Very low short term interest rates. When the rates are set super low, you have business and the masses all borrowing to have today what they will pay for tomorrow. This creates a massive, unsustainable debt overhang. The banks stop lending because of the risks of default. American economy led to believe ‘credit’ is money. Wrong. Credit is just credit. Credit used is debt.
Very low short term interest rates 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. |