Historically we have believed lower interest rates will stimulate the economy, yet we now have record low interest rates and economic growth is very weak while unemployment remains very high.

Part of the reason is that the expected effects of lower interest rates is largely countered by a decimated banking industry that is trying to rebuild capital which mean that it is restricting loans. What good is a low interest loan if you cannot get it? Another problem is that the onslaught of radical new legislation in the midst of a very weak economy has stunned any growth instinct for domestic business like a tranquilizer gun.

But one must consider that perhaps the low interest rate itself is hurting the economy.  Those looking to retire must plan on having more capital to make the same income with dramatically lower rates. This means saving more and spending less.  Low interest rates reduce the returns on fixed income investment and many are still burned by the stock market volatility to re-enter the equity market.  (This alone may be a good reason to consider equities.)

If we thought interest rates would rise we may move to lock in long term rates and actually borrow more. But this would only be true if the banks would freely make the money available.

Supply side economics is often trivialized as “trickle down”, but what is often over looked was the monetary aspect of the Reagan Revolution.  By ending inflation, restoring the value of the dollar, AND reducing the tax and regulatory burden on business we achieved stellar growth.

Though we do not have inflation at the moment, the large national debt keeps this fear alive.  And we are looking at higher taxes and much, much more  regulation.  Perhaps the solution is to RAISE interest rates to increase the value of the dollar while reducing taxes and regulatory burdens.

But the biggest risk is because of the enormous debt the federal governments are carrying.  Imagine how higher interest rates will increase an already uncontrollable federal debt.

In this economy lower interest rates and a high government spending and debt may be having the opposite effect than was expected.

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