Are Low Interest Rates Good?


Mortgage interest rates are at historically
low levels and have been for a long time. Low interest rates are good for borrowers
because it means that it costs less for them to borrow. But low interest rates are bad
for savers because it means that they earn a lower return on their savings. Similarly,
high interest rates are bad for borrowers because it means that they must pay more to
borrow money. But, high interest rates are good for savers because it means that they
earn more interest on their savings. In 1972, mortgage rates were 7 percent and the average
American household’s debt was 76 percent of its income. Mortgage interest rates rose
until 1981 and then fell. As mortgage rates rose, people borrowed less.
And as mortgage rates fell, people borrowed more. Today, mortgage interest rates are almost
half of what they were in the 1970s, allowing households to borrow about twice what they
could afford then. Some argue that we need interest rates to be low so as to encourage
spending. But, low interest rates don’t simply encourage people to spend more. They
encourage people to spend more now in exchange for spending less in the future. Since borrowed
money must be paid back, the additional spending that goes on today will be offset by lesser
spending in the future when people pay back their loans. Similarly, high interest rates
don’t simply encourage people to spend less. They encourage people to spend less now in
exchange for spending more in the future. So what is the right interest rate? The answer is the free market interest rate.
The free market interest rate is the rate we get when the Federal Reserve does not interfere
in financial markets. Individual borrowers and savers know better than the Federal Reserve
whether they should give up spending tomorrow in exchange for more spending today or whether
they should give up spending today in exchange for more spending tomorrow. When the Federal
Reserve actively manages interest rates it replaces these people’s judgments about
what’s best for them with the Federal Reserve’s judgment as to what’s best for them. The
lesson is that borrowing and saving are really about deciding whether to consume more now
and less later or more later and less now. And these decisions are best left to individuals.

100 thoughts on “Are Low Interest Rates Good?

  • "no federal law requiring any business to use fiat money"

    Other than being forced to accept it as legal tender. Or being forced to settle contract disputes in fiat money. Or having to calculate all transactions in fiat money in order to calculate taxes. Or having to pay those taxes in fiat money.

    Except for those few details, you might be right.

  • This guys is an idiot. If interest rates are low so are interest payments. Corporations are effectively paying no interest on debt so they aren't going to consume less in the future. You can make a boom/bust arguments if you want but this is 100% bullshit.

  • The problem is we have artificially low interest rates. Bad for savers, and high inflation despite the low interest rate.

  • This video is the BEST video I've seen for arguing why we should abolish central banks. The best part is that he explains it in under 3 minutes.

  • and i have a goose that lays golden eggs. If you arnt going to substantiate your claim what good can it do any of us? Or was it your intention to pontificate?

  • Um. what? I was told the interest rate goes to the bank and the people never get that money back and that is how the banks make money. How is it that people get their interest rates back when their older???

  • Your full of shit, we already have a banking cartel which is facilitated due to having central banks. If the governments didn't support banks when they get into trouble banks would go bust. Banks wouldn't engage in risky activity for fear of this and only the best banks that provide the best services would survive. Also if there was no deposit insurance people would be more prudent giving their money to a bank and would only deposit money with banks that they thought were not going to fail.

  • You just replied dumbass, now either reply with a proper argument or shut up and stop spreading misinformation.

  • Does that chart include the fact that people are un-able to maintain their current lifestyles due to the job/house market collapse, and in return need more debt to sustain themselves. Maybe that's why they all have more debt? Maybe the chart is misleading because its trying to associate something while ignoring all the other factors? Heh, not like learnliberty has ever been misleading in corporate favor.

  • First off, before I say anything, I am all for a majority free market (minimal regulation, etc…).
    You bring up the survival of the fittest arguement. So, yes, the weak will die off, and the strong will thrive. However, once an entity has become powerful enough, and there's no regulation, it can tear down any potential threat before it's even a real threat.
    Like you said, they aren't going to invest in that risky, new bank, they'd go to their tried and true big bank. Arguement to be continued..

  • Interest rates for saving and for borrowing are the same thing. Very few people have 100k stashed away and even if they have that much money available it is invested and not sitting in banks. On the other hand people very often have 100k+ loans. People also often save money and have a large loan at the same time.

  • The central bank is the banking cartel. Only it's backed by the fucking government.

    I trust a private bank more than a semi-federal one. Simply because it's easy as hell to destroy a company, but nearly impossible to take down a government.

