There has been a lot of discussion recently of the Fed’s new program to buy $600,000,000,000 of U.S. Treasury bonds in an effort to keep interest rates low.
This on top of almost $1,000,000,000,000 they spent over the past year and a half buying mortgage-backed securities, holding mortgage interest rates historically low.
“Quantitative easing” is the term you’ll see in that article — i.e., “easing” upward pressure on the value of the U.S. dollar by artificially increasing the “quantity” of dollars in the economy. Economics 101: when the supply of a product increases without a corresponding increase in demand, then the value of that product will decline.
Is that really what we want? A less valuable dollar? So it takes more dollars to buy imported goods? And so American exporters will collect less euros and yen and pesos and yuan from countries they sell to? Really? That’s good?
And what about those lower interest rates? How low do they need to go? Banks are already borrowing from the Fed at an effective rate of 0% (yes, zero!). Mortgage interest rates are in the 4% range. Businesspeople and investors can borrow cheaper money today than in many, many years!
The issue isn’t credit. It’s growth. If I’m an independent businessperson — and I am — my objective is to grow and invest and support my family and my home. But investing in business growth requires confidence in an economic environment that makes betting on growth a reasonable risk. Many (most?) businesses — small, medium, and large — already have so little confidence in our overall economy that they are slowing or delaying their growth plans. Rather than investing and hiring, many are taking a wait-and-see position.
In that uncertain environment, would a prudent businessperson take on new debt in order to invest in growth? And then exchange their goods and services for less and less valuable dollars? That is not a formula for success.
Okay, so what is the answer? Let the market work. Get the government out of the business of managing business. Provide an environment in which businesses can see five years or more into the future in terms of tax policy and business operating costs. Then just get out of the way. Smarter folks from all over the country will find the opportunities and unexplored markets, and make the right things happen.
Some businesses will thrive. Others will fail. That’s the way the world works. It’s that risk of failure than makes free enterprise the prosperity engine that it is. In a world where entrepreneurs are protected from the costs of their mistakes, then they have no incentive to assess risk rationally. But in a predictable environment entrepreneurs and businesspeople can and will gamble their capital and their livelihoods on the chance to build and grow — creating jobs and prosperity for many others along the way.
In my humble opinion, that’s the only way forward.