The Downside of Low Interest Rates
The Washington Post writes on "The downside of low interest rates." Columnist Allan Sloan says, "There are serious downsides to dropping interest rates that are already low. This may sound heretical, given the enthusiasm on Wall Street and in our nation's capital for the interest rate cut that's expected to emanate from the Federal Reserve in a few days. But it's true. Among other things, making low interest rates ultralow poses dangers to individual and institutional investors who feel compelled to buy stocks because they can't get decent income from safe, conservative investments such as U.S. Treasury securities." Sloan explains, "Ultralow interest rates are bad for retirees (including me) who would like to earn a reasonable interest rate on their lifetime savings. Having retirees who've saved for decades subsidize borrowers is a wealth transfer that I don't find particularly appealing.... Ultralow rates are also bad -- if not catastrophic -- for pension funds, especially way-underfunded government pension funds like those in my home state of New Jersey." The article adds, "If you want a real-world example of how ultralow rates aren't cure-alls, look at Germany, where interest rates are negative (which means that lenders are in effect paying borrowers for the right to lend them money) but the economy is nevertheless weakening. The idea that pushing rates even farther below zero will miraculously solve the economic problems of Germany and other European countries makes no sense to me.... But then again, I'm not sure that the point of European and Fed rate cuts is to make sense. It's to follow conventional economic wisdom. Which in this case, I think, will turn out not to be very wise at all."
