Wednesday, February 18, 2009

How lower interest rates hurt aggregate demand

The formula used to be simple, right? If the economy slows down, lower interest rates. That will goose borrowing and spending, and you'll see aggregate demand pick up, and the economy recover.

I don't know enough about previous recessions to judge how true that ever was really, but in this recession, the problem is that consumers want to save more and spend less, and have been given no other option by stimulus nazis ("no stimulus for you!") like the Obama administration and Paul Krugman than to try and save out of aggregate demand, with predictably dire consequences.

In this environment, it's worth mentioning that interest rates of 0 really hurts savers. At this point, ZIRP is taking savings income out of the private sector, and may be doing more harm than good.


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