Monday, April 25, 2011

Low Interest Rates Don't Work

Don’t Listen to Monetary Policy Experts

The NYT among others is reporting that economists are disappointed that expansionary monetary policy did not have much effect on expanding the economy.

Outside of the mainstream economics profession, this was to be expected.  Low interest rates have limited value in stimulating an economy, Aggregate Demand, the total demand for goods and services is the key factor.  Without sufficient demand, no matter how low interest rates go they will not cause investment which is the key to economic growth.

Keynes wrote about this decades ago, it is called the liquidity trap.  Low interest rates and increased bank reserves just build up, and do not enter the economy.  Hence the need for fiscal policy, primarily in the form of government spending which creates demand for goods and services, increases consumer incomes and gets the economy going.

As usual, we know the cures for the problems of the U. S. economy, there is just not the political will do invoke them.

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