DARK SIDE OF ARTIFICIALLY LOW INTEREST RATES Video
Artificially low interest rates are bad for the economy.
“Public opinion always wants easy money, that is, low interest rates” – Ludvig Von Mises, A Critique of Interventionism
Over the past decade or so the Federal Reserve (the Fed) has used monetary policy to drive down interest rates below market levels. They have done this through keeping the Fed funds rate low and through quantitative easing (QE) – the creation of dollars out of thin air in order to purchase U.S. Treasuries and mortgage backed securities.
Wall Street and Main Street cheer on lower rates because they make access to dollars cheaper. With cheaper access, people have more money to spend, their debts are easier to pay off and stocks and real estate prices rise.
It’s all good, right? Maybe not. Here is the dark side of artificially low interest rates.
How Artificially Low Rates Harm the Economy
Artificially low rates:
Discourage savings and investment by individuals and companies
Savings and investment provide the capital needed to create productive capacity that is self-sustaining. Low rates discourage savings as the return on savings is de minimis. Therefore, when rates are artificially low, some capital gets diverted from productive investments where there might be a long term return on investment, and flows instead towards either speculative ventures or assets (like real estate) with the potential of large returns, or towards the purchase of consumer goods.
Things may go well for a while as the artificially low rates spur rising stock and real estate prices. As rates rise, however, gains on unprofitable speculative ventures often evaporate and the bills must be paid on the consumer goods. Share prices of speculative companies with no earnings crash, companies go out of business and workers are laid off. On the consumer side, spending slows, the consumer goods have been used up and there are little or no savings to repay consumer debt.