Depressingly low rates

Will we be stuck with low interest rates far into the future, with all the various problems that entails?

We can see some of the usual suspects within this Economist piece, inequality of wealth, automation, easy movement of hot money, slowing growth.



"....[T]he problem is a global glut of savings relative to attractive investment options. This glut of capital has steadily and relentlessly pushed real interest rates around the world towards zero.The savings-investment mismatch has several causes. Dampened expectations for long-run growth, thanks to everything from ageing to reductions in capital spending enabled by new technology, are squeezing investment. At the same time soaring inequality, which concentrates income in the hands of people who tend to save, along with a hunger for safe assets in a world of massive and volatile capital flows, boosts saving. The result is a shortfall in global demand that sucks ever more of the world economy into the zero-rate trap...."


From zero to one, then back to zero: Economists? evolving understanding of the zero-rate liquidity trap | The Economist

The (political?) pressure to keep interest on the national debt in check is a huge factor, IMHO. Low saving rates pushes funds into the stock and commodities markets where the mere movement of those funds generates (skimming?) wealth via trade fees/commissions.

ttwtt78640 said:

The (political?) pressure to keep interest on the national debt in check is a huge factor, IMHO. Low saving rates pushes funds into the stock and commodities markets where the mere movement of those funds generates (skimming?) wealth via trade fees/commissions.

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What difference would higher rates on U.S. bonds make? It would shift some savings over to bonds, that's all. None of it puts that savings back into consumption or investment.

JohnfrmClevelan said:

What difference would higher rates on U.S. bonds make? It would shift some savings over to bonds, that's all. None of it puts that savings back into consumption or investment.

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I was simply offering reasons (motives?) for the current policy not saying that it had merit.

Got to love the statist failure to control the economy. It was failing in the fifties and it's still failing today. Wonderful.

ttwtt78640 said:

I was simply offering reasons (motives?) for the current policy not saying that it had merit.

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I get accused of saying plenty things that don't have any merit also. Sometimes the accusers are correct!

Henrin said:

Got to love the statist failure to control the economy. It was failing in the fifties and it's still failing today. Wonderful.

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Then libertarians don't have anything to worry about. The invisible hand prevails!

imagep said:

I get accused of saying plenty things that don't have any merit also. Sometimes the accusers are correct!

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That is why I say right up front that I am "Sometimes wrong".

Low interest rates are a direct result of worthless currency.

When currency was linked to a commodity giving it intrinsic value, then only so much could be printed by a government. The amount of currency in circulation was limited.

In order to have as much money as possible available to banks and the government for loans, investments, and other uses, they had to offer incentives to encourage savings. That's when we saw interest rates for savings accounts as high as 7.5%, and even higher for Certificates of Deposit.

Then we went to this printing of money "as needed," with no value other than "faith in government." There was no need to encourage savings; rather the efforts began to encourage spending. Now we have interests rates on savings at .001 to .003%. I have no idea what the value of government bonds are anymore.

Ganesh said:

Will we be stuck with low interest rates far into the future, with all the various problems that entails? ...

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I hope so.

My young adult child will likely be looking to purchase his first new car and house and household appliances on credit during the next few years, low i-rates makes this easier for him.

Low i-rates is also an indicator that our economy isn't overheated and that inflation is low.

imagep said:

Then libertarians don't have anything to worry about. The invisible hand prevails!

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I promise we will only brag about being right a little bit.

Captain Adverse said:

Low interest rates are a direct result of worthless currency. (still typing)

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If you would like, I will gladly take all your worthless currency off your hands. I could have fedex pick it up at your address, just message me and we will work out the details.

Hey! When you see "(still typing)" then have the courtesy to WAIT before quoting please.

That way you get to see the full thought and can then provide an appropriately inane remark, rather than merely a typical inane remark.

Ganesh said:

Will we be stuck with low interest rates far into the future, with all the various problems that entails?

We can see some of the usual suspects within this Economist piece, inequality of wealth, automation, easy movement of hot money, slowing growth.



"....[T]he problem is a global glut of savings relative to attractive investment options. This glut of capital has steadily and relentlessly pushed real interest rates around the world towards zero.The savings-investment mismatch has several causes. Dampened expectations for long-run growth, thanks to everything from ageing to reductions in capital spending enabled by new technology, are squeezing investment. At the same time soaring inequality, which concentrates income in the hands of people who tend to save, along with a hunger for safe assets in a world of massive and volatile capital flows, boosts saving. The result is a shortfall in global demand that sucks ever more of the world economy into the zero-rate trap...."


