4 ms·

Short term, as a borrower, low rates are fantastic. But really, long term, they're the sign of a sick economy. The rate of return of investment across an econ

by zhte415 11y ago

Short term, as a borrower, low rates are fantastic. But really, long term, they're the sign of a sick economy. The rate of return of investment across an economy is the interest rate. Think of it like a balance sheet - if the economy is able to expense liabilities at a really low rate, then assets are also expensed at a really low rate. Stable interest rates are great (across an economy, not individual rates - plus this gets really hard to measure where a banking system isn't the main source of capital, but I digress no more) are great. It allows planning. Low (real) rates can seem great, but over the long term in a North American/European banking-funding centric economy (i.e. measurable), it indicates low increases on return of capital. And because of the low rates, an economy that is troubled in generating growth. My liability is your asset. If my liability is returning 0.5% real per year, as (real) growth, we're sitting stagnant. As pointed out by someone else, a low rate also means revenue generating assets have a much higher price. That's because they're returning revenue, not growth. Low real interest rates are really, really, bad.

pjc50 11y ago
Interest rate control is used to affect inflation by constraining employment and hence wages. That's the 'linkage' by which the central bank 'lever' acts on the real economy. We have low inflation and moderate unemployment. Pushing up rates will cause deflation and unemployment. If we want rates to go up we have to push up consumer price and wage inflation.
forgetsusername 11y ago
>Low real interest rates are really, really, bad. You can repeat that as often as you want, but it simply isn't true. It's post hoc, ergo propter hoc reasoning: we see low rates in times of trouble, therefore low rates caused the trouble? >My liability is your asset Exactly. So whatever return you aren't earning on your capital, I'm saving on my use of that capital.
- crdoconnor 11y ago
  >You can repeat that as often as you want, but it simply isn't true. It's post hoc, ergo propter hoc reasoning: we see low rates in times of trouble, therefore low rates caused the trouble? It simply is true, although not because of that reasoning. It's a stupid/evil reaction to an over-leveraged economy that has come crashing down. The presumption built into the idea that lowering interest rates would help is twofold: A) If you just started getting people into even more debt then the economic woes would fix themselves because people will start spending again. As if more debt were the solution to too much debt. Hence Japan is still terrified of raising rates 20 years later. Because ramping up debt is not a solution to too much debt. B) If people's asset prices are now worth more (houses, etc.) then they'll feel richer and spend more. Except that only applies to a minority. The majority don't have much in the way of significant assets and are instead getting royally screwed by rentiers capitalizing on those higher asset prices.

by zhte415 11y ago

pjc50 11y ago

Interest rate control is used to affect inflation by constraining employment and hence wages. That's the 'linkage' by which the central bank 'lever' acts on the real economy. We have low inflation and moderate unemployment. Pushing up rates will cause deflation and unemployment. If we want rates to go up we have to push up consumer price and wage inflation.

forgetsusername 11y ago

>Low real interest rates are really, really, bad. You can repeat that as often as you want, but it simply isn't true. It's post hoc, ergo propter hoc reasoning: we see low rates in times of trouble, therefore low rates caused the trouble? >My liability is your asset Exactly. So whatever return you aren't earning on your capital, I'm saving on my use of that capital.

crdoconnor 11y ago
>You can repeat that as often as you want, but it simply isn't true. It's post hoc, ergo propter hoc reasoning: we see low rates in times of trouble, therefore low rates caused the trouble? It simply is true, although not because of that reasoning. It's a stupid/evil reaction to an over-leveraged economy that has come crashing down. The presumption built into the idea that lowering interest rates would help is twofold: A) If you just started getting people into even more debt then the economic woes would fix themselves because people will start spending again. As if more debt were the solution to too much debt. Hence Japan is still terrified of raising rates 20 years later. Because ramping up debt is not a solution to too much debt. B) If people's asset prices are now worth more (houses, etc.) then they'll feel richer and spend more. Except that only applies to a minority. The majority don't have much in the way of significant assets and are instead getting royally screwed by rentiers capitalizing on those higher asset prices.