  • Because of bankruptcy, most people do not pay back the loans they accrue. Personally, I think Bankruptcy is ridiculous. That you can void all debts owe by running to the government is beyond pathetic. YOU took the debt. YOU took on the risks and responsibilities that go with it. Be a god damn adult and take care of your own business instead of acting like a child.

  • No deposit insurance? I'm kinda glad (at least in Canada) that I can sleep at night knowing that my deposits won't be wiped out tomorrow, and the problem wasn't necessarily risk in itself, it was too much risk taken on due to low interest rates and consequently insane leverage ratios. When Lehman went bankrupt, it was leveraged 30.7 times its actual net worth. Other banks weren't much better either. Phony money bought those assets, and so lack of a bailout would have been a disaster.

  • Hiya, have you heard about Zerlux Cash Code? (search for it on google) You will learn about the serious crimes we commit against our wallets. With Zerlux Cash Code, you will discover how to earn more money faster.

  • but if it's possible for your bank to fail, you could lose your money and then it would be up to the FDIC to cover you, I think they cover up to $250,000 but then the burden just gets put on tax payers and future generations through larger debt. I mean you can't really win when it comes to banking.

  • well with American anti-trust laws it would be illegal for banks to collude, they'd be considered a cartel if they agreed on interest rates. without the fed I'm guessing you would have more competition concerning loans and interest rates but we'd also lose our ability to quickly fight inflation and recession which the Fed provides through monetary policy.

  • I understand what he is saying about consumer spending, that makes sense. What about interest rates and business loans though?

    Don't low interest rates promote business start ups and expansions? These down the road produce more wealth then principal and the interest more times then not. So can't low interest rates to debtors with good credit be a positive thing?

  • You said it yourself: it can go either way. If the business in question produces a lot of value, then it was a good deal. But only if it produces value and pays pack the loans. The point is that when an investor uses his own money to fund a business, he is more likely to make better decisions than the federal reserve creating a single interest rate for everyone in the market to follow. Plans by the many are better than plans by the few.

  • Rothschild and Rockefeller were big supporters of using gov't to prop up their businesses and cartels. LearnLiberty opposes most of the policies that they have helped gov't enact.

    Can you point to a single cartel/monopoly that has lasted without gov't propping it up in some significant way?

  • You should keep watching these videos and maybe you would see the point you are missing.

    particularly How Cronyism is hurting the Economy were Dr. Jason Brennan explains that government corruption isn't a function of the free market, actually its the opposite. The Free market means the government doesn't intervene, so bailouts and favored regulations are not present. Capitalism isn't the problem, a lack of capitalism is the problem.

  • I don't think it is fair to call it "deregulation". Such efforts have always left far too much regulation in place to actually blame free markets for the results of the changes.

    More to the point, it is the fact that these people can control/influence gov't that gives them their excessive power. If the gov't were prevented from regulating, they couldn't use force/violence for profit.

    Market forces are too strong to allow a cartel. Cartels w/o gov't always break up within a few years.

  • Lets imagine something:
    lets say a certain US investment firm based in china guarantees a large return in excess of 100% of capital in 20years. Every year, the principal earns interest of 10%. However, in order to sign up for it, you need to fork out an additional 50% of principal in the first year.
    So china billionaire investor A puts 1b yuan in the fund, and pays 500m yuan to the company. He waits 20 years before withdrawing all his money.

  • Another billionaire investor B puts 1b in the fund, and also pays 500m yuan upfront. BUT, every year, he withdraws only the interest of 10%.
    but unfortunately, by that 20 years, the chinese economy has strengthened such that the yuan is worth 10% more every year when exchanged to US dollars. So investor A withdraws his money only to find that his money has not grown a cent, while investor B makes a hefty 91 million yuan profit every year, a total of 1.21b accounting for the upfront payment.

  • Investor A gets angry and sues the company to the tune of 10billion for investment fraud, saying that he was conned of 500m yuan. However, investor B, glad that he has made a huge pile of cash and who does not want his investment to go bankrupt due to the lawsuit, countersues Investor A, claiming that if he had invested his money more wisely, he would have gotten a 100% return anyway. So a legal battle ensues.
    If you were the jury, who would you believe?

  • The problem is if business are making stuff down the road, but everyone already spent all their credit, nothing can be purchased. Kind of where we are now, and it's all due to the Federal Reserve messing with the interest rate. Lots of people saving, which then lowers the interest rate(in a free market) is a signal to business TO investing in the future, because someone will be able to purchase their products by working now and spending later.

  • Usually bankruptcy is more complicated then that especially when you're talking about a company going through it. It's usually more of a payment plan or restructuring than simple debt forgiveness. Though you are right that some people manage to get away totally free and still get some of the stuff.

