Sunday, August 30, 2009

Monetary policy is upside down.

A massive amount of economic research makes the case that the "high-end" marginal consumer drives a great deal of economic activity in this country. In layman's terms, wealthy people can spend with greater alacrity and abandon than most folks and in an economy where Consumer Spending comprises 70% of GDP, this is a significant slice of demand.

And yet, mainstream economic theory would have us believe that lower interest rates stimulate demand across all economies at all times in history.

(Warning: rhetorical question iminent)

So how, dear reader, does extremely low interest rates effect this demographic, and what are the ramifications to demand from this sudden decrease in current and projected future income among this class?

Lower rates decrease present and future cash flows for net savers of financial assets. This is something that has not been addressed by the Monetarist/Rational Expectations crowd.

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