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Why are interest rates so low?

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Re: Why are interest rates so low?

#141

Post by BenoitEssiambre »

w0utert wrote: post #87
BenoitEssiambre wrote: post #39

Earlier quoted context omitted.

This could not be more wrong. Current central bank rates are high compared to market rates for stores of value, otherwise people, banks and businesses would not be keeping so much of their savings in idle excess fiat. I keep some musings about this here if you are curious: http://bessiambre.tumblr.com/

Eh? The Federal funds rate has been at 0.25% since 2008, if it were to go any lower we'd be in negative interest rate territory. The fed has only just started scaling back their asset repurchase program (aka 'QE' for 'quantitative easing'), but just like the previous 3 times (in ~5 years) it supposedly wanted to stop 'printing money', another round of QE is just one big stock market correction or housing market crash…

>we'd be in negative interest rate territory

Risk adjusted market returns are clearly in negative territory otherwise we wouldn't have these piles of idle reserves even at -2% real return.

> for malinvestments (e.g. the shale oil industry...

Malinvestment is not something that exists under any mathematically consistent macroeconomic model but even if we try to tie the word to a somewhat sensical meaning, the most "malinvested" form of savings, short of using the money to hire people to destroy property, is to keep the savings as excess idle money. Savings have a return of near -100% to the aggregate economy when they are turned into uninvested idle fiat. The returns are even lower than -100% if you consider the welfare paid to the unemployed this results in.

Even if the shale oil industry gets a very poor return of -50% it would still be better for economic value creation than building excess fiat. Of course central banks did not cause the shale oil troubles as they set their rate to imply anything not having at least -2% risk adjusted real returns is not worth doing. Shale oil went way below that because of factors independent of central banks.

If a monetary bubble ends up bursting it will be because central banks have been too tight, making fiat keep its value above market safe returns and getting people and banks to stockpile it instead of investing in the private economy, effectively turning savings into mere intrinsically valueless paper which doesn't have any economic activity, any stuff or means of production to back them.

Re: Why are interest rates so low?

#142

Post by sprash »

Sadly, even the chairmen of central banks ignore the most important contribution to inflation: wages.

The reason why we have deflation in Japan and Europe despite almost zero rates and even additional quantitative easing is because nominal median wages there are actually falling.

It is very easy to make sure to have an inflation of 2%: Just raise the minimum wage 2% each year. Thats it.

Example that inflation correlates strongly with wages for the EWU:

http://www.flassbeck-economics.de/wp-content/uploads/2013/03...

Re: Why are interest rates so low?

#143

Post by nickff »

branchless wrote: post #121
collyw wrote: post #90

Earlier quoted context omitted.

I have discussed this with friends recently. Why do we need growth? I don't need a faster iPhone, or more tech. I honestly don't see my life being any better for the last ten years worth of "growth" (much of which seems to have been pumping up asset prices). I would quite like to relax and coast a bit in life, but with the constant chasing of growth by everyone else, standing still means you will get left behind (i.e…

IMHO we need more growth because the more growth we have the more the establishment can skim off and the more they can then consume. If we all stopped producing a surplus how will movie stars and bankers get the energy to run their private jets?

Growth and technology are actually reducing the difference between rich and poor in almost every aspect of life.

Between 1920 and 1960 the only people who could travel quickly around the world were the super-rich. With the advent of the turbofan engine, and the widebody jet, quick and comfortable travel became accessible to the general public.

Cell phones and the internet are another paradigmatic case of this. It used to be that only people with a great deal of resources could get quick answers to uncommon problems, but now everyone can get those answers from a device they carry in their pocket. You can communicate more easily than the ultra-wealthy were able to only 20 years ago. Most Americans have access to communications technology on par or above that of the president.

There are many different examples of this, and the best description of it may be the following quote by Schumpeter:

>"Electric lighting is no great boon to anyone who has enough money to buy a sufficient number of candles and to pay servants to attend them. It is the cheap cloth, the cheap cotton and rayon fabric, boots, motorcars and so on that are the typical achievements of capitalist production, and not as rule improvements that would mean much to the rich man. Queen Elizabeth owned silk stockings. The capitalist achievement does not typically consist in providing more silk stockings for queens but in bringing them within reach of factory girls in return for steadily decreasing amounts of effort."

Re: Why are interest rates so low?

#144

Post by freyr »

mcguire wrote: post #127
enraged_camel wrote: post #73

Earlier quoted context omitted.

You can have technological, scientific and cultural advancement without economic growth. Building more shopping malls out in the suburbs leads to growth, but it doesn't advance society.

