How low borrowing rates slow the economy
Low interest rates may seem great for consumers, but they wreck business models (particularly in the financial industry), and they don't do enough to spur lending and borrowing.
Low interest rates may seem great for consumers, but they wreck business models (particularly in the financial industry), and they don't do enough to spur lending and borrowing.
I'm reading more and more about the Fed's liquidity trap these days, which is interesting considering the timing - on the probable eve of yet another guns-blazing Fed bond-buying program.
The trouble with zero-bound interest rates is that they wreck business models, specifically in the financial industry (insurance companies, lending, investment management, etc).聽 Which would only be a temporary problem if they could actually spur lending and borrowing. But in the context of a decade's long deleveraging process, the simple fact is that they can't spur these things, not in any meaningful way.
And so they end up acting as a damper of financial activity in a bizarre way.
Bill Gross's聽latest missive at PIMCO explains this phenomenon beautifully this morning:
Talk about the Law of Unintended Consequences...