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Fixing the Stagnant Economy

Updated on August 8, 2016

Introduction

When we are faced with a problem, we need to identify the source or cause before acting. Sometimes, a proposed solution is only addressing symptoms and not the cause. That is usually a short term fix and in some cases actually hide the source and makes the ultimate solution even harder. The current economic malaise is one such case. I hope to point to the source and how to fix it.

- Aug. 2016

Background

The current economic crisis started in the fall of 2008. We had a severe recession caused mainly by the housing bubble. We had a fix that involved a massive government bailout of wall street banks. It worked some what and brought us out of the recession. However, the problem persist in the lack of growth of GDP which is tied to the employment numbers and to the deficits and the total debt.

It has been 8 years since the last recession. The question is why the recovery is so weak? and in fact, the weakest recovery in 50 years.

What is the Source?

The main source is the Federal Reserve keeping the interest rate at near zero per cent. All economist agrees that a healthy interest rate is normal and usually fluctuates between 2-3% above the inflation rate.

The interest rate is the cost of money. When one borrows money to buy a house or a car, traditionally, the cost of borrowing is in the range of 5-10%. That is what the bank charges it's borrowers for the loan and the services associated with that loan. The bank also takes in deposits from savers and pays the customers an interest of 3-5%. The difference between the two rates is the overhead of the bank and it's profits. This system has worked for the better part of the 20th century.

The Federal Reserve was put in place to manage the money supply so that we have a stable banking system in the ups and downs of an economic cycle. The interest rate is adjusted to manage growth. In boom cycles, the interest rate is raised to slow down the growth, alternatively, in recession periods, the rate is lowered to stimulate growth and investments.

Why did it not work this latest recession of 2008? What was driving the Federal Reserve to maintain the interest rate at 0% for 7 years? Who were the beneficiary of this policy?

What is Wrong with this Chart?

Federal Government Debt

For a long time, our federal government was living above its means. Year after year, it spent more money than it took in by way of taxes. This deficit spending created a national debt of near 20 trillion dollars. This debt must be repaid just like any other loan. When the interest rate is high, our payment to service that debt goes up. When the interest is low, our payment is much less. When the interest is zero, guess what, it cost us nothing to borrow. That is the key to understand the actions of the Fed.

Most governments operates in the red. As long as the debt is within reason, we can afford it by borrowing from the future. That is to say, we spend it today and pay for it tomorrow with an interest tagged on. As long as we have a healthy economy with an annual GDP that is positive, we can afford to use a small portion of that in interest payments. The problem arises when the debt gets too large, and at the same time, we have a recession, with negative GDP. In this case, we have to service the debt with money that we don't really have. It becomes a vicious cycle spiraling out of control. In order to slow down this spiral, the Fed was forced to reduce the interest rate to zero. This was only suppose to be a short term "fix" to a dire situation. It was not a long term prospect.

What does a zero interest environment mean? It has two effects. The borrower benefits because it can repay its debt with no penalty. On the other hand, the savers loses in income from deposits. It is worse for people in retirement and on fixed incomes. Traditionally, people in their retirement years, move their savings into safer investments such as CDs and bonds. They want to preserve their assets while generating some income to offset inflation.

However, if the interest rate is set to zero, the banks will not be able to offer a decent savings rate to their customers. The people are forced to move their money into other investments that may carry more risk such as stocks and mutual funds. This also creates a bubble in the stock market and drives stock prices higher even though the companies many not perform financially to justify the higher prices.

In effect, this policy by the Fed, is like a huge transfer of funds from the savers to the borrowers. The Federal Government being the largest beneficiary because it is the biggest debtor. It is almost like a "tax" except it is not passed by our legislators. It was imposed by a regulatory agency whose board members are appointed by the President.


Wall Street and The Big Banks

The investor class who runs Wall street also benefits from this artificially created low interest environment. The DOW index reaches new highs while businesses layoff employees and cuts back on plant expansions.

