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What’s up with the obsession about low interest rates? – Publications – AEI

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AEI What’s up with the obsession about low interest rates? Ceterius paribus of course….. Sellers like high prices and buyers/consumers like low prices. If government policy raises prices sellers are happy and buyers are worse off. If government policy lowers prices buyers are happy and sellers are worse off. Workers like high wages and employers prefer like low wages. If government policy raises wages (e.g., minimum wage hikes), workers are happy and employers are worse off. If government policy lowers wages, workers are worse off while employers are better off. Borrowers like low interest rates and savers/lenders prefer high interest rates. If the Federal Reserve “manipulates” lower interest rates, borrowers are delighted but savers are harmed. If the Federal Reserve “manipulates” higher

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What’s up with the obsession about low interest rates?

What’s up with the obsession about low interest rates? - Publications – AEI

Ceterius paribus of course…..

Sellers like high prices and buyers/consumers like low prices. If government policy raises prices sellers are happy and buyers are worse off. If government policy lowers prices buyers are happy and sellers are worse off.

Workers like high wages and employers prefer like low wages. If government policy raises wages (e.g., minimum wage hikes), workers are happy and employers are worse off. If government policy lowers wages, workers are worse off while employers are better off.

Borrowers like low interest rates and savers/lenders prefer high interest rates. If the Federal Reserve “manipulates” lower interest rates, borrowers are delighted but savers are harmed. If the Federal Reserve “manipulates” higher interest rates, borrowers are worse off, but savers are happy.

Conclusion: Raising/lowering prices, wages, or interest rates can only benefit one half of the market (buyers or sellers, workers or employers, borrowers or savers, but not both) and those benefits come at the direct expense of the other half of the market (buyers/sellers, workers/employers, borrowers/savers). In other words, it’s is zero-sum outcome that redistributes gains and losses, but without any net gains, similar to the Keynesian stimulus fallacy illustrated below.

Q: So what’s with the obsession, especially the political obsession, with lower interest rates that are guaranteed to do great harm to savers while benefiting borrowers? And isn’t it an illusion that lower interest rates can generate positive net gains for the economy?

A: The answer must be that there’s a much greater political short-run payoff from lower interest rates than from higher interest rates. That is, borrowers (including corporations) must have a louder and more organized political influence than disorganized savers. In that case, aren’t lower interest rates a form of legal plunder and crony capitalism that allow borrowers to take advantage of savers enabled by easy monetary policy by the Fed?

The chart above shows 3-month bank CD rates for the last 50 years. From 2009 to 2016 bank CD rates averaged only 0.33% annually during a period when inflation averaged 1.6% per year, meaning that the real returns on bank CDs were negative for almost a decade if not longer. A $100 investment in a bank CD in January 2009 would have fallen to about $90 in inflation-adjusted dollars by the end of 2016, representing a 10% loss in purchasing power for savers during that period. So with the obsession about lowering interest rates, why is there never any concern about the disastrous effects lower interest rates, especially negative interest rates, have on savers?

What’s up with the obsession about low interest rates? - Publications – AEI

What’s up with the obsession about low interest rates?
Mark Perry

Mark Perry
Mark J. Perry is concurrently a scholar at AEI and a professor of economics and finance at the University of Michigan’s Flint campus. He is best known as the creator and editor of the popular economics blog Carpe Diem. At AEI, Perry writes about economic and financial issues for American.com and the AEIdeas blog.

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