The Back Alley Archives

So here's a question for you financial brainiacs...is it good or bad for the economy if interest rates are kept low, either naturally or artificially (by the Fed)?

I should have said the US economy.

Any artificial manipulation of interest rates will cause malinvestment and distort signals available to market participants about the true state of affairs and what they should be doing with their money.

That said, when interest rates are naturally low it is a sign to market participants that savings/accumulation of capital is relatively large, meaning that it is cheap to borrow money to produce things. Interest rates rise as savings/accumulation of capital decreases by producing things. Interest rates, naturally speaking, are just a way for the market to signal how capacity, capital, and production are related.

Also, I suppose to really begin to answer the question, we'd have to define what's "good" for the US economy. If "good" is never-ending growth, then you always want interest rates to be as low as possible. Of course, the problem with never ending growth and artificially low interest rates is that sooner or later you (very likely) create a massive amount of over-capacity and then when recognition sets in you get a crash, like a hangover after a night filled with liquor and blow.

aa pretty much nailed it

nicely done AA

to mom : in what context are you asking please?

Just a topic that was brought up on my newsletter from my financial advisor. He just wrote that there are two camps on whether or not it's good for the economy to have long term low interest rates or not. I know this guy is pretty conservative in his views but his newsletters are very neutral and give both sides of the argument since his clients may not have the same views as he does.

I was just curious what you all thought because I am an economic idiot. And thanks AA...I knew what you would say about artificially keeping interest rates low and I know your feelings on the Fed...I was just wonderin.

So here's a question for you financial brainiacs...is it good or bad for the economy if interest rates are kept low, either naturally or artificially (by the Fed)?

to purely answer the question...generally speaking - i think it's good for the economy if interest rates are kept low because it purely means that the fed is doing their job...keeping rates low, in theory, the fed is trying to encourage borrowing (which in turn encourages growth) so long as inflation is kept in check.....i say that in theory because applied in the real world in the real markets, there are a lot of factors in the marketplace that are DISCOURAGING people from borrowing, DISCOURAGING banks from lending and DISCOURAGING businesses from growing.

^^^true dat Rad. I was just thinking the same thing. We really want to expand our business, but I just don't know if it's the right time.

one of the things that companies are struggling with right now has to do with taxation/healthcare overhauls and how that affects their companys bottom line figures...no one wants to expand and grow if this administration continues to signal to the marketplace that they will continue to regulate american businesses and continue to ensure that american businesses remain non-competitive in the marketplace due to excessive taxation and impending healthcare overhaul.

essentially...govt interference and heavy-handed taxation policy have businesses leery of expanding (no matter how low rates are) for fear of unforeseeable, future all-in costs of impending govt involvement and reform.

sidebar - LOTS of companies are taking advantage of low rates and are tapping the capital markets...they're essentially re-financing existing debt and saving massive dollars in the process...Canadian telecom services provider Telus Corp issued 1BLN in 10yr notes to refinance existing 3-5yr debt essentially saving themselves 37MM every 6months...in this case, the company is not taking advantage of low rates to borrow money to expand...rather, they are borrowing money to SAVE money for forecasted "rainy days"

2-3 years ago I wouldn't have had a clue how to answer that question. This board is one of the things that motivated me to learn about economic stuff, after reading rad and a1 talking about it in depth.

ya mean....i'm contributing??

From time to time...a little bit....

one of the things that companies are struggling with right now has to do with taxation/healthcare overhauls and how that affects their companys bottom line figures...no one wants to expand and grow if this administration continues to signal to the marketplace that they will continue to regulate american businesses and continue to ensure that american businesses remain non-competitive in the marketplace due to excessive taxation and impending healthcare overhaul.

essentially...govt interference and heavy-handed taxation policy have businesses leery of expanding (no matter how low rates are) for fear of unforeseeable, future all-in costs of impending govt involvement and reform.

sidebar - LOTS of companies are taking advantage of low rates and are tapping the capital markets...they're essentially re-financing existing debt and saving massive dollars in the process...Canadian telecom services provider Telus Corp issued 1BLN in 10yr notes to refinance existing 3-5yr debt essentially saving themselves 37MM every 6months...in this case, the company is not taking advantage of low rates to borrow money to expand...rather, they are borrowing money to SAVE money for forecasted "rainy days"

I was hearing about how many companies are holding on to their money for these "rainy days" and how the current administration is planning to tax the crap out of that rainy day money if companies hold on to it rather than hire people. Sort of a Catch 22 if you ask me...you hire people and expand your business, you have to fork out God-knows how much to pay for health care, to comply with this gov't (EPA) standard or that standard...you're screwed. Save your money and hold on until things settle down...you're screwed.

I tell you, my in-laws may have been on to something about moving to the outback of Australia.

well NOW....mergers & acquisitions statistics for the month of July are suggesting that that kind of activity is starting to pick up...indicates to the market that companys are cash rich due to implementation of austerity measures/payroll slashing/generally running lean and mean...and instead of investing or expanding (can't invest in the market because rates are extraordinarily low and the the stock market is extraordinarily volatile....can't expand because the current administration is hell bent on taxing companies because they're lucrative), companys are now resorting to buying weaker, more cash strapped companys...i foresee more bank mergers, more oil and gas company mergers, more tech company mergers in the next couple of quarters to a year...as a result, imho, within the next several years, with the reduced amount of suppliers of good and services as a result of the M&A activity, we will see less competition which will result in higher costs (inflation)

Very true. My firm just bought one of our local competitors about a month ago. We'd been looking at them for probably about three years. The price was finally right.