The measure of an economy is money.
A large
economy needs a larger supply of money than does a small
economy.
Therefore, a growing economy needs a growing supply of money.
All money is a form of debt.
Therefore, a growing economy requires a growing supply of debt.
U. S. Federal Debt is the safest, most controllable form of debt, because the federal government, alone among borrowers, never will default.
Thus, there is no
federal debt or deficit problem, and a
balanced federal budget leads to a
recession or a depression.
It widely is believed cutting interest rates stimulates the economy. Repeated cutting of interest rates is the tactic most used by the Fed when attempting to prevent or cure recessions. What is the justification for this belief?
When interest rates are low, borrowers pay less and potential borrowers are more likely to borrow. Companies are more easily able to borrow for expansion. Consumers are more easily able to obtain funds, with which to purchase goods and services.
When viewed only from the standpoint of the borrower, low interest rates make perfect sense. However, what about the lender? For every borrower there is a lender. When interest rates are low, lenders receive less.
Who are the lenders? Everyone who buys a T-bond, T-note and T-bill is a lender. These “T” instruments are the government’s method for borrowing. Everyone who buys a corporate or state-issued bond is a lender. You are a lender. I am a lender. We, the investing public, receive less money when interest rates are low. Receiving less money, we are less able to purchase goods and services.
Everyone who buys a bank CD, or who deposits money into a bank savings or checking account, is a lender to a bank. The bank owes you the money you have deposited. When you receive less return on these loans, you have less money to spend.
Everyone who puts money in a money market fund, or who buys travelers checks, is a lender. Money market funds and travelers checks are part of the money supply and are debts. When they pay lower interest, the public earns less money to pay for goods and services.
Further, when rates are cut, investors are more likely to buy stocks than to deposit money in a bank. Depositing money in the bank creates more money for the economy, because banks lend the money that has been deposited. For every dollar you deposit, the bank is able to create an additional nine (approximately) dollars. In contrast, buying stocks creates no additional money for the economy.
Finally, when rates are cut, the federal government is required to pay lower interest to service its own loans, which pumps less money into the economy. As this is written, the federal government’s “stimulus package” has begun to pump $150 billion into the economy.
Today's (May, 2008) federal debt totals about $9.4 trillion. Every 1% reduction in interest rates allows the federal government to pay lenders $94 billion less interest. In the past two years, interest rates have dropped almost 4%. As a result, the federal government has paid approximately $180 billion less interest.
While Congress attempts to stimulate the economy by pumping in $150 billion, the Fed slows the economy by cutting interest payments about the same amount. The right hand works in opposition to the left hand. The Fed tells us interest rate cuts encourage borrowing. Unfortunately, the act that encourages borrowing also discourages lending and removes billions of dollars from the economy. The Fed’s actions have had an adverse effect on the economy, which is why, as this is written, we head toward recession.