  • No, historically speaking if one banks tried to do that competition would come in and interrupt their plans. It's only when governments put in crazy licensing and other regulations that the big guys can stay big by doing things that their customers don't like. Monopolies don't survive competition long.

  • The whole point is that without the fed adjusting interest rates, people wouldn't have purchased houses they couldn't afford and thus wouldn't be in trouble. Before 2008 people said housing prices will rise forever. No price rises forever and it was only going on because of low interest rates and government policies pushing banks to make loans they wouldn't have otherwise. Corporations, by the way, only exist with government backing and the power that entails.

  • Do you own a car? A computer? A cellphone? Well, someone had to buy the first one, and it was ridiculously expensive and risky. Over time they became cheaper with competition. Monopolies don't survive free and open markets. Historically speaking there is always competition. It's usually the bigger institutions who ask the government to come in because they can't offer the same goods for the same low price and therefore want government intervention to limit competition.

  • They wouldn't have leveraged that far if they knew they would be on the hook if it went belly up. This isn't the first time banks have been bailed out, and it won't be the last. People talk about how we got these 'companies' back. But a company is just people, and the real villains didn't even get a slap on the wrist. Bailouts only encourage the behavior, and even if we had economic hardship because of a crash, it would have been better than continuing the lie of a free market.

  • And so "Learn Liberty' advocates against these regulations. The whole point is that we the people allow the regulation at all, not that we don't like who has the power. As soon as you allow your government to pick winners and losers, they'll start picking winners and losers. They are supposedly the 1%, which means if we don't have knee-jerk reactions every time we see someone who has more then us, they wouldn't get the power in the first place.

  • People are also motivated to produce more when they can give what they have produced during their life to their children or give it to a charitable organisation. I know plenty of people with debt who work less than before because now they have a house and a car. If your goal is to pay of debt then you may work more, but if you have already reached your goal, why would you work as hard?

  • A house looses value over time unless you maintain it(a cost not usually considered unless they actually spend money on it) or you get lucky and your neighbor puts in a nice house. The same thing is even more true with a car. The idea before 2008 of house prices going down was crazy according more the majority of people. Did their believe in a never ending ATM machine make it so? No. The US has been propping up housing for a LONG time, we've just only started seeing the results recently.

  • They still have the debt, which means they can't take out more loans until they're paid off, or until what they own is somehow worth more. If I save today I can spend more tomorrow. If I take a loan today, I can't take out a loan tomorrow…

  • I didn't make a claim that houses went up in value over time. That is not a necessary condition for what I said to be true.

  • That is total bullshit. It doesn't matter how much debt a company has its their ability to pay the debt they have that matters. $1 billion is a lot to a small company, it's nothing to a large company. Whats the difference? Their respective ability to pay their debt. Lower interest rates means larger ability to pay ones debt.

  • low interest rates allow people to live beyond their means even further than if they were high. People who shouldn't be able to afford a house now can, then just wait until the interest rates increase and see what happens.

  • George Osborne today thought that it was good to keep interest rates high. I hate that guy. I hate socialism generally though.

  • I'm confused as to why the debt increased when interest rates went down. I understand that one would borrow more money now compared to future due to less interest rates – does the debt increase because low interest rates give this notion that people tend to borrow more than they can afford rather than saving their money if interest rates rise leading to more spending in the future? Does high interest rates result in less debt because people are less prone to borrow money?

  • I 100% agree, and what you said is even more pertinent now that we had the Cyprus crisis. Central banking has screwed us and I myself have been contemplating getting out of the banking system in terms of credit and savings. I mean, i get no interest on my savings account and my credit penalties are through the roof. I'm looking for a credit union and opening up a retirement account based on market shares. However, i still will use banks (of course) to store a good portion of my liquid assets.

  • In our current economy, we need to increase spending now to boost the economy. If we don't boost spending, then consumers aren't buying products which isn't help companies, whose job is to SELL PRODUCTS. If we boost spending now, we help companies now, who build more products to sell now, who hire more workers to build products now, who now have money to buy more products now… If people don't make money now, they won't be able to save now, and they won't be able to buy in the future EITHER…

  • Furthermore, your final logic is flawed. Just because interest rates are low doesn't FORCE a person to buy now, it merely encourages them to. I am VERY happy interest rates are low, as it allowed me to not only buy a house now and not waste money on rent, but it also allows me to get a better house than I could, meaning my money goes farther than it normally would, AND allows me to spend more money on products, to boost the economy, instead of giving it to a bank and having the bank waste it…

