As part of the U.S. Federal Reserve's and Treasury's scheme to revive the economy, they have short-term interest rates have been lowered to 0%, and officials have jaw-boned the bond market to reduce long-term interest rates. In an effort to keep interest rates artificially low, we're even seeing the Treasury print money and then use the monopoly money to purchase the government's own bonds.
Unfortunately, from an economic perspective, these actions will have little positive effect on long-term economic growth. The misguided leaders of the Treasury and Federal Reserve believe that the remedy for every economic downturn is for individuals, businesses and governments to borrow and spend even more than before. But it is this mentality that has caused much of the
economic distortion and resulting bubble-bust cycle within our economy through much of the past
two decades. Within just this past decade, these reckless policies managed to create the biggest housing and credit bubble the U.S. has ever experienced, with everyday Americans suffering from the resulting high inflation and the inevitable bursting of these bubbles. These problems would have been much less severe if not for the irresponsible actions of our Federal Reserve, namely ultra-low interest rates and excessive money creation.
This cycle will continue to repeat itself until the government-led borrow-and-spend response to economic downturn is broken. When an economy, or an industry, has excessive artificial demand (such as housing, autos, and venture capital in the mid-2000s, "dot.com" companies in the late 1990s, Japanese real estate in late 1980s, etc.), lower interest rates will not stop an economy or those bubble sectors from contracting. Such actions may slow contraction but they will not change the laws of supply and demand. That is what our economy is going through right now. In the latest bubble, key industries in finance, autos, and housing had become such an inflated part of our economy due to excessive and easy credit, that the natural contraction in those industries is having a very strong ripple effect across our entire economy. At this point it would be folly to try to re-inflate those sectors because a normalized level of demand won't allow it. Trying to do so via low interest rates, excessive borrowing and money printing will go simply cause money to once again go into unproductive areas and create high levels of overall inflation.
It is a fundamental economic law that it is savings that sow the seeds for future economic growth. In the absence of savings, encouraging excessive borrowing to increase spending will only pull future growth to the present, create further distortions in the economy and lead to sub-par long-term economic growth. It will further perpetuate inflation as well as the boom-bust cycle.
The ways that individuals suffer from these harmful interventions should be clear by now. Business
cycles become more severe, debt grows must faster than it should, further destabilizing the entire economy, not to mention individuals and businesses. Inflation is much higher than it would otherwise be with a more sane and stable monetary policy. It's the ordinary Americans who are left holding the bag in the form of higher inflation and sharp increases in job losses in bubble areas of the economy.
Lastly, these imprudent decisions from our government punish the country's savers. That's a shame, since it's their savings and investment that would ordinarily furnish the capital, the fuel, for future economic growth. But currently, the reward for savers who put money in their local bank is close to nothing. Low savings rates in the bank and increasing interest rates in credit cards have encouraged more Americans to work on paying down their credit cards. Over the past several months we are starting to see small declines in consumer debt (though at about $2.5 trillion, it's still very large). Though the media spins higher savings and paying down debt as a negative, paying down higher-interest credit cards is always a good step for individuals and will actually lead to stronger long-term economic growth (especially if it is matched by falling government debt, though that doesn't appear likely any time soon).