Wednesday, June 15, 2011

The Unseen Costs of Easy Money

For several years now the Federal Reserve has been printing money (quantitative easing) and lowering interests (through the discount window) in attempt to improve the US economy . Here's why that's not that great of a great idea:
More than any other policy action, monetary policy suffers from the sense that there is a free lunch to be had. Yet the interest rate is a price for the savings that are transferred to spenders. To the extent that the Fed manages to push this price down (and some economists will dispute its ability to push any meaningful interest rate down), it taxes the producers of savings and subsidizes the spenders of savings. Clearly, no government considers pushing down the price of any real good an effective way to stimulate the economy – any gain to consumers is a loss to producers, and the loss typically will outweigh the gain if the market price is a fair one.
Do we really want to be discouraging saving and encouraging debt?

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