From zero to one, then back to zero: Economists? evolving understanding of the zero-rate liquidity trap | The Economist

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It makes sense to me. We've known since the mid 1990s that the combination of too much money expansion connected to too little reduction in national debt would make a real mess. And when the Greenspan/Clinton bubble burst there could be no doubt that we were in danger of falling into a Japanese type rut.

imagep said:

Then libertarians don't have anything to worry about. The invisible hand prevails!

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You are right. It does. But most people never read people like Schumpeter and forgot why it is called a dismal science and not a happy one.

Captain Adverse said:

Low interest rates are a direct result of worthless currency.

When currency was linked to a commodity giving it intrinsic value, then only so much could be printed by a government. The amount of currency in circulation was limited.

In order to have as much money as possible available to banks and the government for loans, investments, and other uses, they had to offer incentives to encourage savings. That's when we saw interest rates for savings accounts as high as 7.5%, and even higher for Certificates of Deposit.

Then we went to this printing of money "as needed," with no value other than "faith in government." There was no need to encourage savings; rather the efforts began to encourage spending. Now we have interests rates on savings at .001 to .003%. I have no idea what the value of government bonds are anymore.

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That's great for people with savings, and not so great for the lower end. Any time you limit available capital, you favor the ones that already hold capital.

Plus, gold had other big problems. It piles up in the hands of big exporters. If we hadn't handed money back to Europe after WWII, they never could have recovered. Today, all the gold would end up in the hands of China, because they are the most willing to exploit their labor.

JohnfrmClevelan said:

That's great for people with savings, and not so great for the lower end. Any time you limit available capital, you favor the ones that already hold capital.

Plus, gold had other big problems. It piles up in the hands of big exporters. If we hadn't handed money back to Europe after WWII, they never could have recovered. Today, all the gold would end up in the hands of China, because they are the most willing to exploit their labor.

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We were taking about why interest rates on savings are so miniscule for the average Joe Citizen. I preferred to save my money and see it grow through good interest rates. To purchase things as needed.

I didn't believe in spending for the sake of spending before it inflates out of any value.

Captain Adverse said:

We were taking about why interest rates on savings are so miniscule for the average Joe Citizen.

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I know that. I thought you were suggesting that things would be better if we were on the gold standard.

Average Joe Citizen never had much in savings. Average Joe Citizen's biggest problem is low income.

Ganesh said:

Will we be stuck with low interest rates far into the future, with all the various problems that entails?

We can see some of the usual suspects within this Economist piece, inequality of wealth, automation, easy movement of hot money, slowing growth.

"....[T]he problem is a global glut of savings relative to attractive investment options. This glut of capital has steadily and relentlessly pushed real interest rates around the world towards zero.The savings-investment mismatch has several causes. Dampened expectations for long-run growth, thanks to everything from ageing to reductions in capital spending enabled by new technology, are squeezing investment. At the same time soaring inequality, which concentrates income in the hands of people who tend to save, along with a hunger for safe assets in a world of massive and volatile capital flows, boosts saving. The result is a shortfall in global demand that sucks ever more of the world economy into the zero-rate trap...."

From zero to one, then back to zero: Economists? evolving understanding of the zero-rate liquidity trap | The Economist

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The article hints at a few points, but misses a bigger lesson on the relationship of investment to all of Fed action... not just long term low interest rates. Because of that I cannot agree with the articles conclusions.

The biggest mistake we made just post the crash was failing to spend enough to influence aggregate demand. Congress did stop the bleeding but once political gridlock took over, around the time of the 112th Congress and the Republican house, then economic policy became less effective.

That forced three things to happen simultaneously. One, it linked market performance to QE activity damn near exclusively with almost zero impact from low interest rates. Cash stayed put and the markets spent more time reacting to QE activity and corporate profits than other fundamentals. Like, growth. Two, it removed the potential for interest rates to increase over a longer period because of lackluster growth (from lackluster demand.) There was no plausible economic theory or indication that we could have increased interest rates at any point before late this past year. Three, we started to show inflation increases that continually missed targets no matter of measured by Core PCE or CPI. Some jumps above 2%, but too many lagging periods were there was mixed economic indication on aggregate demand changes.

"Expectations for long-run growth" then became replaced with expectations for wealth growth and protections based on market reaction to Fed Activity. Debt held by the Fed jumped over 500% since just 2008 and now holds more US issued treasury debt than China does. Something like north of $2.7 Trillion in all sorts of debt.

If we are stuck with even longer terms with low interest rates it will be because of continual aggregate demand faults.

