low interest rates

The Price of Time: The Real Story of Interest
by Edward Chancellor
Published 15 Aug 2022

Borio referred to an ‘interest rate–productivity nexus’, with the causality running from low interest rates to low investment and falling productivity. Ultra-low interest rates, he said, explained both the zombie phenomenon and the fact that once zombified, a company remained for longer among the living dead. The BIS found a close relationship between the share of zombie companies and the decline in policy rates. Low rates begot zombies, and zombies begot lower rates.fn9 The rate of interest both reflects and determines the return on capital, according to this view. Ultra-low interest rates lowered the hurdle rate for investment. As more capital was trapped in low-return businesses, whether zombies or unicorns, the marginal rate of return on capital declined.

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This book is about the role of interest in a modern economy. It was inspired by a Bastiat-like conviction that ultra-low interest rates were contributing to many of our current woes, whether the collapse of productivity growth, unaffordable housing, rising inequality, the loss of market competition or financial fragility. Ultra-low rates also seemed to play some role in the resurgence of populism as Sumner’s Forgotten Man started to lose patience. Part Two of this book (How Low Rates Begot Lower Rates) examines the unintended consequences of ultra-low interest rates (chapters 7 to 16). Part One (Of Historical Interest) sets the scene. We trace the origins of interest to the Ancient Near East (Chapter 1) and follow its story through the Middle Ages to the birth of capitalism in Europe (Chapter 2).

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In Part Three (The Game of Marbles) we examine the impact of ultra-low interest rates on emerging markets. The initial effect of reducing rates to zero on the world’s reserve currency, the US dollar, was to drive capital flows into emerging markets. Commodity prices took off. Rising food prices helped to spur the 2011 popular uprising in the Middle East known as the Arab Spring. After the Federal Reserve started to tighten policy a couple of years later, commodity prices collapsed and emerging markets entered the doldrums. Two of the largest of these economies, Brazil and Turkey, suffered severe downturns. In China, low interest rates fuelled an extraordinary credit boom, accompanied by the greatest investment binge in history and an epic real-estate bubble.

A Failure of Capitalism: The Crisis of '08 and the Descent Into Depression
by Richard A. Posner
Published 30 Apr 2009

Because houses are extremely durable goods, the stock of housing grows only slowly; and when the supply of a good is inelastic, an increase in demand can cause a large increase in price because supply cannot quickly be increased to the level of the new demand. When it seemed that we could have low interest rates without unacceptable inflation, worries about recession receded, since low interest rates encourage economic activity and thus reduce the danger of recession. It is when low interest rates create inflation that a threat of recession looms, because the Federal Reserve will be motivated to raise interest rates in order to break the inflation; that was the cause of the severe 1980—1982 recession. That low interest rates might cause a credit binge that would cause a recession and even a depression was off the policy radar screen, in part because the synergistic effect of cheap credit and financial deregulation was missed.

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It is the product of a financial crisis that resulted from the confluence of two dangerous developments: low interest rates in the early 2000s and the deregulation movement, which began in the 1970s. Low interest rates make borrowing cheap and make safe saving (as by purchasing certificates of deposit or other very safe interest-bearing securities) unattractive, so personal debt rises and the personal savings rate declines. Because houses are bought mainly with debt (a long-term mortgage), low interest rates encourage the purchase of houses, and because the stock of housing expands only slowly, an increase in the demand for houses leads to an increase in their prices. Low interest rates, by stimulating economic activity (people borrow to spend), tend to increase stock values, so people tend to buy common stock in lieu of safe securities.

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But what has brought us to this pass? Low interest rates do not appear from nowhere, nor movements to deregulate the financial sector. The low interest rates of the early 2000s were a product of a deliberate decision by the Federal Reserve. The deregulation movement was the response to justified criticism of common-carrier and public-utility regulation. But the economists who pushed deregulation, as I said, were not macroeconomists sensitive to the role of banking regulation in preventing risk-taking that could bring on a depression, while the macroeconomists viewed low interest rates with complacence because they thought that a depression could easily be prevented, precisely by keeping interest rates low and thus stimulating economic activity.

The Age of Stagnation: Why Perpetual Growth Is Unattainable and the Global Economy Is in Peril
by Satyajit Das
Published 9 Feb 2016

Many corporations borrowed at home to fund their spending, taking advantage of low interest rates and avoiding paying taxes on repatriated overseas profits. Inflation requires imbalances between demand and supply. Many developed economies had a significant output gap—the amount by which the economy's potential to produce exceeds total demand—reflecting lower demand and excess capacity, though the extent was uncertain due to lower labor participation, which reduced the theoretical output. Low demand and lower costs also reduced price pressures. Corporations took advantage of record low interest rates, substituting machinery for labor to improve output.

