Finance, Forex and Investments

Are low short term interest rates really about lending or are they about spending and investing?

When interest rates on bank accounts are beneath the rate of inflation the value of your savings depreciates over time. That is; you'll lose money by saving it. Proponents argue low interest rates encourage lending and home buying. But is that the real reason, or is it an attempt to make all money active in the economy by either being spent or invested?

Public Comments

1. Low interest rates encourage lending and home buying, by making all money active in the economy
2. Well, we don't have a fixed amount of money. Our monetary supply is, as the fed would say, "elastic". The primary reason for an elastic currency is to make deficit spending easier. Even when currency is tied directly to a commodity like gold, governments have always found a way to borrow what they need with war bonds, and get what they can from their citizens by issuing war time inflationary currency. When a currency is made permanently elastic, like ours is, the deficit spending the government does to fund its wars (and other projects) is no longer covered by loans from its citizens or foreign states. Rather, the government prints however much money it wants and spends without limit. The elasticity of fiat currency gives government power to buy whatever it wants, whenever it wants. Though fiat currency is essentially useless, as long as people accept it for goods and services, it remains money. That's why fiat currency is always accompanied by "legal tender laws", making it illegal to refuse the fiat currency for public or private debts. You have part of the equation right for sure. If you sit on cash during inflationary conditions, you lose wealth. The other half of the question is, "who is gaining the wealth that I lose"? The answer to that question: whoever is printing the new money. The process of stealing wealth by printing money is called "seigniorage". Inflation is, as you probably already understand, the increase of the supply of money in excess of the increase of wealth. In the US, it is a cartel of banks called the Federal Reserve (the fed) that creates the majority of our money. They don't print it, instead they simply loan it out; one computer talks to another computer, and no paper money is ever issued. They make money in two ways every time they create money for a loan; first, they get the seigniorage, then they get interest on their loan as well. As you can imagine, the more loans like this they make, the more wealth they are able to keep for themselves. If they were to take it all, or take it too quickly, they would suffocate the economy and reduce foreign confidence in their currency. So they must maintain a balance that permits domestic economic prosperity, perpetuates international confidence, and turns a tidy private profit. That balance is maintained by the constant manipulation of interest rates, encouraging and discouraging lending at different times to control the total monetary supply available for commerce. This constant manipulation of the monetary supply leads to a cyclical pattern of having too much or too little money to accurately represent wealth at any given time. The extra debt or extra money results alternately in fearful hoarding and arrogant malinvestment (which seem rational at the time according to the apparent market conditions). We call this "the business cycle", and it leads to bubbles- that burst- like the big one bursting now. Low interest rates set by the fed are designed to encourage borrowing, which subsequently increases their own profits, but also the monetary supply, reducing the purchasing power of the dollar against foreign goods. But interest rates that are artificially low encourage malinvestment; borrowing and spending that we can only appear to afford.