I was really trying hard not to pay any attention to the election. But today I unintentionally heard Jack Layton’s first campaign promise. He wants to reduce credit card interest rates by nearly half.
To review the last couple years, in case you missed it. The world’s largest economy gets shaken to its knees when government suppresses interest rates causing a massive investment bubble. The bubble bursts causing mass destruction of wealth and unemployment.
It’s not like this happened a hundred years ago and the details are easily forgot. It happened TWO YEARS AGO! Sorry, I didn’t mean to raise my voice.
Dear Mr. Layton, a short economics lesson. Read this slowly:
A loan can only happen when some other person choses to save rather than spend.
The true price of money is therefore the amount that people save. Supply and demand.
In the real world, interest rates would fall as savings grew. But government-suppressed interest rates effectively pretend that people have saved when in fact- they haven’t.
Expansion is no longer the result of saved production but rather in spite of production. This is not sustainable.
This is how the US economy collapsed. Years of government suppressed interest rates made the price of money cheap. Nobody saves and cheap money flows into what eventually become malinvestments. Governments love this because in the short term, people can afford to buy more things. Loans are cheap because the cost of money falls at the stroke of a pen. The deferred consumption that would normally make money cheap never happened and hence the economy ends up leveraged. This house of cards eventually collapses and extracts a massive toll as we are seeing right now in America.
What kind of social democrat wants to make it easier to consume beyond your means anyway?
This kind of magical thinking about the economy must be constantly debunked. Do not be fooled by the cheap trinkets being offered by even cheaper characters.