When the Fed gives hint of a possible rate increase, even a small amount, the market has a correction. It became the job of the Fed to keep the stock market from collapsing. This is a bad policy. It is not the job of the Fed to help wall street. The free market economy demands a hands off policy from government. The market will rise and fall due to basic economic conditions. If companies starts to make profits, their stock will rise. If companies do not perform in the market place, their stock should adjust accordingly.

The economic cycle has ups and downs. By arbitrarily constrain that cycle in the name of protecting the investors, it s doing a disservice. Moreover, by providing bailouts as in 2008 and 2009 in the last recession, it has damaged the credibility of an impartial government who sides with big business and harm the average tax payer. This distorts what free market is suppose to work and creates a "too big to fail" environment where business leaders gamble with our tax dollars while taking no risks. This is a simple concept that everyone can grasp.

Summary

The source of our economic stagnation is the low interest rate set by the Fed. Our national debt is the over bearing reason behind the Fed's instance of low interest rates. The simple solution short term is for the Fed to start raising the interests rate back towards normal levels. In the long term, we need to reduced the debt to a more manageable level. To reach that goal, Congress needs to pass a balanced budget Amendment. It is the only sure way to insure future government solvency and responsibility. In addition, usury laws needs to be adjusted to a resonable level. There is no reason to allow a bank to charge 16% interest rates on credit card debt while the basic interest rate is less than 1%. Things like this is what gives big banks their bad name.

Comments

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    • Old Poolman profile image

      Mike 8 months ago from Rural Arizona

      Jack is it possible our government doesn't want the economy fixed? Many steps have been take to make as many citizens as possible dependent on the government for survival.

      There are few problems that can't be solved if we follow the proper problem solving techniques. We pay our elected officials lots of money to solve problems but they don't seem to have what it takes to do it. In many cases we continue to repeat the same mistakes over and over and over. That indicates to me that this problem with the economy is not high on the priority list of our paid problem solvers.

    • jackclee lm profile image
      Author

      Jack Lee 8 months ago from Yorktown NY

      old poolman, I'm not sure they don't want is fixed or they couldn't because of the implications. If they did "the right thing", it would mean a deep recession in order to correct the excesses of the past. They are just not willing to pay the piper and just want to kick the can down the road...The problem is, there will be an end of the road ahead and it will not be pretty.

    • Old Poolman profile image

      Mike 8 months ago from Rural Arizona

      Jack - It seems our governments answer to every problem is to just hand out large sums of money.

      Many large problems are complex and can't be fixed by one giant and drastic move. Most problems are made up of many parts that when combined create a large problem.

      Much of our economic problems are caused by excessive regulations. Take the Obama care rule of employees who work 30 or less hours leave the employer exempt from the Obamacare expenses and fines. Even an idiot could have seen this rule making millions of formerly full time employees into part time employees.

      The EPA has done some good things, but now much of their regulations leave employers no choice but to move their operations to foreign soil.

      Taxes on Corporations are excessive and have caused many to leave our country.

      There are now more business's closing their doors than new business's starting up. This is a huge red flag. Many business operations have been forced to leave due to a severe lack of skilled labor. This could be fixed if we fixed our school system.

      The economy could be fixed if it was really examined and taken one step at a time. But our business as usual government refuses to do this, or perhaps they are not capable of doing this.

      I still think much of the economy issue is intentional to hold people down and make them dependent on government.

    • jackclee lm profile image
      Author

      Jack Lee 8 months ago from Yorktown NY

      I agree with all that you said. I would add that government cannot create wealth or business or jobs directly. It can only shape how business is conducted that will lead to a growing economy or a stagnant one... The interest rate is one such policy. Others includes EPA regulations and SEC and FTC and the IRS and a bunch of others agencies that control business conducts.

    • Old Poolman profile image

      Mike 8 months ago from Rural Arizona

      Jack - Bottom line is that if our government wanted these problems fixed they could have done it long ago.

      The fix they used for our high unemployment was to distort the numbers to make the situation appear better than it really is.

      Our schools are failing miserably and they keep throwing more money at the the schools but never solve the problem. We should know by know the problem is not all due to a lack of funding.

