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Suppose Macro Policy Models Are Upside Down

December 1, 2019 | Commentary

  • Current monetary and fiscal policy have a foundation in long-accepted macroeconomic theory that dates back to Keynes in the 1930s.  That theory says lower interest rates encourage productive investment by companies while also encouraging more consumption as an alternative to lower yielding savings.
  • A decade after the financial crisis the recovery rate in the United States has been the slowest in history.  The economies of Japan and most of Western Europe are even less vibrant.  This has unfolded against a backdrop of ultra-low and sometimes negative interest rates.
  • In 2010 Offit Capital first wrote about the invisible tax on savers created by zero interest rates.  The estimate was $300 billion then, a sum that has only increased through time as federal debt continues to grow.  Penalized middle class savers become uncertain and cautious consumers.  This in turn could make corporate CEOs hesitant, fearful that there will not be enough demand to justify new investments in plant and equipment. 
  • It might be possible that the early 20th Century theories no longer capture the largely developed economies of the 21st Century.  Today ultra-low interest rates might actually be holding the economy back from its true potential.  After a decade of this approach and disappointing macro outcomes, it may be time to rethink our theories and policies.

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