Borrowing, Spending, and Sustainability

  By Bob Shapiro

Keith Weiner blogged recently explaining how borrowing to consume is a bad thing. Nice job Keith.

However, extending Keith’s arguments, it would imply that any consumption makes us poorer. Do you really need to trade in your 10 year old car when it’s still doing a fine job getting you where you want to go?

Keith makes the distinction between borrowing to consume but I don’t see it. Consuming is consuming. It’s only in the aggregate that the situation makes a difference.

Keith also shows how producing, and borrowing to produce, to supply a borrower’s needs, also is unsustainable, but I also think that may not be true – certainly not 100%.

As a producer, how do you know that your improved product or better business design can’t make it when interest rise? Simple answer: You don’t and can’t know.

You can’t know whether your business activity is good for the Economy. It makes no difference whether your business operates in an artificially low interest rate environment like today, a ‘neutral’ rate environment, or even a high rate environment.

If what you produce is fluff that’s not sustainable, then it’s at risk if rates go up, regardless of where rates are currently. If you make a truly gangbusters advance, it doesn’t matter if rates are high today; it’s an advance ‘for humanity.’

I agree with Keith that the FED’s activities, in screwing around with interest rates and the money supply, on the whole, harm our Economy, and the FED should be abolished. But, the Economy is more than just the FED.

Interest rates will fluctuate even within a hard money system. Prices and costs will fluctuate even within a hard money system.

So long as we have the FED – certainly til long past I’m gone – I prefer to look at where interest rates are compared to where they have been and could be again.

This is about as low as I’ve ever seen, and I can recall rates hitting 20% in the US. In other countries, rates have gone negative, and rates have gone to what we might consider super high levels.

But, what are the chances that rates will be higher in the future or lower? Rates going from 1% to 2%, or from 8% to 9%, might show that some investments were not on as firm ground as others. And yet, other projects, with money borrowed at 2% or at 9% may prove to have been quite sustainable.

But, I like to play the odds. A high rate environment makes me expect lower rates in the future, while existing low rates make me expect that rates will be rising. Rising rates show the unsustainability of many projects, while falling rates indicates to me that many projects, unsustainable or not, will flourish for a while. Similarly with consumption spending.

As far as policy goes, I’d like to see a President come in and direct the FED to consistently allow rates to rise – maybe by 1 basis point (0.01%) every Monday – until such time as the Markets clear without FED intervention. At that point, FED actions on rates would cease

Please notice that I didn’t say direct the FED to ‘raise rates’ but only allow rates to rise. The FED has ZERO business controlling rates, but should allow them to fluctuate with market conditions as the Economy dictates, once that first moving target equilibrium has been reached. Then, Dump the FED.

Rates likely would rise by 0.5% a year (1 basis point times 50 weeks a year) into a second or third 4-year (maybe 4th) Presidential term.

Once the initial OMG! shock that rates are rising into the market, that should be priced in. After that, with the FED’s influence, rates would fluctuate higher and lower due to real world market factors rather than politics.

Well, time o get off my soap box.

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