  • By manipulating interest rates, the top economists are looking at the situation and encouraging people to do something they think is in the best interest of the nation. How is this any different from a company offering people an incentive to buy a product they sell? The company is manipulating the situation for the company's best interest. Neither is forcing someone to do something. Neither is taking away an individual's liberty…

  • I think it has to do with: with a lower interest rate, the larger loan and more debt I can take out for the same monthly payment. For example, if interest rates are 8%, I might only be able to afford a $150,000 house at $1,000 / month, and with $50k down, I'm in debt $100,000. With a 4% interest rate, I can afford a $200,000 house for the same monthly payments (because less goes to pay the bank for loaning me money) meaning I'm now in debt $150k, but I still pay the same amount. Isn't that good?

  • So, the low interest rates allow individuals, like me, to better leverage my money and get a better house, and that's a bad thing? It keeps the banks afloat, which is a bad thing? We haven't gone into hyperinflation, and that's a bad thing? Huh… apparently I like bad things…

  • And… who has time to figure out which banks are the best? The whole point of deposit insurance is to give people faith in the banks, which we NEED to be able to have a working economy…

  • If you're going to give thousands of your dollars to a bank who lends it out to other people, you should look up the balance sheets of the bank which you are giving your money. but since the government distorts this so much, people don't care if they give their money to banks that make risky loans.

  • Lower interest rates don't keep banks afloat. Banks makes less money off of lower interest rates since they make less off of making ordinary loans to people. You spending more money on a house isn't necessarily a good thing. You should save more so that the supply of loanable funds goes up. But the incentive to do this is too low because of low interest rates. Buying houses doesn't increase production. Building factories does.

  • Yeah, it's good for you. Is it good for the person who has their money in the bank which is loaning that money to you? No. You're only looking at one side of it. Also, that saver is spending less money since he's making less interest. based off of your logic, interest rates should be 0% or even negative because it would encourage people to buy more expensive houses.

  • And that is exactly the reason why the savings rate in the United States is lower than 0.1%. All you're looking at is consumption. An increase in consumption doesn't necessarily boost the economy. Based on your logic, if less people carpool, more would be spent on gasoline. So this would boost the economy. But you're wrong because that money would have been saved in banks instead and would be used to loan to other people.

  • Higher interest does not help to drive inflation. Lower interest rates do. Lower interest rates increase demand, which causes demand-pull inflation.

  • We don't need to increase spending. Our country has a spending problem and that's why there is so much private and public debt. Based off of that logic, it would be acceptable to claim that everyone should take out $1,000 of their savings account and go spend it, and that would cause economic growth. Hopefully I don't have to explain to you why that wouldn't work because it's really just common sense.

  • No, lower interest rates cause inflation because it expands the amount of credit available in the economy. First it primarily affects capital goods (which prices skyrocket during a boom) and then once the money percolates to the rest of the economy, the ratio spent on consumer goods to capital goods goes back to pre-boom levels and businesses realize their capital investments were too ambitious because people don't really have that much savings as the interest rates indicated.

  • I did my best to explain it in less than 500 characters. And the misallocation of capital occured in the 1920s, the depression was where those misallocation of capital were liquidated. The misallocation of capital during the 1920s was in real estate, but I'm not sure about where else; I'm presuming in other capital investments. Where the misallocation was doesn't really matter because we know there was misallocation because of the crisis.

  • and in response to interest rates, real interest rates are determined by the value society places on buying these in the present rather than the future. And yes inflation is a part of this, but there wouldn't be any significant fluctuations in interest rates if it weren't for central banks manipulating it. A reduction in the real low interest rate indicates that more people are saving, therefore in the future, they will have more money to spend on things such as housing.

  • Well I pointed out that there was malinvestment in development of housing, especially in Florida. I haven't looked into the particular malinvestments made in the 1920s, but I would presume that they were at least somewhat similar to the boom in the 2000s. The ABCT could be falsified if there was a "bust" without over expansion of credit, but this over-expansion if credit was the cause of the Great Depression. It probably would have recovered in a couple years too if it weren't for gov actions.

  • The money supply was NOT essentially flat. M2 was at 33.72 billion in 1922. By 1928 (only 7 years later) it was up to 46.42 billion. That's a 38% increase. And to deny that there was a bubble is absolutely absurd.

