The Trade-off Between Economic Stability and Economic Growth

 

The Trade-off Between Economic Stability and Economic Growth

Economics Without The B.S.**: 

[**  Double entendre intended.]

 

https://www.wsj.com/articles/rising-interest-rates-hit-landlords-who-cant-afford-hedging-costs-11673900169?st=8bw3rzwf8t6pbf0&reflink=desktopwebshare_permalink

This is a good article in the Wall Street Journal that illustrates what I see as a problem in our economy -- financing long-term investments with short-term loans. It is a way of showing we have an investment community that is more situated in what is called "rentier capitalism", earning income on the cash flows of an asset/investment rather than an emphasis on increasing the productive output of a capital investment that grows an economic opportunity that is new, what was more likely in an industrial economy.

 

It makes the investors constantly vulnerable to the fluctuations of short-term interest rates; in effect the viability of their investment is subject not only to the productiveness of the asset but also the constant variability of the short-term financing.  When enough businesses operate this way, dependence on short-term financing of long-term investments, it puts pressure on our Fed and government policy for encouraging low interest rates, which in my opinion offsets higher rates of economic growth.

 

In other words there is a trade-off between lower interest rates, more moderate growth rates, in effect economic stability, with higher rates of growth which can result in a tolerance for more speculative ventures.  It is a trade-off between stability and growth, in effect between stability and societal change -- trying to find the sweet spot between the two at any point in time subject to change.

 

Another way of looking at it is how much vitality in a society -- acceptance of change -- is related to more vitality in economic activity by encouraging higher rates of growth? And since the U.S. provides the economic leadership in the world and the dollar is the primary reserve currency for international financial transactions and commerce, how much effect does U.S. policy have on other less developed nations and the rest of the world?

 

 The importance that finance has played in making investments and structuring the financial aspects of the investment, something that has become more prominent since World War II, has, along with changes in the tax code, made the finance discipline even more important in business and society than it previously was.  This is one reason why we have had the growth of the Financial Sector and Service Sector and the decline of the Industrial Sector since the 1960s when we were more of an industrial society. And we have had lower rates of economic growth since the 1960s, even in our good years like the 1990s.  So how do we get the change our society needs to stay creative and innovative in meeting the wants and needs that arise as we go from generation to generation?