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Long Term Low Interest Rates and the US Economy



Long term low Interest rates may have negative consequences, and may be indicative of a systemic issue as seen in the US Economy.

One such consequence is housing prices consumers borrow consistently over a long period of time, the demand for houses is consistently high, raising its price as the supply is very slow to grow to match creating housing issues and homelessness as has become common around America now.

The systemic issue being that despite the low interest rates and further lowering of the interest rates, the natural forces that push interest rates up aren’t pushing the economy becomes a lie.

Interest rates are the proportion of a loan that is charged to the borrower of money, they’re the price of money.

They are also a tool of the Central Banks and Governments to influence the economy.

By changing the interest rates, they effectively change the price.

Raising the interest rates slows down the economy as they raise the price of money and consequently lowering its demand.

The inverse is also true, in that lowering the interest rates boosts the economy by dropping the price, and increasing the demand.

Increasing the interest rates slows spending and borrowing as people start leaving their money in banks to gain the deposit interest, and slows borrowing as the price of that loan has increased, and vice versa.

Lowering the interest rates reflects recognition from the central bank that the economy isn’t going so well, keeping them low reflects long term economic issues within the economy that low interest rates failed to solve, doing the same thing and expecting a different result is the definition of madness, long term interest rates as seen in the USA reflects the inability to truly invigorate the economy. The strategy of the low rate in the USA is in part to cheat on trade, lowering the value of the currency.

Low interest rates have the effect of increasing spending, inflation, borrowing, and generally boosting the economy. Of course there are exceptions.

If the interest rate is already low then lowering it even further, from .5% to .25% for example, won’t have the desired effect. Or perhaps no one wants the money, as they expect future prices to drop or they expect the interest rates to drop again.

As Didier Saint-Georges put it in his article “Persistently low interest rates aren’t such good news after all”, he says “Because the self-fulfilling-prophecy aspect of low rates and flat or even inverted yield curves gets ratcheted up a notch. Conscious of the feedback loop between low rates and a feeble economy, market participants begin to price in a downward spiral in interest rates. Low interest rates thus go from being a cure for weak economic growth to being a harbinger of it.” After all, why take out a loan if close in the future, the loan will be even cheaper?

If you’re interested in further research into this topic, the following are published papers and articles on the subject.

Low Interest Rates and the Housing Bubbles: Still No Smoking Gun
Low for Long? Causes and Consequences of Persistently Low Interest Rates
Persistently low interest rates aren’t such good news after all
What Are the Consequences of Long Spells of Low Interest Rates? By the Boston Feds 62nd Economic Conference

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John Heffernan is an Analyst at HEFFX. John is a BSc in Economics with Honors from the University of Buckingham, and is a contributor on equities at Live Trading News.