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What Does Bernanke’s Announcement Mean for the Rest of Us?

June 25, 2013

The fragile recovery we now supposedly enjoy will wilt again as as soon as interest rates rise. We are only in the eye of the storm. Though the Fed has promised to keep the prime interest rate near zero, in the long run the government must raise the interest rate, and when it does the true weakness of our economy will be revealed. At once, the adjustable-rate mortgages still extant will suddenly go up. Credit card rates, now adjustable as well, will rise. Minimum monthly payments will add to higher mortgage payments, pushing people beyond the limits of their fragile budgets. North Americans will default at rates that will make the current crisis look like a foothill to the Rockies.

The solution to all these complext problems is surprisingly: investment. Investors, entrepreneurs, and corporations all lack productive places in which to put their money. Productivity and profitability are not aligned because financial instruments make it easier to invest in consumer debt than in business debt. Consumers borrow because it is cheap and easy to borrow, but lenders give them money because it is profitable. Investors, without new companies in wich to invest, put money into mortgage-backed securities, inflating the housing market. For General Electric and Citigroup, it is more profitable to lend money on credit cards than to give loans to small businesses or even big businesses. Capital that in another time would have been put into new enterprises, creating jobs and raising incomes, instead goes into consumer credit. This has happened not because capitalism has failed but because it has been so successful. Global capitalism has been so profitable that there is now an overabundance of capital in the world and too few places in which to put it. As workers, North Americans have seen the efficient capital operate with cheaper and fewer workers, cutting incomes. As consumers, North Americans have access to cheap capital to borrow. Consumer credit is necessary for modern capitalism to function, but the excess of capital allowed to form at the very top is starting to inhibit the growth of the economy. High tax rates, like those we had during the postwar prosperity, put money in the hands of consumers and the government to spend. Since the Reagan administration, those tax rates have been falling. The justification of our low tax rates today is that the wealthy will invest their savings and grow the economy. Instead that wealth has been invested in speculation, destroying capital and hampering growth. If that capital were invested in businesses and not in consumer debt, the low tax rates could be justified. Consumer borrowing has crowded out business borrowing. The key question is, then, how can we enable good investment while keeping tax rates low?

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