It’s the Debt Level Stupid (From 'The Coming Great Depression')

There were, once upon a time, usury laws that generally held any interest rate greater than 10% was illegal. The Federal Reserve under Paul Volcker believed that interest rates needed to be raised to insane levels to stop the runaway inflation, which was the first stone that hit the water sending the shock waves that we are having to pay for today. Once the usury laws were altered so the Fed could fight inflation, it set in motion the doubling of household debt, not to mention the national debt. At 8%, the principle is doubled through interest in less than 10 years. The national debt exploded from $1 to about $10 trillion in 25 years and household debt has doubled. Some states now consider usury to be 26%. Historically, these are the interest rates paid by the very worst of all debtors - the bankrupts. In fact, in China, the worst creditors historically paid at best 10%. What we have done is the lifting of usury to fight inflation back in 1980, has resulted in usury now being so high, a larger portion of income of the common worker is spent on interest, not buying goods & services that even create jobs....The extraordinary rise in interest rates that are historical highs since at least pre-Roman times, could not have been possible but for the lifting of usury laws back in 1980 to fight inflation....Consumers pay the highest rates in thousands of years that feed the banks at the expense of economic growth. Even the National Debt rose from $2.1 to $8.5 trillion between 1986 and 2006 with $6.1 trillion being interest. We are funding the nation on a credit card and destroying the economy simultaneously.

This amounted to setting a fire to try to stop a brush fire that failed. Consumers pay the highest rates in thousands of years that feed the banks at the expense of economic growth. Even the National Debt rose from $2. 1 to $8.5 trillion between 1 986 and 2006 with $6. 1 trillion being interest. We are funding the nation on a credit card and destroying the economy simultaneously.

This article isn't quite coherent. The high interest rates did have their negative effect (along with a beneficial one which was to encourage savings). But if this author's logic is correct, the current zero interest rates should be a panacea.

In a nutshell, what destroys economies is misallocated resources. Anytime rates are lowered (or raised) beyond what the market would do if it were left alone, the market starts to deploy (or fail to deploy) borrowed money in more and more bubbly ways. The bubble masks the underlying rot in the economy (the bubble itself diverts resources from sustainable enterprises). Then when the bubble pops, the defaults by the speculators ripple through what is left of the economy and tear it up even more.

That is what happened a year ago. The sustainable part of the economy (small businesses mainly) were doing ok until their material costs skyrocketed with the commodities bubble until July 08. Then it popped and brought down the speculators who in turn brought down the banks who had loaned them the loose money. The freezing of credit hit the sustainable parts of the economy along with everyone else. Now the debt created to bail out the banks is a sword over the economy, either taxes will be raised which will kill the productive classes, or the currency will be trashed to dilute the debt which will do the same.

If you really want to know what is going on, there have been decent articles posted here like this: http://www.freerepublic.com/focus/f-news/2379777/posts

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