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Why are interest rates so low?

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Re: Why are interest rates so low?

#11

Post by Mikeb85 »

colund wrote: post #6

Why the obsession of economic growth? In Sweden we currently have negative prime interest rate and people have higher salaries than ever and housing prices are all time high. This greed doesn't lead to less global warming or happier people. I think politicians and economists should start thinking about what actually makes people happy. Economics is efficient management of resources nothing else. Giving the population…

Because economic growth is the only way to pay off the massive amounts of debt that currently exist. The US needs to constantly grow and acquire more and more resources, labour and capital or else it will cease being the way it currently is...

Re: Why are interest rates so low?

#12

Post by madman86 »

colund wrote: post #6

Why the obsession of economic growth? In Sweden we currently have negative prime interest rate and people have higher salaries than ever and housing prices are all time high. This greed doesn't lead to less global warming or happier people. I think politicians and economists should start thinking about what actually makes people happy. Economics is efficient management of resources nothing else. Giving the population…

It is a large part of how people in the US make money. Most people have their retirements tied to the stock markets (401k, 403b, and other options are basically just a huge collection of stocks, commodities, and bonds). If growth doesn't occur, the markets don't do as well and may even fall causing a LOT of people to take a hit in retirement funds.

Re: Why are interest rates so low?

#13

Post by vitriol83 »

> The Fed does, of course, set the benchmark nominal short-term interest rate....The Fed’s ability to affect real rates of return, especially longer-term real rates, is transitory and limited.

this would be a plausible argument if the us treasury weren't the biggest buyer of long-term government debt.

Re: Why are interest rates so low?

#14

Post by throwaway43 »

colund wrote: post #6

Why the obsession of economic growth? In Sweden we currently have negative prime interest rate and people have higher salaries than ever and housing prices are all time high. This greed doesn't lead to less global warming or happier people. I think politicians and economists should start thinking about what actually makes people happy. Economics is efficient management of resources nothing else. Giving the population…

Because otherwise we'd have a revolution over the inequalities in our societies.

People don't mind that much as long as everyones pie is growing.

Re: Why are interest rates so low?

#15

Post by abfan1127 »

cynicalkane wrote: post #7
brador wrote: post #4

Earlier quoted context omitted.

> there is little demand for money. Wrong side of the equation. There is an oversupply of money, leading to low interest rates.

This is a false understanding of how the supply and demand for money works. For example, news about QE was positively correlated with long term interest rates. The expectation of an increased future money supply tilted the balance towards the demand side in the present. Money is fundamentally an intertemporal thing, and we've known since the 1930s that the cute little supply-demand time-slice diagrams in textbooks do…

I'm not sure I follow. The Federal Reserve has manipulated the interest rates and money supply since 1913. The money market demand can't help determine the supply of money since the cost of money is the interest rate. Consumers aren't allowed to see if its worth while to save their money and earn interest rather than spend their money. Businesses can't see if its worth it to focus on current production or invest in infrastructure for future production because of artificial rates.

Re: Why are interest rates so low?

#16

Post by jacquesm »

w0utert wrote: post #9
jacquesm wrote: post #5

Earlier quoted context omitted.

I guess it depends on which side you are thinking from in arguments like these. The interest rate a bank will give you depends on how much demand there is for the money that you are about to give that bank. If the bank has no way to make a profit on the money they give you because there is little demand then they will offer you a low interest percentage (or even none or a negative one). So yes, there is an oversupply…

The monetary system hasn't been about 'me and my savings', for at least 3 decades. Reasoning about banks, capital, supply/demand, return on investment, in terms of whether consumers spend their savings or leave it sitting on a bank account, will not make you any wiser about the state of the economy or our monetary system. Current rates are low because central banks everywhere are basically flooding the world with fre…

That's definitely a good point, but even a madman with a printer counts as 'supply outweighing demand'. The principles don't really change. That's why printing all this money is going to catch up with us sooner or later.

Re: Why are interest rates so low?

#17

Post by Someone »

Mikeb85 wrote: post #11
colund wrote: post #6

Why the obsession of economic growth? In Sweden we currently have negative prime interest rate and people have higher salaries than ever and housing prices are all time high. This greed doesn't lead to less global warming or happier people. I think politicians and economists should start thinking about what actually makes people happy. Economics is efficient management of resources nothing else. Giving the population…

Because economic growth is the only way to pay off the massive amounts of debt that currently exist. The US needs to constantly grow and acquire more and more resources, labour and capital or else it will cease being the way it currently is...

Inflation also is a way to get rid of debt. A few years with 10% inflation would do wonders for the debt of most countries, provided that their debt is in their own currency.

Re: Why are interest rates so low?

#18

Post by don_draper »

Another good question: Why are S&P500 stock dividends so low? The average S&P500 stock dividend yield is like 2%. In theory, you buy stocks to receive earnings. But if companies only give out a fraction of those earnings, you as an investor are not really getting much. So how can companies get away with a 2% dividend yield?

Re: Why are interest rates so low?

#19

Post by jellicle »

It is worth also reading Paul Krugman's take on this blog post:

http://krugman.blogs.nytimes.com/2015/03/30/ben-bernanke-blo...

In particular Krugman notes that the average retiree has basically nothing in interest earnings. The median retiree has a bit more than $100K in total net worth (most of it in housing), and earns bupkis in interest.

Re: Why are interest rates so low?

#20

Post by patio11 »

don_draper wrote: post #18

Another good question: Why are S&P500 stock dividends so low? The average S&P500 stock dividend yield is like 2%. In theory, you buy stocks to receive earnings. But if companies only give out a fraction of those earnings, you as an investor are not really getting much. So how can companies get away with a 2% dividend yield?

To oversimplify, companies can distribute earnings as dividends or as capital gains. The US' tax regime strongly rewards the latter. Investors, particularly large investors, have both a) explicitly asked for and b) implicitly expressed their preference (via market mechanisms) for their earnings to be in the form of capital gains.
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