Low interest rates are a killer

Part of the Keynesian disease, a big part, is the fetish for low rates of interest. Not everyone now necessarily thinks so. This is from the Bank for International Settlements:

The international body representing central banks is warning its members that record low interest rates are generating conditions for another global financial crisis that may be worse than the first.

In its annual report, the Swiss-based Bank for International Settlements (BIS) expressed serious concern that global share markets had reached new highs and the interest rate premium for many risky loans had fallen.

“Overall, it is hard to avoid the sense of a puzzling disconnect between the markets’ buoyancy and underlying economic developments globally,” the bank wrote.

The BIS says the disconnect is largely due to continued monetary stimulus in the form of money printing and record low interest rates by many developed economy central banks.

Why interest rates too low are a problem is hardly obvious and is hardly taught. Very clear from reading the pre-Keynesian literature but who reads any of that now. But the BIS is sending out the clearest possible warning but is it even possible that anyone at the heights of our political establishment would either understand or act on this advice.

(With thanks to Julie for sending the link along.)

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25 Responses to Low interest rates are a killer

  1. Squirrel

    The BIS has a number of wise, sobering and unpalatable things to say – so it will doubtless be ignored, as far as possible (until its warnings come true).

  2. Driftforge

    The health of an economy can be measured in the gap between its interest rates and its inflation rate.

  3. JC

    The health of an economy can be measured in the gap between its interest rates and its inflation rate.

    No it isn’t. That’s a mere observation in one part of the economy that may or may not be signaling health or even sickness.

    The health of the economy can only be measured by rising/falling living standards.

  4. JC

    Interesting decision. How does Judge Roberts reconcile this decision to the earlier one where the court deemed Kenyancare to be constitutional and he was the swing vote. He deserves to have his head placed in a vice for his earlier vote.

  5. JC

    I’m sorry steve, but I’m not buying the BIS comments. If interest rates are too low the TIPS market would be showing inflation down the tunnel. But it isn’t and the bond market is more than well behaved.

    If there’s a crisis, it would be caused by the Fed either being too tight or too loose. However looseness isn’t the problem these days.

    One other thing Drift. That spread you raised isn’t the most important determinant. Market participants would regard the slope of the yield curve to be far more important.

  6. 2dogs

    The low interest rate economies need to stop racking up government debt, which is cancelling the stimulatory effect of the low interest rates.

  7. Bruce of Newcastle

    Interest rates are low because there is little demand for money to invest. Capital expenditure is low and companies are returning it to their shareholders as there isn’t anything else they can do with it. That is because in the current climate of government control and green nanny state bureaucracy you cannot invest and expect to make a profit which repays the investor. Furthermore the dead hand of the left has made investment and profit a sin, so social pressures reduce the demand even further.

    The way you get out of the low interest rate environment is to remove bureaucratic barriers to business. Then people can have an incentive to chance their arms and banks have an incentive to back them with loans, since there is a much better chance the loan will be repaid. Increased demand for capital will raise its price.

    One good thing about the low interest rate regime is that it is slowly forcing people to move away from bank interest to the sharemarket, which is a form of capital investment for profit. This is breaking down some of the social inhibitions, but since it is a quiet grass-roots movement (ie individuals investing long term for dividends, as in the first link) there is little political pressure on politicians to reform. Also countering this quiet revolution is the continued rise of progressive doctrines, which regard capital and capitalism as evil.

    So low interest rates will continue until something breaks. We saw this in the PIIGS when they were flirting with insolvency, investors dumped their bonds and the interest rates rose to 7 and 8%. But action by the ECB and others succeeded in putting the interest rate monster back in its cage and their bond rates are now lower than ours. Which is silly.

    But when the crisis returns, since none of those governments are reforming despite the pressure, the same will occur. Their bonds will be sold off and the rate they are forced to pay for government debt will rise to reflect the risk. Unfortunately the chances of default this time are higher because debt has risen even more as a ratio to GDP. And the growth in GDP which they all hope and expect to save them isn’t happening because their economies are so tied up in red tape, green silliness like renewable energy mandates, and mad bureaucratic regulations.

    When the riskiness of unreforming governments’ debt reasserts then, and only then, will the hold that central banks have on interest rates fail, and rates for debt will rise to a level reflecting the actual risk.

    Its not the sharemarkets that are the problem. It is the governments.

  8. AP

    Why interest rates too low are a problem is hardly obvious

    Not true. Anyone would remember their first economics lesson in year 8 taught them that resources are scarce and wants are limitless, therefore economics is a question of the best allocation of resources to offer the most satisfaction. The way to ensure the best allocation of money, when it is thought of as a resource, is to charge a fee for it’s use. People who have a use for that money which has a high probability of returning the original amount plus the fee gain access to the resource, and the lower the probability of returning the original amount, the higher the fee is.

    Keeping interest rates artificially low completely goes against that first basic economic principle taught across the globe in almost every high school. It results in misallocation of resources.

    The fact our “leaders” and central bankers can’t see this is a sad indictment on them.

  9. AP

    red tape, green silliness like renewable energy mandates, and mad bureaucratic regulations.

    Sounds like my day at work.

  10. Driftforge

    One other thing Drift. That spread you raised isn’t the most important determinant. Market participants would regard the slope of the yield curve to be far more important.

    Why so?

  11. .

    JC
    #1365834, posted on July 1, 2014 at 1:10 am
    I’m sorry steve, but I’m not buying the BIS comments. If interest rates are too low the TIPS market would be showing inflation down the tunnel. But it isn’t and the bond market is more than well behaved.

