President Barack Obama managed to overtake Republican challenger Mitt Romney on the exit poll question “Who is better for the economy?” and a strong majority of Obama voters felt that the economy is better off than four years ago. Indeed, anyone (particularly Bernanke) would concede that without the Fed’s zero interest rate policy we would be experiencing a far worse economy—the true Obama-Keynesian economy.
The danger here, as we have seen in every other bust for a century or more, is that we can only suspend the laws of economics for so long. And in general we are only good at considering immediate consequences, while being very, very bad at considering later consequences. As 19th century French economist Frédéric Bastiat observed, “The bad economist pursues a small present good, which will be followed by a great evil to come, while the true economist pursues a great good to come, at the risk of a small present evil.”
In the short run (and this is what is so insidious about the Fed’s artificially low interest rates), all we are seeing is an illusion of economic progress. Specifically, the Fed has manufactured a distortion intended to trap both consumers into spending more and entrepreneurs into investing more, or lengthening their production periods (becoming more “roundabout,” as the Austrian School economists said), as if savings were more plentiful. This combination would never occur in an unhampered, noninterventionist economy for the simple fact that higher consumption would mean higher interest rates (from less savings), which would discourage longer production.
Thus, investment in this illusory economy is malinvestment, or investment that always unravels with the intervention’s inevitable end, due to either untenable credit levels (such as today’s corporate debt-to-asset ratio, still at historic highs) or a resource crunch (rising commodity prices) that eliminates any advantage from printing money; and one or both of these scenarios is unavoidable.
Economic progress requires a chain reaction from lower time preferences: foregone current consumption and a higher pool of savings lowers interest rates and triggers a natural entrepreneurial response, greater productivity, and subsequent economic growth. (The “Paradox of Thrift” that warns of the hazards of higher savings is the nonsensical stuff of the ivory tower.) By circumventing this process, as we have today, we have built but a temporary façade.
Long story short, we’re kicking the can down the road. There will be very hard times ahead financially due to this.
Also worth revisiting: