Interest Rates Question

[xaeniac]

Are there any negatives to keeping the interest rates low for such a very long time? This is the lowest they have been to my recollection and they have been a long time. Bernanke said that they will be held low until unemployment rises to 6% (no sure if is exact). Not sure if unemployment will ever hit 6%.

 

[ShintaiDK]

Short answer: Yes.

Long answer: Look at Japan. Plus low interests are basicly destroying pension agreements.

 

[DCal430]

Low interest rate didn't cause Japan problems. Without low interest rate we would be experiencing devastating high deflation. Without the low interest rate Japan deflation would have been many times worst. Deflation is ALWAYS bad. Remember high deflation leads to economic depression.

 

[Attic]

Are there any negatives to keeping the interest rates low for such a very long time? This is the lowest they have been to my recollection and they have been a long time. Bernanke said that they will be held low until unemployment rises to 6% (no sure if is exact). Not sure if unemployment will ever hit 6%.

Yes of course. This is why the fed will stop keeping them low through qeX. Low is good now while the economy builds some legs, it is not good long term policy.

 

[ShintaiDK]

Low interest rate didn't cause Japan problems. Without low interest rate we would be experiencing devastating high deflation. Without the low interest rate Japan deflation would have been many times worst. Deflation is ALWAYS bad. Remember high deflation leads to economic depression.

Japan now had a slow deflation for what? 22 years?

The point is to take the loss or try sweat it out. Both got pros and cons.

 

[DCal430]

Japan now had a slow deflation for what? 22 years?

The point is to take the loss or try sweat it out. Both got pros and cons.

The deflation would have been much much worst without the lowering of interest rates. Nothing worst for an economy then deflation.

 

[ShintaiDK]

The deflation would have been much much worst without the lowering of interest rates. Nothing worst for an economy then deflation.

The question is, is it better to take a hard crash and get onwards. Or to suffer 20years+ of deflation.

Sofar there is still no end in sight for the japanese. They now gonna try something worse instead as a desperate method, devaluation.

 

[lotus503]

The deflation would have been much much worst without the lowering of interest rates. Nothing worst for an economy then deflation.

What's worse deflation or inflation is highly dependent on external circumstances. Inflation right now would be much worse in the USA for example.

 

[DCal430]

The question is, is it better to take a hard crash and get onwards. Or to suffer 20years+ of deflation.

Sofar there is still no end in sight for the japanese. They now gonna try something worse instead as a desperate method, devaluation.

It would have been worst than 20 years of deflation, instead of 20 years of mild deflation it would have been 20 years of very high deflation, massive unemployment think 20 to 40% and this would have been for more than a decade.

The lower interest rate are not the cause of the 20 years of deflation, they are what stopped it from being worst.

 

[ShintaiDK]

It would have been worst than 20 years of deflation, instead of 20 years of mild deflation it would have been 20 years of very high deflation, massive unemployment think 20 to 40% and this would have been for more than a decade.

The lower interest rate are not the cause of the 20 years of deflation, they are what stopped it from being worst.

We have plenty of examples where the low interest rate wasnt used. And it went very well besides the initial pain. However the low interest rates amount of success is very limited.

Sofar there is no end on the slow deflation associated with the low interest rates. Its a negative feedback cyclus that cant break on its own.

 

[DucatiMonster696]

Low interest rate didn't cause Japan problems. Without low interest rate we would be experiencing devastating high deflation. Without the low interest rate Japan deflation would have been many times worst. Deflation is ALWAYS bad. Remember high deflation leads to economic depression.

Ummm....high rates of inflation are also very bad. In fact neither high inflation, nor high deflation are desired effects in any economies. Furthermore most nations strive to ensure that rapid swings in either inflation or deflation are minimized but that is not to say that creeping but uncontrollable rates of inflation or deflation are also not a major concerns for nations and the value of their currency.

As for the effects of high rates of inflation it:

High inflation robs the average consumer of their purchasing power, reduces the gains made by wage earners unless wages are pegged to rising inflation. However the result of doing so can actually cause more unemployment (Stagflation of the 70's) because employers often scale back their hiring and expansions to ensure that they can keep their wages and costs in check with rising levels of inflation.

Furthermore wage demands by workers may also help to further fuel the cycle of inflation as everyone tries to pay catch up with inflation and thus creating more inflationary wage demands in the economy by pushing inflation higher and higher through wages. High inflation also makes it extremely difficult for people on fixed incomes to get by in life due to again rising costs of goods and services and this usually effects the elderly and poor the most. Additionally high levels of inflation promotes hoarding of goods which are capable of storing wealth and keeping up with the destructive effects of inflation such as precious metal or commodities.

Also higher rates of inflation drive up the costs of borrowing which in turn reduces demand for loans and kills off any incentive for savings among a populace outside of storing wealth commodities like gold or silver. This also brings up another point in that high inflation causes investors to seek riskier investments because of diminished returns on investments due to high inflation further complicating and entangling economies in cycles of booms and bust periods.

High inflation also essentially reduces the competitiveness of nations in a global economy by reducing the demand the currency afflicted by inflation and making goods exported out of country more costly and thus leading to greater trade imbalances. Lastly high and prolonged rates of inflation in a currency have historically been observed to cause major bouts of political unrest which sometimes lead to larger regional wars and in some cases global wars.

 

[DucatiMonster696]

It would have been worst than 20 years of deflation, instead of 20 years of mild deflation it would have been 20 years of very high deflation, massive unemployment think 20 to 40% and this would have been for more than a decade.

The lower interest rate are not the cause of the 20 years of deflation, they are what stopped it from being worst.

Low interest rates are a one shot deal so to speak. They either pull you out of your economic ordeal or they facilitate and cement your demise. If any economy cannot pull itself out via low interest rates and spur on real demand it will not grow and will in fact often experiences a short lived boom before crashing hard and than the market will force interest rates reset to their actual market levels which tend to be a lot higher.

 

[DCal430]

We have plenty of examples where the low interest rate wasnt used. And it went very well besides the initial pain. However the low interest rates amount of success is very limited.

Sofar there is no end on the slow deflation associated with the low interest rates. Its a negative feedback cyclus that cant break on its own.

You think there would be an end to the very high deflation associated with higher interest rate. That is what happen in the great depression of the U.S. A deflation death spiral. That is what low interest rate prevent.

So if you want to see what happens when interest rates are not allowed to fall during a period of deflation, look at the great depression of the 1930s, that is what you get.

 

[ShintaiDK]

You think there would be an end to the very high deflation associated with higher interest rate. That is what happen in the great depression of the U.S. A deflation death spiral. That is what low interest rate prevent.

So if you want to see what happens when interest rates are not allowed to fall during a period of deflation, look at the great depression of the 1930s, that is what you get.

How long did the great depression last? How long have the japanese one lasted sofar?

 

[DCal430]

How long did the great depression last? How long have the japanese one lasted sofar?

The great depression lasted over a decade and was far worst than anything japan has experienced so far. Prices dropped by around 30 to 40% during the great depression, compared to 1 to 3% for Japan in the last 12 years.

 

[Jadow]

The risk of keeping rates low is rising inflation. What's suprising about the current long term low rate environment is that inflation hasn't gone up.

 

[Chris A]

The risk of keeping rates low is rising inflation. What's suprising about the current long term low rate environment is that inflation hasn't gone up.

With the fed printing and the us government buying we are just sinking all the cash into debt.

 

[ShintaiDK]

The great depression lasted over a decade and was far worst than anything japan has experienced so far. Prices dropped by around 30 to 40% during the great depression, compared to 1 to 3% for Japan in the last 12 years.

I dont think you understand it. Japan is stuck in a timewarp anno 1980s. And the rest of the world moved on. You essentially advocate that the rest of the world joins the timebubble.

After some years the wages started to get hit badly. And the buying power of the japanese people keeps on dropping. Thanks to the low interest rates.

Japanese people get less and less year after year.

And it makes no sense to save up money either. When the real interest rate is actually negative.

Its a country headed for disaster.

 

[DCal430]

I dont think you understand it. Japan is stuck in a timewarp anno 1980s. And the rest of the world moved on. You essentially advocate that the rest of the world joins the timebubble.

After some years the wages started to get hit badly. And the buying power of the japanese people keeps on dropping. Thanks to the low interest rates.

Japanese people get less and less year after year.

And it makes no sense to save up money either. When the real interest rate is actually negative.

Its a country headed for disaster.

You dont seem to understand that lower interest didn't cause lower wages, but prevented wages from falling even more. Lowering interest rate causes wages to rise due to rise in inflation.

 

[ShintaiDK]

You dont seem to understand that lower interest didn't cause lower wages, but prevented wages from falling even more. Lowering interest rate causes wages to rise due to rise in inflation.

Not in the long run. Also as shown in the graphs. Not to mention there is still no hope in sight for the japanese. They did exactly what you said would be good.

 

[piasabird]

If you can get some interest from the money you have there is no reason to invest it. Just put it in the bank. For years what you were suppose to do is look at the rate of inflation (Say 4%), and if you cant get a return higher than that, then it is a bad investment. Right now there is no real return on bank deposits or even bonds. So some interest would be a good thing.

 

[DCal430]

Not in the long run. Also as shown in the graphs. Not to mention there is still no hope in sight for the japanese. They did exactly what you said would be good.

Yes in the long run, wages would have fell much more without lower rates as was seen in the great depression. This is accepted by all major economist. It is well established eceonomic theory.

 

[ShintaiDK]

Yes in the long run, wages would have fell much more without lower rates as was seen in the great depression. This is accepted by all major economist. It is well established eceonomic theory.

Is it ?

 

[DCal430]

Is it ?

yes it is. Get some education in basic economics.

 

[ShintaiDK]

yes it is. Get some education in basic economics.

No, you simply picked one method and claims its accepted by all major economists. Thats just plain BS.