One key reason consumer spending is down and depressing the economy is interest starvation. If you had saved $100,000 expecting that, at worst, you could earn four or 5 percent by putting it into safe government securities you would have expected $4,000 or $5,000 a year in income. But if this turns out to be only a few hundred, you certainly can't spend the interest you didn't earn. You probably aren't going to spend the few hundred either since you don't know what is coming next.
As late as five years ago, even the most conservative financial advisor would have calculated that you could earn four or five percent fixed income on top grade investments, even government securities. Nobody predicted that a lunatic would get control of the Federal Reserve and lend banks vast sums for nothing.
As a CPA, I know that debits have to equal credits. This is as certain as the law of gravity in physics. This means that when the Federal Reserve lends vast sums to banks for virtually no interest, others can't earn anything when they put money into what were once called fixed income investments: bonds, CD's, money market funds
In practical terms, those who did the right thing and saved their nickels and dimes for 40 or 50 years so they would have some investment income in retirement instead of relying solely on government benefits or help from family members find themselves stranded.
You might have little sympathy for old people with money but how are you going to be able to persuade young people to save for their own retirement if they see this happen to those who did? People now speculate that Social Security won't be around when those who are now young get ready to retire. But what if there was no way for them to earn anything on their investments? There needs to be an incentive for people to keep investing. In the long run, we need an economy where capital comes from investors, not new money printed by the government.
I recently noticed at least one commentator say that a good thing about low interest rates is that it encourages people to spend instead of save. While this could have some purpose in a short run, in the long run it leads to ruin and generations of old people with nothing but government services to live on.
Even the low rates don't seem to be stimulating the economy that much. If you are a business considering a loan, you have to look at the prospects of earning enough money from the loan to pay the principal as well as the interest. If you don't think you can earn enough to pay the principal, it doesn't matter what the interest rate is.
All the emphasis is on making cheap loans. But this starves those on the other end of the transaction. I'm hearing ads on the radio about home loans for under 3% for a ten year loan and not much more for a longer loan. This is another disaster in the making. It can only be done by creating money through government action. What if these loans are securitized and sold to investors?
The Fed gets away with this in the short term because people are more concerned about their principal than earnings. So they buy government securities that pay virtually nothing. But in the long run, this isn't going to work. In 5 or 10 years, interest rates will go up and these securities will drop in value relative to those with higher rates.
Throwing the future away to pretend we are fixing the present is what we did wrong in the first place. Lending to anybody willing to take a mortgage certainly boosted the housing and lending market and boosted prices. But when it became clear that many of these borrowers couldn't pay, the whole thing collapsed and it will take years for the system to digest the mess.