Fiscal and Monetary Policy or Doomsday Scenario?

An article in last Friday's Globe and Mail tries to put the fear of high interest rates and high debt into us. Currently, Canadians owe about $1.47 for every dollar of disposable income. The argument is that as interest rates rise servicing this debt will cause undue hardship. Canadians took on more debt during the economic slump because interest rates were low. As interest rates rise consumer spending will fall and this will slow the economic recovery.

We all know that a car today is worth more to us than a car in the future. The ratio of the marginal utilities is determined by our personal intertemporal discount rates. Economic theory tells us that when the interest rate is below our discount rate our utility increases by borrowing against future incomes. When the interest rate is above are discount rates we reduce consumption now, increase our savings and increase consumption in the future. There should be no surprise then, that when the bank of Canada reduced interest rates we borrowed against future earnings.

The basic idea behind monetary policy is that we can reduce interest rates during a recession to stimulate spending by way of borrowing and we reduce inflationary pressures by increasing interest rates during both periods. That causes spending to increase in recession and decrease during inflationary boom. This is exactly what the article is talking about. Why did they seem so surprised?