Keynesian economics has ruined our understanding of how economies work in many many ways, but near the top is the belief that low interest rates promote growth and stimulate economic activity. It’s all part of the absurd notion that demand is what drives an economy. What actually drives an economy is the supply-side, and what low interest rates do is allow many low productivity and no productivity activities to access funds in place of truly value-adding investments which either remain unfunded, or receive fewer funds than they ought to receive given their relative economic potential.
It may be the one issue of significance I disagree with Donald Trump about. The Fed in the US has been raising rates and the economy keeps getting better. The Fed does it because they are trying to spike Trump’s success, and Trump worries that they might succeed. There is also no doubt that rates can be raised too high, but there is also no doubt that rates can be too low. In the US it is hard to tell, but in Australia rates are too low and lowering them further will only make the economy worse. Falling real incomes are the surest sign. And then there’s this from Alan Kohler.
Even the RBA recognises this, calling for fiscal stimulus at the same time as it cuts, and on that score, no sooner said than done: two days after Governor Philip Lowe’s speech on the matter, the tax package was passed, delivering the equivalent of two rate cuts in tax refunds.
The straight out ignorance of basic economics inside the RBA, who are lowering rates and calling for a stimulus, ought to be a scandal, except that economists are Keynesian through and through. Let me send you to the last two chapters of my Free Market Economics if you would like to understand how economists looked at these things before the Keynesian blight ruined economic theory, possibly forever.