Savers hate low interest rates.
The rest of the economy cannot survive with anything else.
This is why I think low interest rates are here to stay:
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I don’t disagree with any of the comments in the video, however, it skirts around one of the big issues of interest rates failing to track inflation. If an organisation (eg bank) pays 0% interest on cash, it can convert the cash into an asset and make a low (?zero) risk profit on the asset simply rising in line with inflation. This distorts normal risk attitudes and pumps the value of all assets to artifically high levels. We see it especially with assets that typically at least track inflation eg house prices, stock markets, art, fine wines etc. This can have major consequences – one of the major causes of the great depression was people borrowing money to invest in the stock market causing it to become over-valued.
I am beginning to see many parallels now. Stock markets seem to have been disconnected from normal analysis of risk. Despite COVID19, the Nikkei and S&P have regained the levels they were pre-COVID. You may be right that governments have too much to lose by putting up interest rates, however, the consequences of this decision could be significant.
Not sure it is quite right to lead with “low rates are here to make the cost of servicing government debt low”. Low debt servicing costs are a corollary to low rates, not the purpose (well, not for government, at least).
I agree that low rates are here to stay and that savers just need to live with that. I also agree that this is the correct policy – borrowers need support as they are the ones that drive the economy. But just setting the rate paid on reserves at close to zero is not the end of the story….. and using QE as a tool to drive long-term rates lower is not enough either. Government needs to look at the transmission of these low rates into the real economy. Large companies with access to the bond market are seeing tighter spreads on borrowing but what about small business where, in practice, loan pricing is dictated by the banks? With government now involved in the market as a result of COVID should it not stay involved? A job for a National Investment Bank?
Yes – because banks are charging (maybe excessively) for risk that does not exist
I agree that all governments are forced to keep interest rates minimal , if not negative, to avoid serious economic and social distress. This does pose a problem for the future survival of capitalism in its present form. As you point out the only way people or corporations can benefit is by having large savings or surplus cash is to use it for speculation or high risk taking investment. The present system ‘s survival is predicated on increasing this huge and mounting debt, whether corporate, personal or government There will come a time, like in 2007/8 when this debt bubble mountain will burst again as major defaults and business failures multiply out of hand.
Dear Mr Murphy,
Low interest would be good; I am no expert on anything finacial, but I agree with you on that.
It makes me wonder what is going on with the banks at the moment. I went to my bank to apply for a loan on something I wanted to buy, naively anticipating that interest rates would be good at the moment with the base rate being near zero. I only wanted to borrow £2000 over 24 months and was offered a 26% interest rate; the best rate I could find from them was 12% if I borrowed £8000 over 72 months. It would seem that I am not someone they are keen to lend small amounts to! It is odd that interest rates are much, much higher now than when I paid off a previous loan (£8000) with the same bank earlier in June this year; that loan had been running at 6% p.a. (set about 4 years ago when the base rate was at around 0.25%). I am baffled!
That’s to do with risk
The interest rate is a combination of multiple factors
The price of money is only one of them
I suggest that government could actually encourage savings – not by QE for City wealth but simply by savings at NS&I for say a max £10k at 2.%. There is no reason all interest rates need to be the same – indeed they are not for the banks currently. 20% on credit cards and 3% or so for mortgages. Why shouldn’t government do the same when they can?
Then we could have bonds sold to individuals in say £500 -1000 values for certain public purposes. Green New Deal ones are the most obvious but local councils could, I’d suggest be encouraged to benefit – say we want a footpath organised to here or a bridge to there and in due course this would replace the charitable shenanigans that take place for charities – almost all of which should actually be part of a government for public purpose looking after us all – such as Children in Need, whereas a local ‘improvement’ would be much more subject to local effort or lack..
That would gives us all a proper social engagement – as well as the seemingly inalienable right to make fools of ourselves in beneficent endeavours….
Agreed Peter
Until I began to learn about MMT , I had got the idea that if the financial markets didn’t like the government’s spending plans or the size of the deficit/national debt, they would not want to buy bonds, so interest rates would have to rise as an incentive for them to do so. If it is not true now but was in the past, what has changed, and when?
QE changed it all
From 2009
Has QE always been possible since 1931, and it’s just that the “financial authorities” wouldn’t countenance it?
It has been since 71 – but the powers that be have tried to refuse the right of government to spend as it wishes