Saving for an economic rainy day brings on and lengthens that rainy day.
News item: Fed keeps interest rates low; cites jobless data
Improving the employment data is a noble goal, and tries to influence the business cycle.
Low interest rates discourage saving, even as they are meant to promote borrowing to invest in equipment, expanding production capacity as firms anticipate recovery. Low rates can also encourage spending, since it's not worthwhile to hold onto cash while inflation eats up its value.
This tactic, however, is based on an assumption that in the business cycle, an economic upturn will be soon, and the cycle will respond to fiscal intervention.
But that assumption may not be valid. It's hard to know how long or how deep the trough will be.
Meanwhile, wary firms and consumers conserve funds and try to pay off previous debt as they wait for the upturn. It's like waiting for the other guy to move first.
Consequently, no one moves.
No comments:
Post a Comment