and finance companies bent these rules to allow 10% or less in downpayment, and now the devaluation risk increases. Add to that the unemployment rate, and the fact that most who do get laid off are replacing only 50-75% of their income and you can understand why the risk is rising.

Another risk factor is dollar devaluation on the International Market. If the dollar devalues, then foreign purchasers of U.S. government bonds will require a higher interest rate to purchase. An auction will result in no buyers (or few buyers) of U.S. securities, and then they will have to be reauctioned with higher pricing.

The combination of these factors means that the risk is soaring, and banks are responding, despite the low fed funds rate, by raising interest rates.

The other thing, I think has happened in our economy is that we didn't listen to John Maynard Keynes. His economic theory was that the United States would pump extra money into the economy during recessions and take extra money out during times of rapid growth. The idea was to smooth out the business cycles to where, at least in theory, wild swings in the economy didn't occur. The problem is that, in good times, we haven't paid down our public debt. The U.S. is attempting to stimulate their economy ALL THE TIME through deficit spending, and never paying back the debts.

At some point, the purchasers of U.S. securities will stop buying, will demand higher interest rates, and the U.S. will have a serious problem on their hands. Because at that point, Alan Greenspan will not be deciding the interest rate, our creditors will.

We could respond by seriously devaluing the dollar relative to foreign currencies, but that will drive investment away from America and into other countries.

I actually think that many companies are investing in foreign IT workers, because they realize that this debt bomb will eventually go off. When it does, goods will disappear from America, gas will cost $10 a gallon, food will soar, and everyone will be scrambling to get rid of their dollars, buying anything to avoid holding worthless dollars. Just think of the future in Brazil, Argentina, or Russia and you get the idea.

It's not stagflation, it's simply the fact that at some point, the U.S. will have to default on our national debt, and God help us on that day.