freediver wrote on Oct 18
th, 2008 at 6:12pm:
If you overstimulate the economy, the growth becomes unsustainable. Rather than preventing a boom-bust cycle, you create one. It still has to be driven by the fundamentals. What the reserve bank does only effects the short term stuff.
For long term economic growth, investment in some form of capital (eg education, infrastructure) rather than consumer spending (eg government handouts) is the way to go. This goes for both private and public sector spending.
Central bank interest rate fixing doesn't so much "stimulate" the economy as it does distort the perception of available, lendable savings and cause malinvestments. When the target interest rate is lower than the market rate (which is dependant on the availability of savings and the demand for them), monetary expansion will occur to meet the excess demand. Prices will rise and business ventures that relied on low interest rates (ie. speculative activity) will no longer be viable when interest rates inevitably rise again.
At the end of the day there is nothing to gain by fixing interest rates, rather it is the market that should determine them. Any "stimulus" provided by fixing interest rates low will produce unproductive economic activity that doesn't create real wealth or improve an economy in the long run.
As far as government spending goes, it's pretty simple. It's a zero sum game. Money spent by the government is money not spent by the private sector. It is the private sector that creates real wealth, so to draw resources away from it and reallocate them is less optimal.