The Hidden Cost of Zero Interest Rate Policies

By Laurence B Siegel & Thomas S Coleman – Re-Blogged From

Should the Fed raise interest rates? Some believe that ultra-low interest rates are good for investors because they drive up the prices of stocks and real estate, fattening household balance sheets. Others counter that zero rates are an insidious tax, transferring wealth from borrowers to lenders, distorting incentives and misallocating capital for individuals and government and making the American investor poorer over time.

Where you stand on the Fed raising rates is likely to depend on which of these two positions you support.

We think the latter. Zero interest rates – which translate to negative real interest rates after inflation – are a massive transfer of wealth from investors to governments and other borrowers around the world. We’ll show that the scale of the transfer is nearly $1 trillion per year in the U.S. alone and will argue that the zero-interest-rate policy lowers expected returns on stocks and real estate as well.

Low interest rates hurt more than just investors. Everyone suffers because low rates distort consumption and investment decisions, potentially causing economic growth to be slower than it otherwise would be. Initially, in 2008-2009, low interest rates were an element or consequence of a policy of liquidity injection needed to avoid a collapse of the banking system and serious depression. Since then, however, they have become a tool of stimulative macro policy with limited success.

They are disastrous as an ongoing strategy.

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Negative Interest Rates

cropped-bob-shapiro.jpg   By Bob Shapiro

Several countries, especially in Europe, are suppressing interest rates to the point that creditors must pay for the honor of lending the debtors money – Interest Rates are negative.

Here in the US, we have had negative REAL interest rates for most of the last generation. Negative Real Rates just means that the nominal rate is below your favorite measure of price increases in the Economy.

Negative Real Rates are extremely hard to measure, since the wonks running the various federal agencies tasked with putting out statistics such as the CPI, are political appointees. As such, they torture the data until it confesses to a low rate of Inflation. Another way to describe these agencies activities is to say, “They LIE!”

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