Most politicians and economists are confused. Why are not people spending and business borrowing? After all, to them the Great Recession is long over and economic prospects appear good.
The Wall Street Journal noted that two years ago, the European Central Bank cut interest rates below zero to encourage people to spend more. They gave an example of Heike Hoffmann, who is in the produce business.
“When Ms. Hoffmann heard the ECB was knocking rates below zero in June 2014, she considered it madness and promptly cut her spending, set aside more money and bought gold.”
As envisioned by those living within the Beltway, negative interest rates ae supposed to boost growth by encouraging people to borrow for consumption or business, but it hasn’t happened.
In a BusinessWeek article by Peter Coy, he says mega-investor Larry Fink said in April that efforts to stimulate the economy by making rates super low or even negative are self-defeating, because savers will become even thriftier to reach their nest egg targets.
Davis Stockman, Ronald Reagan’s budget director, says negative rates incite “lunatic speculation” on Wall Street and on the left Nobel laureate Joseph Stiglitz points out large corporations are sitting on hundreds of billions of dollars because they already have too much capacity.” “Why build more simply because the interest rate has moved down a little?
What both articles miss is that consumers have lost confidence in their economies. That is why people are saving more and buying gold. The Obama administration has written nearly 600 regulations making it harder to operate a business. Hillary Clinton has already told West Virginia, Tennessee, Pennsylvania and Kentucky coal miners it is her intention to put them out of business. Why in the world would anybody take chances given the president’s political and economic record and his Democrat Party? The lack of productivity and poor economic conditions can be traced to bad policy not some unknown fact.
In Mr. Coy’s article, he quotes Ethan Harris with Bank America/Merrill Lynch. Negative rates also send a signal that the economy needs life support. “If people think negative rates are bad, then they become bad.”
What is bad? To many Americans not getting a pay raise in 10 years is bad. Seeing your job moved overseas or allowing illegals into the country to keep wages low is also bad.
Those living in Washington, D.C., don’t see this the way others do. Perhaps it’s time for them to get out of town and see how the other half lives. The privileged have their gated communities and walls to keep people out. Perhaps it’s time for Americans – all Americans – to have a wall to keep illegals out of our country.
When higher interest rates do return, it will cost far more to finance a $20 trillion national debt and the prospect of government borrowing crowding out private borrowers becomes a real possibility.
Negative interest rates are a product of what ails people – not the cause. People borrow and spend when they are confident. They are not confident about what tomorrow might bring. Our sluggish recovery has been slowed by poor policies put into place by Washington policy makers.
These policies have made it harder for people to move up in life. Schools are worse, yet cost more, debt is hard to pay off and there is a real lack of opportunity in many quarters of the nation.
Negative interest rates are not a signal to consumers that something is wrong. People already knew it. It’s time for policy makers to get out of Washington and see it for themselves.