      I could go on with this but you get the drift.

    • Dont Taze Me Bro profile image

      Dont Taze Me Bro 8 months ago from TWO OF THE MANY LYING LIB CRYBABIES OF HUB PAGES

      The economy can't be fixed, the U.S. (and the rest of the world's economies for that matter) is already too far gone, exactly what Obama and his ilk are aiming for, a total collapse of the world's economies. When you realize EVERYTHING IS RIGGED: Medicine, science, elections, the media, money, education, search engines, social media... you are living in a fabricated fairy tale, you will reakize there is no turning around this fantasy land.

      http://www.naturalnews.com/054857_rigged_elections...

    • jackclee lm profile image
      Author

      Jack Lee 8 months ago from Yorktown NY

      Donttazemebro, that is a depressing point of view. I am not a conspiracy kind of guy. We have serious problems for sure. Nothing can't be turned around. We just need the right policies from Washington and all the state assemblies. If the people get engaged, good things can happen.

    • Old Poolman profile image

      Mike 8 months ago from Rural Arizona

      Good luck getting the people engaged. Many don't even bother to vote and can't even name the first President of the USA. Others only vote for the one that says "free" the most times in their campaign promises.

      Like don'ttasemebro says, it may be too far gone to ever bring it back.

      Perhaps the liberals have won and we will all soon be slaves of the government.

    • Dont Taze Me Bro profile image

      Dont Taze Me Bro 8 months ago from TWO OF THE MANY LYING LIB CRYBABIES OF HUB PAGES

      Jack, I am not trying to be negative or depressing, I am just looking at what I see compared to 50 years ago, which quite frankly is when America started to change and go downhill which Jimmy Carter's administration is a testament to. Then came Reagan, and yes that was a situation where we had serious problems and Reagan came with the right policies, but did he turn it around? He did for a while but then Bush Sr.(and his "new world order" crapola approach started us down the rabbit hole again giving us the Clintons, followed by his son (what a joke he is just bringing aboard all his father's cronies) and now Obama and possibly the Clintons again...you see the writing is on the wall. The country was and is so far gone even a monumental hero like Reagan didn't stop the eventual onslaught of liberalism and what will wind up being the destruction of the America "the greatest generation" new. We have nothing near a Reagan in any elected office anywhere in the country, we hardly even have any leaders who are conservatives, sure they give conservatism lip service but their actions (including Cruz) are not in support of anything but their own personal advancement. The recent primary PROVED that. If anyone thinks Trump is a conservative or could a candle to Reagan they need to see a shrink.

      But I am an optimist. My optimism doesn't stem from trying to lie to myself about the state of the country, this fairy tale land or faith in the election of any one president or his policies. My optimism comes from the fact that everywhere liberalism and socialist policies are tried they have failed and will always fail. It is from that eventual failure success will arise. From the ashes that are left all will have sadly learned the lesson that a godless civilization, which is what liberalism gives us, where there is no truth because they say truth is relative (so the ends justifies the means) leads to pain. all the while they're saying they feel your pain and are laughing all the way to the bank.

    • jackclee lm profile image
      Author

      Jack Lee 8 months ago from Yorktown NY

      Donttazmebro,

      You are right about the current state of affairs. The elites which control both parties have been playing us and one side against the other. It's like a magician using his illusions to fool the people in what is really going on. The fact is, they are making a lot of money while the middle class is squeezed. The only way out in my opinion is term limits for Congress.

    • Dont Taze Me Bro profile image

      Dont Taze Me Bro 8 months ago from TWO OF THE MANY LYING LIB CRYBABIES OF HUB PAGES

      Don't hold your breath for that. There is no way out, only slower ways down. Like a hiker falling off a cliff into an abyss. He may hit a few trees on the way down that slow his fall for a few moments but nothing is going to stop his fall save if some huge tree branch does catch him, even so he'll be too damaged from the length of the fall and the impact it would be as terminal as hitting the bottom. He'll never climb again.

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