[iThinkBig]

“It doesn’t make a lot of sense to complain about low interest rates causing the current slowdown. As you said, when interest rates are low people will borrow to acquire today what they will pay for tomorrow.

OK, so if interest rates are high, people will not acquire today... they’ll acquire when they’ve saved up enough to pay cash.

Which means we would have the same slowdown, except that it will happen at the front end with the higher interest rates, and at the back end with lower interest rates. The interest rates might shift the slowdown through time, but the borrowing didn’t cause anything to happen that wasn’t going to happen without the borrowing.

If interest rates are very low, borrowing to acquire some productive investment is a really good deal. If I can buy a machine on credit for 4% interest, and the machine generates a profit of 8% of its purchase price, I should do that deal every chance I get. To just call it “debt” and pretend that it is therefore “bad” makes no sense.”

I am happy to get into a longer economic debate with you about this over freepmail if you want. My quick reply is that the short term rate must be adjusted higher to stymie the length of the debt overhang. Frankly, the market should set short terms rates, there should not be manipulations of interest rates. How is that for ‘should’ occur?

[Nick Danger]

Frankly, the market should set short terms rates

Surely you don't believe that nonsense in the papers about how the Fed "sets" interest rates. Reporters are all liberals; they think government runs everything.

The Fed sets only its own interest rate, the rate it charges banks. What do you suppose will happen if the Fed sets that rate higher than market? Banks needing money will get it somewhere else... London perhaps, or Dubai. The world is full of money. If the Fed sets the rate lower than market, the banks will borrow all of it and lend it out somewhere else. There is very little room for price fixing in a world where capital crosses borders at the speed of light.