What if someone told you that there exists a way to reduce empty consumerism, which puts stress on natural resources and the environment, while at the same time achieving more significant technological development and long-term economic growth? Would you be interested?
Such a method exists, and it is surprisingly simple once you get past some conceptual hurdles. The downside is that it has to do with monetary policy, a topic that practically no one understands. Don’t worry though. We will keep it simple by sticking to basic economics.
Monetary policy can be explained in terms of supply and demand. The interest rate can be thought of as the price of borrowing money. When the interest rate goes up, borrowing becomes more expensive, and therefore the demand for loans goes down.
At the same time, when the interest rate goes up, lending becomes more profitable. When you put the money in the bank, in practice you are lending it to other people, because the banks lend it out for you. In sum, fewer people want to borrow money, and more people want to save.
The exact opposite happens when the interest rate is lowered: more people want to borrow money, and fewer people want to save. Ever since the 1930s, the monetary policy has roughly speaking, been to have an artificially low interest to “stimulate” the economy.
The idea behind stimulus policies is that if people spend a lot of money, businesses will earn more and create more jobs for ordinary people.
There are multiple problems with this, which are beyond the scope of this article, but one problem is that an artificially low-interest rate means that lending mostly goes to consumption in the present. Most of the debt in the economy today is consumer loans. Only a small fraction of the debt is for investment in the future.
What this means is that an artificially low-interest rate rewards short-term consumption, and punishes long-term investment. Do you see the problem? The stimulus policy leads to excessive and empty debt-fueled consumerism in the present while neglecting forward-looking investment.
So, while we are all gorging on the latest iPods and iPads, the infrastructure of the country is crumbling, and little effort goes into developing new science and technology which will benefit us down the road.
Fortunately, there is a natural fix to this. America could drop its debt addiction and start increasing the interest rate to reduce empty consumerism, which puts a strain on resources and the environment, while at the same time rewarding saving and investment for the future.
There is only one issue with this. America’s debt is so massive that even a small increase in the interest rate will put a huge economic strain on millions of people who are barely scraping by already. Again, fortunately, there is a way out of this, which is to increase the interest rate only on new loans. This allows the economy to segue into a healthier economy.
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