Thursday, May 2, 2013

Keynes was right: rate cuts don't work

Today the ECB lowered their lending rate.  They are moving toward the US Federal Reserve effective target of zero interest rates.  It's done nothing for the US, why should it offer any hope for Europe.

Keynes argued persuasively in the 'General Theory' that, absent the 'animal spirits' of entrepreneurs, lowering interest rates may have little or no effect on a stagnant economy.  He was right.

Lower rates don't make an employee that is paid $ 50,000 in wage and salary but costs $100,000 to hire (because of government) worth doing.  You can subsidize rates --make them negative -- and it won't matter.

An economic policy that confiscates profits from businesses, pushes labor costs to a multiple of what the employee actually receives in income, arbitrarily outlaws important free-market economic initiatives (Keystone), and rewards political cronies (Solyndra) is not likely to produce economic growth quite apart from the level of interest rates.

Tinkering with Fed policy might matter if the other economic policies were not in place.  But, the other policies are in place and they matter.

With an Administration fighting a daily war against free markets, the economy is not going to go anywhere.  The economy needs a return of  'animal spirits' in the business community, as Keynes argued.  Absent that, expect more of the same dismal economic news.

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