Are Low Interest Rates Good?

Are low interest rates good for the economy? Many argue we need low rates to increase spending, since these rates make borrowing money cheap. Prof. Davies ex…

By | 2013-08-25T01:20:14+00:00 August 25th, 2013|Mortgages Home Loans Interest Rate|24 Comments

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  1. Water Sloth August 25, 2013 at 5:31 PM - Reply

    And that is exactly the reason why the savings rate in the United States is lower than 0.1%. All you’re looking at is consumption. An increase in consumption doesn’t necessarily boost the economy. Based on your logic, if less people carpool, more would be spent on gasoline. So this would boost the economy. But you’re wrong because that money would have been saved in banks instead and would be used to loan to other people.

  2. Water Sloth August 25, 2013 at 4:58 PM - Reply

    Higher interest does not help to drive inflation. Lower interest rates do. Lower interest rates increase demand, which causes demand-pull inflation.

  3. Water Sloth August 25, 2013 at 4:31 PM - Reply

    We don’t need to increase spending. Our country has a spending problem and that’s why there is so much private and public debt. Based off of that logic, it would be acceptable to claim that everyone should take out $1,000 of their savings account and go spend it, and that would cause economic growth. Hopefully I don’t have to explain to you why that wouldn’t work because it’s really just common sense.

  4. RogueCapital August 25, 2013 at 3:33 PM - Reply

    low interest rates are often a symptom of low expected inflation, as was the case in the great depression, and today. interest rates were also high in the “great inflation” of the 1970s, as investors required higher returns to keep up with expected inflation. the takeaway is that the demand-pull mechanism has a relatively weak effect, and interest rates are a remarkably poor indicator of the stance of monetary policy, as noted by milton friedman.

  5. Water Sloth August 25, 2013 at 2:59 PM - Reply

    No, lower interest rates cause inflation because it expands the amount of credit available in the economy. First it primarily affects capital goods (which prices skyrocket during a boom) and then once the money percolates to the rest of the economy, the ratio spent on consumer goods to capital goods goes back to pre-boom levels and businesses realize their capital investments were too ambitious because people don’t really have that much savings as the interest rates indicated.

  6. RogueCapital August 25, 2013 at 2:32 PM - Reply

    I didn’t disagree with your claim; I just pointed out that there are other, often stronger effects that can drive interest rates in reality. I then discussed some clear cut examples of this reality (tight money and low rates, loose money and high rates). then you told me more about the theory, which I already understand well, and I think you did your best to explain ABCT for some reason. tell me, where was the misallocation of capital in the great depression?

  7. Water Sloth August 25, 2013 at 1:51 PM - Reply

    I did my best to explain it in less than 500 characters. And the misallocation of capital occured in the 1920s, the depression was where those misallocation of capital were liquidated. The misallocation of capital during the 1920s was in real estate, but I’m not sure about where else; I’m presuming in other capital investments. Where the misallocation was doesn’t really matter because we know there was misallocation because of the crisis.

  8. Water Sloth August 25, 2013 at 12:55 PM - Reply

    and in response to interest rates, real interest rates are determined by the value society places on buying these in the present rather than the future. And yes inflation is a part of this, but there wouldn’t be any significant fluctuations in interest rates if it weren’t for central banks manipulating it. A reduction in the real low interest rate indicates that more people are saving, therefore in the future, they will have more money to spend on things such as housing.

  9. Water Sloth August 25, 2013 at 12:03 PM - Reply

    fluctuations in inflation*

  10. RogueCapital August 25, 2013 at 11:35 AM - Reply

    so in your view, the ABCT misallocation-of-capital view of a bust can never be falsified, because the very existence of a the bust proves that there was a misallocation of capital (we just have to look harder?). it’s the exact same circular reasoning used to “prove” the existence of god with religious texts, and that is why people see austrian econ as more of a cult or religion than economic science. there is no strong evidence to suggest that real estate was particularly bubbly pre-1929.

