Historically low interest rates have done nothing to grow economies in the US or elsewhere. Why not?
Economists and politicians are doing everything in their power to avoid looking at the root cause of economic malaise. They talk about “consumer confidence” as if that can be manipulated by interest rates.
They report statistics that are defined so as to skew perceptions of the reality consumers face. Neither CPI nor the unemployment rate as reported in the US accurately represent the situation consumers face. (I’ll talk about both of these problems in detail in future posts.)
The reality is that
(1) Western economies are based on consumer spending, and
(2) Consumers don’t have money to spend.
Consumers are tapped out because
(A) Historically low interest rates have not been passed along to most consumers. Further, intelligent consumers are afraid of being squeezed when rates rise. After been burned a number of times, people do learn. (Unless they are politicians.)
(B) There has been no real effort to reform or reign in costs for healthcare, education loans or housing, and people are being told that they have to save for retirement at a much higher rate than in the past. There’s no money left over for anything else in most households.
(C) Job downsizing is rampant, especially among those reaching the magic age of 50. Corporations cut older workers to reduce salary and health costs, and don’t hire older workers for the same reason. So, right when people are in the final push toward retirement, their income drops by 50% or more. Historically, that was the age group with the most disposable income to support consumer spending, and now that’s gone.
(D) Regressive tax policies. Reductions in income taxes and increases in gasoline taxes and usage fees shift the tax burden to those who can least afford it.
The Federal Reserve can set interest rates any place it wants, and it won’t materially impact what consumers have to spend. In this environment, the Fed has lost its ability to steer the economy. Turn a car’s steering wheel when the car is stopped and tell me what the car does? Nothing. Without consumer spending to push the economy forward, the Fed can do whatever it wants and nothing will happen.
What can you do? Until Washington decides to confront reality, plan for a stagnant economy. Employees need to plan for what happens when they lose their current job. In your 40s? You need to plan for a second career. Employers are going to have to find ways to reduce costs and find growth through innovation. The same-old, same-old isn’t going to get it done. Mergers and layoffs simply worsen the situation.