Low interest rates haven’t spurred a recovery

It’s a financial axiom that central banks can make money available and set the rates, but they cannot dictate where it goes.

Yet, the IMF just now seems to be figuring that out.

As for central bank sponsored “risk taking,” haven’t we seen enough already?

Where the Money Went

  • Junk bond speculation
  • Stock market speculation
  • Stock market buybacks at ludicrous prices
  • Robots in lieu of hiring
  • Free profit for banks thanks to interest on “excess reserves”
  • Private equity firms buying up houses
  • In Europe, banks loaded up on their own allegedly risk-free bonds
  • In China, property bubbles and profitless SOEs [state-owned enterprises]

Where the Money Didn’t Go

  • Higher wages
  • Infrastructure
  • Investment

via Mish’s Global Economic Trend Analysis.

(Hat tip to Naked Capitalism)

In the United States, the Federal Reserve System has driven interest rates down to near-zero.

The idea is that this will spur an economic recovery because consumer loans and business loans will become more affordable, and both consumer demand and business investment will increase.

So far, though, the main result has been to bid up the prices of existing stocks as savers look for better returns on their investments.

Evidently the International Monetary Fund is attempting the same thing on the world scene, with the same result.

The basic problem is the world’s big backlog of debt—consumer debt, business debt, governmental debt.  Many people are struggling just to survive.  Even those who are solvent are prudently paying down their debt rather than increasing their spending.

I think the alternatives are to wait until the world pays its way out of its current debt burden, which may take a long time, and or to work out some system of partial debt forgiveness.

So it seems to me.  What do you think?


Afterthought: Technically, the world economy, including the U.S. economy, is recovering.  Economic output is greater in each fiscal quarter than in the quarter before.  So my headline is not accurate.  It is just that we, the people, are not getting much benefit from the supposed recovery.


Look at the economy.  Fight the illusion of normality.  Feel the weirdness on the Fabius Maximum web log. [added 10/11/14]

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11 Responses to “Low interest rates haven’t spurred a recovery”

  1. whungerford Says:

    Low interest rates haven’t spurred a wished-for robust recovery due to other factors, but they may have prevented a much worse prolonged economic collapse.


    • philebersole Says:

      I think a temporary lowering of interest rates might have revived the economy if what we were experiencing was part of the normal ups and downs of the economic cycle.

      I think we are in an economic crisis in which ordinary measures will not suffice.

      Aside from that, a large proportion of the banking industry is controlled by unindicted felons. If you want justification for that statement, read Matt Taibbi’s The Divide or watch Charles Ferguson’s documentary movie Inside Job.

      It is naive to lend them money at virtually zero interest and expect them to use the money responsibly.

      The national and international banking authorities have a hard problem. Allowing interest rates to rise is equivalent to taking a critically ill patient off life support. But artificially low interest rates can’t continue forever.

      We the people must look for more robust ways to create jobs, rebuild public services and infrastructure and revive manufacturing.

      No, I don’t have a master plan of how to do this. But that doesn’t obligate me to ignore the fact that what’s now being done is ineffective.


      • whungerford Says:

        Are interest rates “artificially low” or merely low?” Read more here: http://krugman.blogs.nytimes.com/2014/07/07/not-knut/


      • philebersole Says:

        Janet Yellen, the chair of the Federal Reserve Board, says that the Fed will decide whether interest rates rise or not.


        That is my definition of “artificial.” A natural interest rate would be one determined by the workings of the market.


      • whungerford Says:

        Krugman explains two views which he considers equivalent:

        “The Keynesian view of monetary policy is that the central bank should, if it can, set interest rates at a level that produces full employment.”

        “Wicksellian analysis is an older tradition; it argues that there is at any given time a “natural” rate of interest in the sense that keeping rates below that level leads to inflation, keeping them above it leads to deflation.”

        Interest rates are wisely set according to a monetary policy. Unregulated rates would likely lead either to stagnation or to wild gyrations in employment and inflation–unacceptable and unnecessary cycles of boom and bust.


      • philebersole Says:

        The experience of the past five years has shown that, in the present crisis, there is no level of interest rates that will produce full employment.

        Near-zero interest rates have neither generated full employment nor brought about renewed inflation.

        Therefore, in my opinion, we are in a new situation which the old theories don’t explain and the old policies don’t apply.


      • whungerford Says:

        The Paul Krugman article cited explains: “Sometimes it (monetary policy) can’t: even at a zero rate the economy remains depressed, so you need fiscal policy.”


      • philebersole Says:

        Fiscal policy, in this context, is more deeply into debt. But the United States, and the world in general, are already choked with debt. I don’t think that more government borrowing, in and of itself, is going to stimulate the economy.

        John Maynard Keynes’ idea for governmental fiscal policy was for governments to run surpluses during years of economic expansion, and deficits during years of economic recession.

        This is a good idea, but we didn’t follow it.

        During the Bush years, the government ran big deficits during years of economic expansion. With the recession came, it was hard to prime the pump. The pump was already waterlogged.



        I respect Paul Krugman, but, in this case, I think it is necessary to think outside the boxes of monetary and fiscal policy as understood up until now.

        Just to be clear, I am not someone who thinks that the deficit has to be reduced at all costs.

        Borrowing money to build things that will contribute to the long-range strength of the economy is good. Borrowing for emergencies is justified. Borrowing for no other reason than to see if it will stimulate the economy—that I question.


      • whungerford Says:

        Any spending for goods and services causes the economy to strive to supply them–that’s true regardless of whether past government actions were wise or foolish. It would be silly to spend for things we don’t need, but there is no lack of unfulfilled needs today. As for debt, the national debt is unlike private debt in many ways–valid reasons to fear private debt are irrelevant to the national debt.


      • philebersole Says:

        Any spending for goods and services generates jobs for people striving to supply them—that’s true enough. But when it’s done with borrowed money, the money has to be paid back, and that subtracts from the demand for goods and services.

        Government differs from private borrowers in that a government never has to pay back the principal on its debt. But it still has to pay the interest, and the interest compounds each year as the government’s debt increases.

        John Maynard Keynes addressed the problems of the 1920s and 1930s, when there was an excess of saving that was not used for productive investment.

        His idea was that by spending borrowed money, a government could cause the economy to grow faster at a faster percentage rate than the growth of its debt plus the interest rate on the debt, and thus the debt would not be a problem.

        This actually happened after the Second World War. The war debt was never paid, but the economy grew at such a rapid rate that the national debt became less and less of a fraction of the overall economy.

        Now the United States and much of the rest of the industrialized world are in a different situation. We don’t have an excess of saving. We are crushed by debt.

        It isn’t the government debt that is the problem. It is the debt owed by individuals.

        Sensible people will use any extra income to pay down their debt, not increasing their spending. This would be a good thing. It just wouldn’t be much of a Keynesian economic stimulus.

        Having said all this, I agree with you that the government should not be deterred from spending money on national needs because of fear of deficit spending.

        Here is one of many examples of such needs.


        My preference for paying for this would be to raise upper-bracket taxes. As Thomas Piketty wrote, it is better to tax the rich than to borrow from them.


  2. Chico Says:

    and 70% of stocks are owned by the top 5%…


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