Central Bank Rate Cuts Will Not Work


The central banks of the world like the Federal Reserve in this country are drastically lowering interest rates to stimulate the economy.  In this environment, this will not work as well as they wish it would.  This should not be hard for capitalists to understand if they give it half a moment of thought.

Suppose you are a manufacturer of widgets.  Suppose your warehouses are full of inventory and your factories are producing widgets faster than you can sell them.  Suppose you look around and see that your competitors in the widget making business are in the same position.  Moreover, they are cutting prices like mad in an attempt to sell what they already have produced.

You are all using up whatever cash you have to pay employee salaries, pay for energy to keep your buildings open and machines running, pay to run the trucks to carry your inventory to warehouses and the few customers that are still buying.

What kind of a deal on low interest rates do you think the bank would have to offer you to encourage you borrow to invest in more factories, hire more employees, and buy more raw materials?

If it takes you more than 30 seconds to conclude that there is no interest rate at zero or above that could get you to invest, then you aren’t much of a capitalist.

If you are fairly wealthy and you see the cost of companies dropping like a rock, would you immediately start buying or might you sit on your cash and wait for a better deal to come along?  What kind of interest rate would the bank have to offer to charge you to get you to borrow against your assets in order to buy more?

What is it that actually is in short supply and could benefit the economy by having more? We could have more public transportation for those who cannot afford to run their cars as much and so that we could use energy more efficiently, we could have better education so that our children would be able to be more productive when the economy turns around, we could get more modern water and sewer facilities to improve our health, we could do maintenance on our public infrastructure so that it won’t deteriorate from lack of care, etc.  Paying people to do these things is what will get money flowing again. It will increase demand for the widgets and raw materials that you can’t give away now.

What entity can look at the big picture of the whole economy and afford to make decisions on a broader basis than one person or one company or one industry?

If you cannot figure this out, see Obama’s Challenge: A Transformative Opportunity.

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