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Sun Nov 25, 2012, 09:05 PM

Interest Rates (Low for a sound Reason)

Story thus faróIn both the US and the UK interest rates are way down....

In the United States, we supposedly have low borrowing costs despite our budget deficit ó and if we donít implement Bowles-Simpson immediately, the bond vigilantes will attack. Really! This time we mean it! Meanwhile, in the UK, the official line is that the low rates are a reward for all that fiscal austerity ó and VSPs get upset and abusive if someone well-informed points out that a much better explanation is that investors expect the economy to remain weak, and hence for short-term rates to remain very low, for a long time.

Letís unpack this a bit. Itís very hard to come up with any reason why either the US or the UK might default, since they can simply print money if they need cash. And given the absence of real default risk, long-term interest rates should be more or less equal to an average of expected future short-term rates (not exactly, because of maturity risk, but thatís a fairly minor detail).

So if you expect the US and UK economies to be depressed for a long time, with the central bank keeping rates low, long rates will be low too ó end of story.

But wonít that money printing cause inflation? Not as long as the economy remains depressed. Budget deficits could lead people to expect higher inflation down the road, once the slump finally ends ó but that would be a good thing for the economy in the short run, discouraging people from sitting on cash and weakening the exchange rate, thereby making exports more competitive.


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Reply Interest Rates (Low for a sound Reason) (Original post)
cthulu2016 Nov 2012 OP
msongs Nov 2012 #1

Response to cthulu2016 (Original post)

Sun Nov 25, 2012, 11:21 PM

1. savings interest = 0+ and credit card interest = screw customers thanks to congress nt

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