Last week an Op-Ed in the New York Times suggested a plan for the economy which would lower interest rates below zero and randomly invalidate one tenth of the paper money supply to provide incentive for lending. Crazy, I know.
Peter Schiff has written a reply:
In “Maybe the Fed Should Go Negative” (Economic View, April 19) N. Gregory Mankiw suggests that negative interest rates could kick-start the economy. A way to achieve this, he argues, is for the Federal Reserve to produce enough inflation to motivate people to borrow and spend.
But can’t our current problems be traced to unsustainable levels of borrowing and spending? Keeping that merry-go-round spinning will only prolong and deepen the crisis.
Remember that someone has to save in order for someone else to borrow, and that savings squandered on consumption are not available for investment. Economies grow precisely because consumers do not spend but loan their savings to businesses to fund capital investment instead.
The column argued that more inflation may be preferable to current economic problems. But with its ability to wipe out savings and stifle investment, inflation is the ultimate weapon of financial destruction. At best such a plan trades short-term gain for long-term pain. Ask anyone in Argentina if it’s a deal worth making.
Read Schiff’s rebuttal here.Published in