Bad Debt

In his book, The Great Inflation and Its Aftermath; Robert J. Samuelson argues how the thought of inflation can be misleading when it comes to deciding on economic policies. As he refers to the US economy since the Great Depression onwards, he explains how different presidents with different policies have created or deepened business cycles in which the economy either flourishes or gets into a recession. Since the term for each president is four years which can be extended if re-elected, it is indeed sensible to conclude that short-term thinking can be of great risk for the economy and people who are affected by the economic policies put in place. And because the US was the one to accept US dollars in exchange for gold in its reserves; whatever economic policies that the US comes up with domestically would echo in all directions worldwide because of the effect these policies might have on the US dollars. For instance, if the Fed decreases its interest rates, money supply increases in the economy which de-valuates the US dollar.

So to elaborate on the gold case, a de-valuated US dollar will make countries rush to the US and exchange the dollars that they own for gold before it’s too late, or before other countries rush towards doing so. The basis of their action is the thought of the US not having enough gold against the dollars being printed, which turned to be true until the dollar concept was dismissed in Nixon’s time as he allowed the currency to lose its value because of excessive printing to fund the wars in his time, like the one in Vietnam. You should know here that despite the fact that the US central bank, the Fed, is supposed to be independent; what the president of the Fed does can greatly affect the president and his re-election prospects. Therefore, the president would be manipulating the latter’s job description and stirring it towards his own interests and benefits, not necessarily the economy’s. The Fed, however; can only indirectly alter two basic concepts: the overnight interest rates to banks and money supply in the form of reserves that banks keep with the Fed.

Mistakenly, interest rates were either increased or decreased to boost or restrain the economy’s growth if it was due to double digit inflation. If the rates were decreased, banks borrow more from the Fed and from one another and would so have more to lend to the public. The issue here is that so much money circulating in the economy can also be dangerous for price stability and the value of the currency. In addition to that, when people spend this money on stuff with no return, let’s say buying cars and residential homes, the increased money supply can accelerate inflation in a  way that can only be curbed by a recession in which prices will start declining, businesses will have to charge less, profits will be shrinking and consequently unemployment rate will be increasing. And this goes on as more businesses go bankrupt or suffer insolvency. In the same book, Samuelson justifies this by that “[T]he “real bills” doctrine held that the Fed should provide credit only for productive loans: loans that increased output of goods and services”.

To conclude, central banks play a major role in what happens in the economy. And yes, this means that even a recession can be tracked back to them, but they are not the only ones to be blamed. The loans they provide, increased or decreased based on the interest rates charged, can define people’s wealth in different economies regardless of what income level they belong to. When loans are invested in the way they should be, the increased growth in the economy can be a real one rather than one based on price instability and inflation. And if the economy goes into a recession, prices won’t have to swing severely to create an alert in the minds of the people that it’s time to pay for what you got to enjoy earlier. Also, do remember here that when loans are being invested in a way that the profit made out of them exceeds interest paid, in percentage terms as well; it means that these were obtained cheaply and that you only invested your future  savings based on the notion that a dollar obtained  today is worth more than one obtained tomorrow.