Stubborn Fact: Low Interest Rates Cause More Harm Than Good

Stubborn Fact: Low Interest Rates Cause More Harm Than Good

I’ve been amazed that the Federal Reserve (and those who run it) have seemingly had their collective heads in the sand regarding the effects of keeping the interest rates low and their systematic employment of quantitative easing to help bring our economy out of this quasi-recession.

They may in fact be doing more harm to our economy by using these outdated measures based on poor analytical data and interpretations. Are they too stubborn to admit they’re on the wrong course, using an outdated map? Are they acting on the behest of Wall Street and Big Banks (doubtful since low interest rate hurt their bottom dollar)? One needs to look no further than Japan and much of the European Union to see the erroneous path Janet Yellen, and her predecessors at the Fed, has rigidly kept to. This argument was superbly presented  in a paper from Michael A. Walker of the Fraser Institute (Vancouver) back in February of this year.

In his aptly titled paper “Why Are Interest Rates So Low?” Mr. Walker lays out a comprehensive argument that keeping interest rates artificially low has actually stifled the economic growth the Fed hoped to achieve. The Fed policy may in fact be contributing to a contraction of the economy, the exact opposite of its stated goals. Mr. Walker goes into great detail (and I must say very readable for a non-economist like myself) in explaining his observations:

- For every saver, there must be a borrower. A symbiotic relationship that keeps the flow of funds moving and is the basis of a healthy economy. 

- Our current monetary model of whole (national or global) economies is based on individual aggregate actions but this model is out-dated and has failed to describe the new national economy.

- Constant population growth is the underlying factor that is at the heart of the old model. We don’t currently have the population growth to sustain the model that our monetary policy is based on.

Mark Twain once said “Facts are stubborn things, but statistics are pliable.” 

I think it’s time for the Fed and Ms. Yellen to wake up to the facts that so seemingly obvious that keeping interest rates artificially low has only hurt our economy. We’ve been misdiagnosing the cause/effect for so long (thank you Messrs Greenspan and Bernanke) we’ve become so infatuated with treating the symptoms that we are seemingly blind to the real cause, depopulation.We need to rethink our monetary policy before we get into the same dire straits that Japan now finds itself in. Declining population, rampant deflation, stagnant economy. The U.S. isn’t alone in this boat either, Russia and EU, even China has renounced it’s one-child mandate and is actively coercing parents to have more children. Ms. Yellen can massage the statistics all she wants but the stubborn fact is that low interest rates aren’t helping.       


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