Wednesday, May 7, 2014

Why Central Banks Will Continue To Keep Interest Rates Low

Martin Wolf, writing in the Financial Times, explains why central banks have kept interest rates low and why they will continue to do so.  Our general economic problem is that demand is below the level required for full employment.  This is the result of inadequate business investment.  Despite high levels of profit, businesses have saving rather than investing.  For a variety or reasons, including distorted managerial incentives, businesses are not investing in the future even at ultra low interest rates.  Savings are too high relative to a huge surplus of savings.

Low interest rates affect groups in different ways.  Some groups, including governments, have been winners in a low interest rate environment.  Other groups have been harmed by low interest rates.  Wolf provides a good analysis of the winners and losers.  He concludes by arguing for the "euthanasia of the rentier".  We need more investors willing to take risks, and fewer investors holding safe assets.

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