  • M2 was 34.8 billion in 1920. In 1929, it was 46.6 billion. A general stock market rise is one of the effects of a boom, as we saw in the 2000s. Yes it fits the ABCT because businesses are expanding rapidly (even though they shouldn't be). And there was a real estate bubble. If you look at any of the data from the 1920s, you will see that. Type in "lessons from the Great Depression real estate boom and bust" on google. It's the one from ClevelandFed.

  • Uh…hu? Created by the Congress, the Federal Govt, running a monopoly on money, created by govt fiat, the dollar, monpolizing intrest rates, of govt money, paying all profits, to the US govt, having a Fed Chairman, put in place, by the leader of the Federal govt, the Pres. Yes, sounds like any private business.

  • But, but… that's going to turn loans into a real-estate-like business; it'll be worse than monopolies, I mean look at the rent pricings now.
    Government ruins many things when they interfere, that's true.
    I, I… don't know what to do; I can only hope that when that day of government overthrowing comes, humans will progress generally in all good aspects un-poor.
    I just hope thy economist know what you're doing.

  • The federal reserve can only influence nominal interest rates. What really matters are real interest rates, what is left from nominal rates after accounting for inflation. The real interest rates are and always will be determined by demand and supply of loans, while the mandate of central banks is to set a nominal rate such the inflation is low but positive.

    While higher real interest rates would be good, higher nominal rates would only increase deflationary pressure.

  • Well everyone in the us has a PHD in Finances so why not let them decided on the outcome of the US economy.

  • The banks would have considerably more power than the individual over the setting of interest rates. It wouldn't become about individual choices as to what is best for them it would become about what allows the biggest banks to get the most money out of individuals.

  • One of the more ludicrous LearnLiberty videos (and that's saying something).

    Your overall premise is correct; lower rates encourage immediate spending because we want to capitalize on cheaper borrowing and/or are less inclined to save.  But you still gloss over that fact that the cheaper rates by definition mean you SPEND LESS on interest.

    So now instead of paying a $2000 mortgage every month, refinancing your loan or pulling the trigger on that house you really wanted might mean you only have to pay $1800 a month (ceteris paribis like loan term).  That $200 can be spent elsewhere.

  • Where he goes wrong is in suggesting that the Fed CONTROLS interest rates. In the long run , it's always the market. In the short run, central banks have some ability to set rates, but eventually it's market forces that determine the real rates of interest.

  • I find interest rates very confusing: Here's how I see it. Ceteris paribus, with a high real interest rate you will buy less stuff because in effect you are paying a higher price. And a low real interest rate will encourage you to buy more overall because it is equivalent to a lower price.
    Also, when demand goes up it is easier to make a profit so interest rates should rise as businesses seek funds for expansion. When demand recedes interest rates should fall since businesses will pull in their horns rather than expand. 
    When business is good there is less need to borrow to pay creditors since cash is flowing in from operations. So demand for funds should go down and rates go down.
    When business is bad there is more need to borrow to pay creditors so demand for funds should go up. and rates go up.
    So either rising or falling rates could be driven by an upswing or a downswing depending on how these different forces interact. I don't see how you could untangle all these factors and draw conclusions about the cause or effect of today's rates. Am I missing something?

  • He didn't really talk about the distortions you get when you have low interest rates like a housing market bubble or other bubbles you get when the cost of borrowing money is virtually zero. Or what happens in an environment that has had low interest rates for an extended period of time and a recession comes.

  • Low rates cause inflation so you dont save you as much as youd think. A home worth 100k in 1985 at 15% 30year fixed youd pay $355,000 interest. Now today that home has inflated to around 600k 4% 30 year fixed =431,000 interest. Id rather buy it for 100k at 15% and pay it off early. Not to mention your property taxes are much lower on 100k vs 600k. This is why government and banks love high home prices and inflation, fees taxes etc are based on a percentage of value. Oh and i almost forgot low interest rates make people pull money from saving and roll the dice in the stock market!

  • recently i have an assignment about the effect of low deposit interest in economy…..can anyone help me out?

  • what about the effect of low interest rates as it makes it more easy for people to set up new business ?

  • I am 63 and don''t get any pension. Earlier I get 48000 quarterly as interest on my fixed deposits, now getting only 38200 quarterly on the same amount, though cost of medical and other expenses rising every month. What is the future of people like me who saved money for their old age ?

  • Been researching on interests rates for long. You've given the best answer!
    Decentralize Banking system, Taxation is Theft and Abolish the Fed!

  • Low interest rate are bad, the lowest rates were in 2008,look what happened, High rates is the only weapon to save the world economy. A fool that hides his folly .is better than a wise man that hides his wisdom! Vote high interest rates.

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