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Interest Rate Manipulation and Loose Money Promote Economic Collapse

Interest Rate Manipulation and Loose Money Promote Economic Collapse

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Published by Ron Robins
Manipulated, low interest rates and loose money eventually create excessive debt that leads to economic collapse as the debt unwinds. The Soviet Union failed in trying to circumvent the universal laws of supply and demand. Similarly, western central banks striving to circumvent these same laws as they relate to money, will also fail.
Manipulated, low interest rates and loose money eventually create excessive debt that leads to economic collapse as the debt unwinds. The Soviet Union failed in trying to circumvent the universal laws of supply and demand. Similarly, western central banks striving to circumvent these same laws as they relate to money, will also fail.

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Published by: Ron Robins on Feb 24, 2010
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April 6, 2009
Interest Rate Manipulation and Loose Money PromoteEconomic Collapse
byRon Robins, MBAFrom my blog:Enlightened EconomicsFew people would compare downward central bank interest rate manipulationand loose money policies to Soviet style command economics. But I do. And Isuggest that if these policies continue for much longer, it could lead to aneconomic collapse, something approaching that of the Soviet Union’s in the late1980s. Consider the outcomes for the United States of excessively low interestrates and loose monetary policies in recent years fostered by the U.S. FederalReserve:
A real estate boom and bust, with massive over-building.
Discouragement of savingswhich fell to all-time lows relative to incomes.
The taking of inordinate financial risks.
The creation of excessive debt, particularly by consumers.
The expansion of total debt far faster than either GDP or income.Furthermore, the Japanese experience with many years of zero-based interestrates and easy money has enormously compounded its economic problems.Here is the situation in Japan today:
Japan cannot raise interest rates in any meaningful way due to itsgargantuanpublic debt. To do so could bankrupt the nation. The country istrapped into lower rates.
Until recently, Japan had become the financier of ultra cheap plentiful loansthat artificially boosted global asset prices. The so-called ‘yen carry-trade’,and, its recent collapse has helped crush global asset values.
Zero-based rates combined with major monetary expansion smashed downJapan’s exchange rate, making imports expensive and discouraged balanceddomestic consumption.
A ‘cheap’ Yen gave Japanese exporters an unfair trade advantage relative toother developed economies, particularly that of the United States.
Japan has failed to pull itself out of an almost twenty-year slump.
Japan has produced a situation of significantly diminished resources to fightits present downturn, not only due to the enormity of its government debt,but also because of deteriorating savings in recent years and lack of domesticconsumer demand.With central bank rates of zero per cent proving inadequate to get individualsand companies borrowing, and banks lending again, governments now seek tolower their bond yields. Thereby rates for mortgages, auto loans, consumerloans, etc., are also manipulated down, hoping to kick-start consumption.Hence, the U.S., Japanese, British and other central banks are engaged in amassive ‘printing money’ exercise to buy huge quantities of their respectivegovernments’ bonds in an effort to lower their bond yields and create the easymoney. Such policies usually have the following outcomes:

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