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March 22, 2017

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The effects of higher taxation at all levels, along with increased health insurance deductibles and premiums should be looked into as further additional factors limiting spending and therefore preventing full normalization of interest rates.

Low interest rates are a blunt instrument. They may help support an increase in capital spending temporarily, but will likely cause problems elsewhere – for example, bubbles in the stock market and real estate assets to name two. I believe that low interest rates have contributed to the amplified boom-and-bust cycles in the domestic oil & gas market. At best, extremely low interest rates are a temporary solution that will cause problems in other sectors of the economy if the underlying (structural) causes of weak capital spending are not identified and addressed. Without a determined comprehensive approach to address the structural problems of weak capital spending – some of which you have identified in your article – a policy of extremely low interest rates is bound to postpone the inevitable economic downturn and probably make it worse than it otherwise might have been.

Let’s assume for a moment that, because of the increased demand for deposit alternatives created by the savings glut, pre-crisis investment spending in the US was both higher and tilted toward those investments which can be used to create deposit alternatives with the shortest collateral chains – primarily real estate, particularly residential real estate. The implication is that decreased residential spending SHOULD account for more of the drop (50%) than it’s pre-crisis percentage of investment outlays (25%). It also implies that over time we should see most of the investment slack taken up by non-residential investment.

Amazing that you could write this entire article without including a long-term chart of soaring household debt to GDP. This demonstrates everything wrong with central bank thinking and lack of common sense.

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