Why are interest rates so low?

And your arithmetic doesn't quite work either at the very least if you assume that money actually gets respect with a certain speed.

http://www.forbes.com/sites/stevekeen/2015/03/30/the-princip...

Um, no. I agree that printing money has bad side effects, but this is not one of them.

Here's a better way of looking at it. You currently have a money supply of 1000. That money supply is matched up to 1000 units of goods and services. Assuming this situation has been stable for a while, there will be some set of equilibrium prices.

Now you print 100. The total money supply is now 1100. But the supply of goods and services has not changed. So the first order effect is to raise prices, since you have 1100 units of money but only 1000 units of goods and services, so the previous set of prices is no longer in equilibrium. (Plus, whoever got the 100 that you printed got to spend it first, so they got the advantage of the lower prices; in other words, printing money is a way of favoring some economic actors over others.)

But there is also a second-order effect--at least there is according to Keynesians. If you print money, that makes people think there are more goods and services--i.e., that the economy is growing. So they are more willing to take economic risks--hence growing the economy. So, according to Keynesians, if you print just the right amount of money, you can stimulate just enough growth to match up with the money you printed. In the above example, if we suppose that the 100 units of money printed stimulated just enough growth to increase the supply of goods and services to 1100 units, then 100 units was the right amount of money to print to keep prices stable.

Nowhere in any of this is there any "interest" on the additional money printed. That's not the bad side effect. The bad side effect is that, in reality, the amount of money printed is never just the "right" amount to stimulate the matching amount of economic growth. It's not even clear if printing money can be counted on to stimulate economic growth at all: the Fed has been printing money at a snappy pace for a number of years now, and they are still saying the economy is stagnant.

(It's true that prices have not gone up very much, at least if you believe the CPI numbers; but that's because banks aren't lending the money that's being printed--they're hoarding it in their cash balances, because they don't want to be caught short if there's a downturn. So the actual money supply, the supply that affects the prices you and I pay for ordinary items, is considerably smaller than the total amount of money that's been printed.)

That's not really how it works. I will get a new phone when mine dies because (A) I need a phone and (B) the phone I have isn't being made anymore.

Does this means I am paying for 'more tech'? If you do not keep buying new stuff, you don't stagnate, you regress. If I don't want new technology, I have to go with no technology, not the same-old technology.

they provide a negative nominal return, you're better off hoarding greenbacks.

the zero interest rate policy already breaks the banking system. the payments system was historically paid for just by giving the bank an interest-free loan. If the bank can't reinvest above zero, there's no value in running a branch network to collect deposits or running a payments system in exchange for some float. the whole system is on life support because the Fed provided a bank subsidy via interest on excess reserves. but the whole system, things like money market funds, CDs, they make no sense in a negative interest rate environment.

how about all those people with 30-year, 80% loan to value mortgages? the value of the house goes down year after year, the real value of the mortgage and the fixed mortgage payment goes up, they're going to have a pretty bad time.

how about all the (much reduced) companies and municipalities that have defined benefit pensions, or even life insurance contracts that assume a positive, relatively risk-free return? all those pension funds and insurance companies go bust.

how are people going to feel about periodic reductions in their wages? people have a hard time with it, and wages and prices tend to be stickier going down than going up. constant downward pressure makes people unhappy and is hard to get used to, even if relative prices stay the same.

the expectation that prices are not going to consistently go down over time is pretty hard-coded into the financial system and contracts and people's psychology, and if it happened it would cause more disruption than higher-than-expected inflation.