    Are bank balance sheets shrinking? Is there some interest rate parity mechanism?

    There are other places adjustments can occur. As long as monetary growth outstrips GDP growth, there will eventually be inflation.

    The lack of perceived future inflation might simply be a sign of perceived future GDP decline and prices falling in a crisis.

  12. maurie

    Rampant money printing by the so far world’s largest economy & its subsequent distortion of other currency values doesn’t seem to even rate a mention!

  13. EB

    Well look on the bright side, at least all those idiots borrowing 100% on interest only terms to speculate on residential property will be wiped out when the time comes.

  14. Hydra

    Still convinced the RBA every single month oversees the fact that the only reason we do not have rampant inflation above 4% in this country is because Woolies and Coles and artificially competing to keep their prices at record lows.

  15. Andrew

    Don’t look to the RBA for guidance. Read Batellino’s speech in 2011 for the lulz – they thought we would have 6% rates in a mining boom by now, and a massive budget surplus.

  16. Pyrmonter

    “Keynesian” – there is a perfectly respectable monetarist linked to in the sidebar with essentially the same prescription. Methinks Dr Kates doth complain a little too much agin what has been pretty orthodox macroeconomics

    http://www.themoneyillusion.com/

  17. Interest rates are simply a reflection of the supply and demand for money, minus risk. But this can be distorted by money printing and the like, which is precisely what’s happening in various places in staggering amounts. All distortions must be adjusted eventually, and that is never pretty. It’s time for governments to get out of the way.

  18. brc

    they thought we would have 6% rates in a mining boom by now, and a massive budget surplus.

    But for the shockingly incompetent previous government, this might have occurred.

    Think of all the big projects that have been shelved in the last 4 years – not for reasons of softness in demand for products, but because of construction cost blowouts, changes in laws and taxes, and general flight of foreign capital scared off by nationalisation projects. The previous government didn’t even understand what normal returns on investment are, and were determined to shut down productive industries to appease luddites.

    Remember when Swan used to crow about the investment pipeline? That was before the investors all took their sections of the pipe to different places. If you want real lulz, find a 2006 era copy of a business newspaper and read all the stories about investments, growth, new projects and the like. Then compare it to one these days. 8 years goes by in the snap of the fingers, and a lost decade is easy to achieve.

    I was making a fire on the weekend and was tearing up a 2010 era newspaper. Funnily enough, it had massive full page ads telling us all about the wonders of the NBN (schoolchildren touring european museums, natch). The rollout was happening and would be done in 8 years, it said. Well, that means in 2014 half of all Australian households should have an NBN connection, right? Right?

  19. MartinG

    The ugly face of a socialist.

    But Nobel prize winning economist Joseph Stiglitz says if Australia wants to prosper in the coming years the Abbott government should be spending more, not less.

    Joseph Stiglitz

  20. will

    One other thing Drift. That spread you raised isn’t the most important determinant. Market participants would regard the slope of the yield curve to be far more important.

    Why so?

    Players in the bond market seem to think that the slope indicates something, maybe expectations about the future, but looking at chicken entrails may be more meaningful.

  21. Tel

    But Nobel prize winning economist Joseph Stiglitz says if Australia wants to prosper in the coming years the Abbott government should be spending more, not less.

    Hello? Hello, is this thing turned on?

    Abbott is spending more and not less.

    Stiglitz is usually a touch brighter than that, even for a socialist, maybe he secretly went John Galt and left some sort of wind up device filling his chair, a lot of people are doing it these days, so I’m making an educated guess on that.

  22. Andrew

    they thought we would have 6% rates in a mining boom by now, and a massive budget surplus.

    But for the shockingly incompetent previous government, this might have occurred.

    Much as the GFC (Gillard Financial Crisis) was deliberately engineered by the Goose, we could never have tolerated a 6% rate gap and a mining boom. The currency would have gone to levels that would have forced remedial action of some kind.

    Yes, the lack of new mines during a 100 year commodity bubble is why I believe the death penalty should be brought back. And having destroyed the economy for a century, why I’ve always argued that Abbott666 would never have had a chance of repairing the damage. But when Battellino made his insane speech in 2011, the WBCT and the WBMT were both already known. It was evident that the economy was destroyed and recession likely.

  23. Habib

    Tell me about it, I’ve got cash, and will get no return on it here. I’m not prepared to invest in a property bubble, and Australian shares in mining have sovereign risk. Overseas ones aren’t much better. I’m tiddling around on exchange rates and commodities. This stagnation isn’t sustainable.

    A decent government here would start wholesale repeal of idiotic hippy legislation, and we’d be Dubai, Singapore or Switzerland with resources, an ocean view and democracy. We’d need to stump up a bit more for defence though, but if you’re nuclear, who’s going to fuck with you? Could even afford the idiot welfare state pillocks seem to insist on. I wouldn’t care in that circumstance.

  24. MartinG

    Tel
    #1366436, posted on July 1, 2014 at 6:18 pm

    But Nobel prize winning economist Joseph Stiglitz says if Australia wants to prosper in the coming years the Abbott government should be spending more, not less.

    Hello? Hello, is this thing turned on?

    Abbott is spending more and not less.

    He’s also taxing more and adding extra costs on industry such as his daft PPl scheme. He’s a fucking economic imbecile but may achieve some good for all the damage he’s done.

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