All the evidence is there. Against the basket of currencies the US Dollar is not doing too bad. Investing in hedges against inflation is non-existent outside of FoxNews commercials. Over 80% of the money "created" (really in the form of reserves) by the various QE stages has ended up idle. Literally held as excess reserves in private banks to the point of record levels, almost at $2 Trillion of that new Fed held debt. Deposits to loan ratios by trend are going the wrong direction. And, we know all of that is accurate as money velocity is still low and at least 2 of the income quintiles (the middle) are still below 2008 levels (i.e. never recovered.)

In a way the article is accidentally right on one point, the Fed does not have the tools in monetary policy alone to fix why upping interest rates may be problematic to the point where we reevaluate going to even longer terms of low interest rates (or even greater periods between stair stepping the rate up over time.) Why? Aggregate Demand faults. Or, the failure of economic policy to complement Fed policy to date. That is a clever way of saying that the $2.7 Trillion in debt the Fed is holding may all be for very little overall economic value as Congress over the past 4 years at least went to sleep on their part of the deal. The liquidity trap became realized because of Congress, not because of Fed actions alone. Besides, it is absent of all reality that the Fed alone could undo all the damage from the crash.

However and predictably, wealth did rather well in this recovery. Everyone else, not so much.

Captain Adverse said:

Low interest rates are a direct result of worthless currency.

When currency was linked to a commodity giving it intrinsic value, then only so much could be printed by a government. The amount of currency in circulation was limited.

In order to have as much money as possible available to banks and the government for loans, investments, and other uses, they had to offer incentives to encourage savings. That's when we saw interest rates for savings accounts as high as 7.5%, and even higher for Certificates of Deposit.

Then we went to this printing of money "as needed," with no value other than "faith in government." There was no need to encourage savings; rather the efforts began to encourage spending. Now we have interests rates on savings at .001 to .003%. I have no idea what the value of government bonds are anymore.

Click to expand...

Low rates are an attempt to get a sluggish economies moving again, for reasons described in the piece. It's not working very well, and I'd suggest that a big part of the problem is right shift in political sentiment in recent years. One thing the article did not mention was raising taxes. A few decades back, there would have been much less of a pool of unused capital, as it would have been taxed and spent. Today, many public projects cry out for worthwhile investment, yet governments are reluctant to fund them, given the hysteria of libertarian and tea party style groups.

There are plenty of ways to raise money for investment, the stock and bond markets being prominent. This of course shifts risk towards the consumer, and profit towards brokers and intermediaries, and those with significant knowledge in the field.

imagep said:

I hope so.

My young adult child will likely be looking to purchase his first new car and house and household appliances on credit during the next few years, low i-rates makes this easier for him.

Low i-rates is also an indicator that our economy isn't overheated and that inflation is low.

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Yes, but this is a double edged sword, is it not? Low interest rates translate into higher home prices (thank you invisible hand).

JohnfrmClevelan said:

That's great for people with savings, and not so great for the lower end. Any time you limit available capital, you favor the ones that already hold capital.

Plus, gold had other big problems. It piles up in the hands of big exporters. If we hadn't handed money back to Europe after WWII, they never could have recovered. Today, all the gold would end up in the hands of China, because they are the most willing to exploit their labor.

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I totally agree, but let me add that you are talking about "cash saving", not productive investments. People who own businesses or stocks would be wise to hope that our i-rates remain low.

The only people that high i-rates help are those who have large amounts of unutilized cash. That eliminates the vast majority of American citizens. Even people like Buffet and Gates don't hold onto large amounts of cash, their wealth is invested in productive businesses.

Captain Adverse said:

...I preferred to save my money and see it grow through good interest rates.

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In otherwords, you prefer to sideline your money, hope that inflation doesn't eat into it too much, and take little risk. That's not very productive, and does nothing for our economy. Thank God most of our citizens are not like you, if they were we would be an incredibly poor country.

No offense, but I tend to think of people who save money as non-productive horders, economic slackers.

imagep said:

In otherwords, you prefer to sideline your money, hope that inflation doesn't eat into it too much, and take little risk. That's not very productive, and does nothing for our economy. Thank God most of our citizens are not like you, if they were we would be an incredibly poor country.

No offense, but I tend to think of people who save money as non-productive horders, economic slackers.

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Interesting.

Here I was thinking I was I was saving money for a "rainy day." For things like my eventual retirement, unexpected emergency expenses, the ability to make purchases without going into debt, etc.

I never realized that spending everything I make, going into lifetime debt, and pandering to a consumerist mindset were social obligations to stimulate the economy. :roll:

I think you still believe in Reagan's "voodoo ecomonics" otherwise known as "trickle-down economics." Well, the top 1% have gotten massively richer, and we have yet to see how any of that amassed personal wealth has trickled down to the rest of us.