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Perhaps an unorthodox way of looking at things, but it's very intersting take a step back to consider what 0 to low interest rates might accomplish for society

Perhaps an unorthodox way of looking at things, but it's very intersting take a step back to consider what 0 to low interest rates might accomplish for society: - Low interest rates mean it makes no sense to simply keep cash, it's better to invest in something productive. For companies that's new projects/ideas which create jobs, for individuals that might be spending on goods to stimulate the economy or buying a house. - High interest rates are a considered a way to reduce "risky" investments. But in reality, interest is rent seeking on capital which benefits (1) lenders/banks (2) capital holders. Cheap capital enables more projects with positive ROI (above cost of capital) to be persued. And this is good for society as it drives innovation and allocates capital to innovators instead of locking it under stagnant rent seeking. Lest you worry, this doesn't hurt capital holders, as they can instead proactively invest in companies and make the same or larger returns, but now capital is allocated by merit of the project being invested in instead of by simply who can afford it because it meets some threshold. This unlocks the "long tail" of innovation. This is what is referenced in the article: 1970s Hertz took a risky bet using debt which paid off to record profits. - Higher interest really means higher long run inflation. If you can just let money sit in a bank, doing nothing directly productive for society, and there is suddenly more of it, prices will adjust accordingly. With low interest rates, money supply will adjust with GDP growth from innovation and prices might even be reduced by higher competition and discovery of efficiencies. As long as innovation (enabled by access to capital) stays on pace with money supply, inflation stays low. This is of course a very optimistic way of looking at things which doesn't consider the effect of things like wage growth which has all but stopped. One could argue in a non-inflationary environment that might be ok, but this is a larger topic having to do with social mobility goals rather than just the economics.

pjc50 6y ago
> Higher interest really means higher long run inflation. In orthodox macro, higher interest rates -> reduced investment -> reduced demand -> reduced inflation. This is pretty much empirically proven by how central banks have been able to control inflation in the West. The way I see it is the "search for safety", especially where negative interest rates are concerned. There are two huge concentrations of safety-seeking money in the modern economy: pension funds and oligarchs. The pension funds more or less have to buy government bonds in a certain ratio, regardless of the price. Whereas the oligarchs have hundreds of billions they need to keep anonymously in a stable economy - ie dollars, pounds, and euros. Things like the Apple "cash" pile of $245bn represent a lot of floating wealth too. Ultimately, if we don't get real wealth taxes, interest rates will be forced negative simply by the market and the huge volume of safety-seeking money.
- dsukhin 6y ago
  It's always strange to see the "orthodox" macro realtionship take precedent over emperical results (see article and figure 1 scatter plot: https://www.stlouisfed.org/publications/regional-economist/july-2016/neo-fisherism-a-radical-idea-or-the-most-obvious-solution-to-the-low-inflation-problem https://www.stlouisfed.org/publications/regional-economist/j...). In the short term, the orthodox thinking might be correct and an effective lever for the economy, but long term, it's clear that high interest leads to higher inflation AND less innovation which are bad outcomes IMHO. I agree with your observation for the demand to keep money "safe". We should define what that means. Historically, if you choose to keep wealth in a stable cash with real interest rate (nominal interest rate minus inflation rate) that is positive or zero, it's safe as it retains or grows its buying power. The "or zero" part is important as it allows for a zero interest environment if that also means low inflation. Some may even argue that a reasonable negative interest rate is "safe" and it's just like a "wealth tax" which is the cost of service for keeping large sums of money at the bank. Shouid safety be free (no negative rates)? I would say maybe yes, but safety shouldn't also reward you... and positive interest rates do exactly that.

pjc50 6y ago

> Higher interest really means higher long run inflation. In orthodox macro, higher interest rates -> reduced investment -> reduced demand -> reduced inflation. This is pretty much empirically proven by how central banks have been able to control inflation in the West. The way I see it is the "search for safety", especially where negative interest rates are concerned. There are two huge concentrations of safety-seeking money in the modern economy: pension funds and oligarchs. The pension funds more or less have to buy government bonds in a certain ratio, regardless of the price. Whereas the oligarchs have hundreds of billions they need to keep anonymously in a stable economy - ie dollars, pounds, and euros. Things like the Apple "cash" pile of $245bn represent a lot of floating wealth too. Ultimately, if we don't get real wealth taxes, interest rates will be forced negative simply by the market and the huge volume of safety-seeking money.

dsukhin 6y ago
It's always strange to see the "orthodox" macro realtionship take precedent over emperical results (see article and figure 1 scatter plot: https://www.stlouisfed.org/publications/regional-economist/july-2016/neo-fisherism-a-radical-idea-or-the-most-obvious-solution-to-the-low-inflation-problem https://www.stlouisfed.org/publications/regional-economist/j...). In the short term, the orthodox thinking might be correct and an effective lever for the economy, but long term, it's clear that high interest leads to higher inflation AND less innovation which are bad outcomes IMHO. I agree with your observation for the demand to keep money "safe". We should define what that means. Historically, if you choose to keep wealth in a stable cash with real interest rate (nominal interest rate minus inflation rate) that is positive or zero, it's safe as it retains or grows its buying power. The "or zero" part is important as it allows for a zero interest environment if that also means low inflation. Some may even argue that a reasonable negative interest rate is "safe" and it's just like a "wealth tax" which is the cost of service for keeping large sums of money at the bank. Shouid safety be free (no negative rates)? I would say maybe yes, but safety shouldn't also reward you... and positive interest rates do exactly that.