Why are interest rates so low? It’s a question which has apparently been occupying a couple of North America’s top economists but this blogger sees the discussion as a screen hiding some very important economic issues.such as the root cause of the economic crisis and values which will guide us in trying to find a solution.
On the surface the answer is simple. Interest rates are the price of money and are determined by supply and demand. They are low because that is where the two balance. They appear low because we are used to high returns on our investments and are reluctant to give them up. There is no reason why interest rates could not be zero and maybe they should be.
To understand the root cause of the economic crisis we need to go into a macro economics classroom and watch the lecturer draw his basic diagram on the blackboard. It is in the shape of an”x” with one side representing the financial side of the economy and the other the real or physical side. This is important. As we measure the physical part of the economy in financial terms it is easy to forget the distinction and analyze economic problems only in financial terms. We need to ask what is happening to the physical side of the economy because it could be that is where the problem is.
This blogger figures the problem is with the resource base. There are lots of energy and mineral resources left on this planet but we have exploited the most easily accessible. Those that are left take a lot of time and energy to extract and this is causing a lot of economic problems. It could even force us into negative growth. This is a much more serious problem than why interest rates are low. It is also an extremely difficult problem because it challenges some deeply held beliefs and values. It’s a lot easier to talk about why interest rates are low.
Some ideas about how to fix the economy are included in the essay “LETS go to market: Dealing with the economic crisis” on this weblog. A major feature of that essay is a proposal to change the way in which we create money.
The emotions surrounding money make it a such a difficult subject that few people understand the economics of money and banking. This is unfortunate as money is so essential to how we exchange goods and services. I encourage you to take a look at the essay.
While I prefer to see low interest rates as a symptom rather than the problem here are some observations.
Money should be considered a tool to facilitate exchange rather than as a commodity with a value of its own As the quantity of goods and services we want to exchange varies up and down so does the amount of money supply we need, If there is too much money there will be inflation and if there is too little money there will be deflation. Some people believe there should be mild inflation but this reduces the value of savings and should be considered theft.
Quantitative easing has been an attempt to stimulate economic activity by increasing the money supply. It has resulted in a rising stock market but has done little for the real economy. That has to be a sign of a serious problem which has not been identified.
The way in which we create money, known as fractional reserve banking, is a heavy-duty problem because it is based on loans on which interest must be paid. If all debts had to be repaid at one time there would not be enough money in the economy. It is a Ponzi scheme on a grand scale and it is no wonder we experience frequent financial crisis. For more on this topic see these previous posts on this weblog.
I believe we are facing a serious economic problem in that it is not clear there can be a return to economic growth. Dealing with this will require some major changes in our way of life. It is disappointing that two of our most well-known economists are protecting us from having to deal with this with a frivolous argument. It’s as if they are playing in the turkey poo on animal farm and producing gobbledygook.
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Filed under: Economics | Tagged: banking, economic crisis, economic growth, Economics, energy and mineral resources, fractional reserve banking, interest rates, macroeconomics, money, Ponzi, quantitative easing, resource base |