  11. Water Sloth August 25, 2013 at 11:19 AM - Reply

    Well I pointed out that there was malinvestment in development of housing, especially in Florida. I haven’t looked into the particular malinvestments made in the 1920s, but I would presume that they were at least somewhat similar to the boom in the 2000s. The ABCT could be falsified if there was a “bust” without over expansion of credit, but this over-expansion if credit was the cause of the Great Depression. It probably would have recovered in a couple years too if it weren’t for gov actions.

  12. RogueCapital August 25, 2013 at 11:17 AM - Reply

    there is a reason that you don’t hear much about a pre-depression housing boom: it’s indefensible that such a bubble, if it existed, could have caused the crash of 1929. you’re right that the government prolonged the depression with atrocious regulatory & fiscal policies, but the major intensification of the depression happened when the money supply contracted by 1/3 in 1930-31 (even as gold inflows should have created new money). the money supply had been essentially flat over the prior decade.

  13. Water Sloth August 25, 2013 at 10:27 AM - Reply

    The money supply was NOT essentially flat. M2 was at 33.72 billion in 1922. By 1928 (only 7 years later) it was up to 46.42 billion. That’s a 38% increase. And to deny that there was a bubble is absolutely absurd.

  14. Water Sloth August 25, 2013 at 9:37 AM - Reply

    6* years later lol typo

  15. RogueCapital August 25, 2013 at 8:42 AM - Reply

    I should have stated more clearly: the money supply in 1920 was at roughly the same level as 1929. it hit a low in 1922 so if you data-mine from that low, sure, you can find a large increase.
    are you saying that it’s absurd to deny that there was a real estate bubble or a general stock market bubble? (I think neither is absurd, but the former is not well-established by data, and the latter doesn’t fit the ABCT story- that would just be an allocation of capital since it’s not sector-specific).

  16. Water Sloth August 25, 2013 at 8:18 AM - Reply

    M2 was 34.8 billion in 1920. In 1929, it was 46.6 billion. A general stock market rise is one of the effects of a boom, as we saw in the 2000s. Yes it fits the ABCT because businesses are expanding rapidly (even though they shouldn’t be). And there was a real estate bubble. If you look at any of the data from the 1920s, you will see that. Type in “lessons from the Great Depression real estate boom and bust” on google. It’s the one from ClevelandFed.

  17. mmann66666 August 25, 2013 at 7:48 AM - Reply

    Someone needs to look at the downward demand spiral.

  18. Runner899 August 25, 2013 at 7:06 AM - Reply

    Just FYI the federal reserve is not part of the government, it’s a private bank.

  19. luvcheney1 August 25, 2013 at 6:15 AM - Reply

    Uh…hu? Created by the Congress, the Federal Govt, running a monopoly on money, created by govt fiat, the dollar, monpolizing intrest rates, of govt money, paying all profits, to the US govt, having a Fed Chairman, put in place, by the leader of the Federal govt, the Pres. Yes, sounds like any private business.

  20. luvcheney1 August 25, 2013 at 5:21 AM - Reply

    I ran across Fderal Reserve discussions, from the period ( before 1929 crash) a few years ago, and they were concerned about the stock bubble. Murray Rothbard estimates money supply growth higher than those, because they were not reporting the same way, and he put other, near money into it, like insurance, etc that could be redeemed quickly. The margin debt, of the stock boom, is where the credit was going.

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  22. Abdullah Rowaished August 25, 2013 at 3:44 AM - Reply

    But, but… that’s going to turn loans into a real-estate-like business; it’ll be worse than monopolies, I mean look at the rent pricings now.
    Government ruins many things when they interfere, that’s true.
    I, I… don’t know what to do; I can only hope that when that day of government overthrowing comes, humans will progress generally in all good aspects un-poor.
    I just hope thy economist know what you’re doing.

  23. seeheers August 25, 2013 at 3:17 AM - Reply

    yeah but low interest rates cause people to spend recklessly on stuff they don’t need; causing more waste. 

  24. Aeuora August 25, 2013 at 2:20 AM - Reply

    funny how obama doesnt wanna do anything about those interest rates

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