Can you? How can you have technological or scientific advancement without someone to pay for it in advance? Who would pay for it without a reasonable expectation of getting more out than they had to put in? (For some reason, I'm reminded of the Superconducting Super Collider and the western invention (discovery? reverse-engineering?) of porcelain.) I'm going to leave the idea of "cultural advancement" alone, 'cause I…

> How can you have technological or scientific advancement without someone to pay for it in advance? Who would pay for it without a reasonable expectation of getting more out than they had to put in?

Value is not the same as growth. We may pursue technological advancement because we think it will provide more value than whatever assets we have on hand. Continual reward is not the same as continually increasing reward. Continually increasing reward might be good, but at some point that goal may come at too great a cost.

Re: Why are interest rates so low?

#145

Post by dap »

jack9 wrote: post #101

> That’s true only in a very narrow sense. I love his complete willingness to mislead. What an asshole. If a bank can borrow from the Fed at a lower rate, they refinance their existing debt almost immediately. This trickles down to smaller institutions without the ability to borrow directly from the Fed. It's not true that the Fed sets the interest rate in a narrow sense, it's true in a very strict and immediate sens…

He doesn't say that the Fed doesn't set the nominal rate in the short term. As I understood it, the post argues that it's unsustainable for the Fed to attempt to set the nominal short-term rate to something different than the medium-term real rate, over which it has no control. Did you skip the whole part about what happens if the Fed sets the nominal short-term rate lower or higher than the medium-term real rate?

Re: Why are interest rates so low?

#146

Post by dismal2 »

harperlee wrote: post #113
twobits wrote: post #98

Earlier quoted context omitted.

"Why the obsession of economic growth?" Because central banks (CB) print money out of thin air. That "money" is debt. You print 100, you owe 110 counting interest. How can you pay the 10, if you only printed/exists, 100? You can't. You, me, everyone, is a debt slave. "Times are good" = CBs print a lot of money (out of thin air). A lot of non existant interest too, but you don't notice, cause more money/debt is printe…

Assuming that you can create value of 11 or more with that 100, someone can exchange 11 of their future / current / past effort (with money), (s)he pays you, you pay your debt, and you now have 1 or more to be at the other side of the transaction. Unless you state that all value in the world is fixed, a zero sum game, that argument of the "Money as debt" documentary doesn't really hold water.

Money is absolutely debt, are you claiming that it isn't?

Re: Why are interest rates so low?

#147

Post by mark_l_watson »

ArkyBeagle wrote: post #62
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…

We have nonnegative gains in efficiency and we have population growth. If those are not reflected in the monetary base, then the result is a trend in the direction of deflation. That presents a set of problems, challenges to very deeply established assumptions about things like government, business and personal debt. Deflation leads to in stability, as people who want to work cannot - and not for a good reason, but b…

You might enjoy reading the Austrian Economics take on this at the mises.org web site. Their front page has a few articles on how (sometimes) deflation is just fine.

Re: Why are interest rates so low?

#148

Post by dap »

mkempe wrote: post #78
guelo wrote: post #42

Earlier quoted context omitted.

Is there an example of a successful economy that ran without a central bank?

The USA before 1913. See [1] for a detailed treatment of economies that thrived without central banking. [1] http://www.amazon.com/dp/B004VMUL6G

What about an example of a major economy without a central bank that survived a major depression (say, the size of the Great Depression)? Or counterexamples? (I believe there are counter-examples -- nations with no central bank that took a worse beating than other nations that had a central bank during a major recession -- but I cannot remember them. Sorry.)

Re: Why are interest rates so low?

#149

Post by tedunangst »

mkempe wrote: post #78
guelo wrote: post #42

Earlier quoted context omitted.

Is there an example of a successful economy that ran without a central bank?

The USA before 1913. See [1] for a detailed treatment of economies that thrived without central banking. [1] http://www.amazon.com/dp/B004VMUL6G

Bank failures and panics were a regular feature of life in the US before 1913. Take your pick of the panic of 1873, 1884, 1890, 1893, 1896, 1907.... I wouldn't use the word "thrived".

Re: Why are interest rates so low?

#150

Post by ethbro »

boomlinde wrote: post #140
mcguire wrote: post #127

Earlier quoted context omitted.

Can you? How can you have technological or scientific advancement without someone to pay for it in advance? Who would pay for it without a reasonable expectation of getting more out than they had to put in? (For some reason, I'm reminded of the Superconducting Super Collider and the western invention (discovery? reverse-engineering?) of porcelain.) I'm going to leave the idea of "cultural advancement" alone, 'cause I…

> Who would pay for it without a reasonable expectation of getting more out than they had to put in? Perhaps no one, in that sense limiting technological advancement to things that would benefit people.

Which leaves us in a fair quagmire when you have substantial gaps between discoveries and engineered products (e.g. quantum theory -> semiconductors -> the computing revolution).
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