February 13, 2025
Funny Money Makes the Economy Go Flat
Decades of low interest rates have held back productivity growth.
Decades of low interest rates have held back productivity growth.

For the last twelve years, and to some extent for the last quarter-century, the United States has been living under a regime of artificially low interest rates. The Federal Reserve’s policy of easy money has inflated asset prices and widened inequality. Most important, as has been the case with other countries that have done the same thing, it has caused productivity growth to languish, making us poorer and making our economic problems harder to solve. It is time for this policy to be reversed, and rates returned to their “natural” rate of about 2 percent above inflation.

Most supporters of a free economy would agree that price fixing is bad. They cite the example of Gosplan, the Soviet planning agency, whose activities caused huge shortages of goods and massive economic inefficiency. Yet when it comes to interest rates, the most important price in the economy, they support a system under which an unaccountable central bank sets rates at the level it wants, without reference to market supply and demand. Since the dollar lacks the fixed anchor it had under the gold standard, its value floats against other currencies and the central bank is free to set rates wherever it wants them.

Since high interest rates slow economic activity in the short-term and low rates stimulate it, a good number of central banks have a bias towards setting rates as low as possible. These days, in many countries, they will even distort the banking system so as to set interest rates below zero, and some are planning ways of pushing all payments into electronic mechanisms, thus removing the alternative of holding physical cash, which the populace does if rates are more than marginally negative.

[Interesting Read]