The real problem is that interest rates have been too low for almost ten years.
This is the primary source of the boom-bust cycle that we are experiencing as explained in an earlier article of mine, The Economic Collapse Could Have Been Prevented.
These low interest rates coupled with massive expansion and availability of credit are what created the booming economy. The low interest rates and availability of credit are why the economy over build houses and cars.
Without low interest rates and availability of credit, the economy would never have over expanded and much of the misguided investments would never been moving into the over production of houses and cars.
The low interest rates and expansion of credit created a phony economy, like fairy tale land, in which it looked like money grew on trees. That fairy tale economy did not reflect the true purchasing power of the consumers, which is actually much lower. The true purchasing power of US consumers is much lower than it appeared to be, which means the true GDP is also much lower than it appeared to be. The future GDP projections are not going to materialize as many were hoping they would.
Much of the over production of the economy cannot return to over production. The economists who think the economy will return to its fairy tale state are still living in fairy tale land. To correct for the over consumption and over spending of the last decade, the economy needs to contract as we try to pay for the houses and cars that we purchased on credit during the boom years.
Economy Is Still Getting Worse
The economy has not turning a corner, nothing has changed, and in fact many things are still getting worse.
But the massive amount of money that the government has poured into the economy in the last few months may be enough to slow the natural healing process of capitalism at the expense of a much larger debt obligation and a much bigger recession in the near future.
We may have escaped a deep recession, only to produce an inflationary depression in the near future. When Bush-Greenspan lowered interest rates to one percent in 2001, the economy was able to grow for seven years before it came crashing down in late 2008.
This time the Fed had to lower rates to zero and add trillions of dollars just to avoid the much needed recession to correct the bad investments created from low interest rates. If the economy manages to stabilizes, I think we are only going to get a few years before the economy comes undone and the big recession becomes unavoidable.
The longer we put off the recession, the larger it's going to get and the more damage it's going to cause. The sooner interest rates return to market rates the sooner we can start rebuilding a sound economy.
If we continue down this path of unreasonable low interest rates along with out of control government spending, the world will soon turn its back on the US economy and stop borrowing us money - sending the dollar and the US economy down a hole it will perhaps never recover from. China has already said they plan to replace the dollar as the World Reserve Currency by 2020 or sooner.
What we really need is a strong President to face the music and tell the public that the economic collapse is truly a national security issue. That without a sharp cutback in government spending, the dollar could plunge sending the US economy into a hyperinflationary depression.
Instead of that, we have Obama who has convinced a good portion of the public that his monetary policy will save the economy from a deep recession and his massive government expansion and tax increases will save the day.
Nothing could be further from the truth. The Obama team is setting up an inflationary depression.