Salting the Economy to Death
One popular delusion that won’t seem to go away is the notion that policy makers can stimulate robust economic growth by setting interest rates artificially low. The general theory is that cheap credit compels individuals and businesses to borrow more and consume more. Before you know it, the good times are here again.
Profits increase. Jobs are created. Wages rise. A new cycle of expansion takes root. These are the supposed benefits to an economy that central bankers can impart with just a little extra liquidity. Unfortunately, this policy antidote doesn’t always work out in practice.
Certainly cheap credit can have a stimulative influence on an economy with moderate debt levels. But once an economy has reached total debt saturation, where new debt fails to produce new growth, the cheap credit trick no longer works to stimulate the economy. In fact, the additional credit, and its counterpart debt, actually strangles future growth.
Present monetary policy has landed the economy at the unfavorable place where more and more digital monetary credits are needed each month just to stand still. After seven years of ZIRP, financial markets have been distorted to the point where a zero bound federal funds rate has become restrictive. At the same time, applications of additional debt only serve to further the economy’s ultimate demise.
The fundamental fact is that the current financial and economic paradigm, characterized by heavy handed Federal Reserve intervention into credit markets, is dying. Debt based stimulus is both sustaining and killing the economy at the same time.
No doubt, this is a strange situation that has developed. For further instruction, let’s look to California’s San Joaquin Valley…
The World’s Richest Agricultural Valley
Dropping down the backside of the grapevine from the Tejon Pass, along Interstate 5 between Los Angeles and San Francisco, one is greeted by an endless sea of agricultural fields.
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