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The policy justification was that higher profits improved the bank's capital and reserves, enabling increased lending and bad loans to be written off. In fact, banks paid higher bonuses to staff, increased dividends, or returned surplus capital to shareholders through share buybacks. Low interest rates and QE policies also weaken a currency. The US, UK, Japan, Europe, China, and Switzerland have used direct intervention, by way of artificially low interest rates and QE, to try to devalue their currency. Devaluation makes exports more competitive and assists individual countries to capture a greater share of global trade, boosting growth. It also reduces real debt levels, decreasing the purchasing power of foreign investors holding a nation's debt.

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Citizens were accepting of the sacrifices necessitated by the economic problems. Savers accepted the net transfer of wealth to borrowers through low interest rates. The social structure of many troubled economies may not accommodate the measures required to manage the crisis without significant breakdowns in order. Japan highlights the difficulty of engineering a recovery from the collapse of a debt-fueled asset bubble. It reveals the limitations of traditional policy options—fiscal stimulus, low interest rates, and debt monetization. The lesson from Japan's experience may be that the only safe option is to avoid debt-fueled bubbles and the subsequent buildup of public borrowing in the first place.

The Rise of Carry: The Dangerous Consequences of Volatility Suppression and the New Financial Order of Decaying Growth and Recurring Crisis
by Tim Lee , Jamie Lee and Kevin Coldiron
Published 13 Dec 2019

Indeed, in much financial commentary the term “carry trade” is synonymous with “currency carry trade.” If a speculator were to implement a simple currency carry trade, he would borrow in a low interest rate currency and invest the funds borrowed in a high interest rate currency. He collects the difference in the two interest rates, or the interest rate spread, which is his income from the trade. The risk is that the high interest rate currency depreciates in value against the low interest rate currency, and the capital loss on the currency depreciation ends up being greater than the income the speculator earns from the interest rate spread.

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This risk can be understood in terms of the volatility of the exchange rate. If the exchange rate for the currency that he invests in against that which he borrows in is volatile, the chance will be greater that a 9 10 THE RISE OF CARRY loss in value of the high interest rate currency in terms of the low interest rate currency outweighs his net interest gain. The world of currency markets can be broken down into low interest rate currencies that tend to be “funding currencies”—that is, currencies that are attractive to borrow in to finance carry trades—and high interest rate currencies that are “recipient currencies”—that is, currencies that seem attractive to invest in to benefit from their high interest rates.

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In a theoretical classical equilibrium model of the economy, currency carry trades should produce a zero return over time; their expected return should be zero, and therefore they should be an unattractive proposition. This is because, at equilibrium, the high interest rate for a high interest rate currency will reflect the expectation of a similarly high inflation rate over time. Conversely, a low interest rate currency would be expected to have a low inflation rate over time. Therefore, the expectation should be that the high interest rate currency will depreciate against the low interest rate currency at a rate in line with the inflation differential, and therefore in line with the interest rate differential, because this is required for the maintenance of the high interest rate country’s trade competitiveness.

The End of Indexing: Six Structural Mega-Trends That Threaten Passive Investing
by Niels Jensen
Published 25 Mar 2018

The Global Financial Crisis was caused by abnormally high debt levels in certain sectors and countries, and monetary authorities responded by lowering interest rates – both at the near-end (through policy rates) and the long-end (through QE). To begin with, such a strategy made sense, but it is way past its sell-by date now. We have reached a point where the solution (low interest rates) is causing more damage than the problem itself (high debt levels). Low interest rates lead to lower productivity growth Low interest rates damage economic growth through the negative impact they have on productivity. The logic is as follows. The fall in interest rates ever since the early 1980s has led to a monumental bull market in credit and equity markets, lasting over 30 years.

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Why our leaders suddenly think they can fix everything with only one policy tool (monetary policy) is beyond me. Anyway, what has been achieved with the extraordinary low interest rates of recent years is that savings-induced consumer spending has been converted to debt-induced consumer spending. This means that another of my trends – the end of the debt super-cycle – is very much part of the same story. The extraordinarily low interest rates that we supposedly all benefit from form one of the biggest challenges Europe has faced since the war. How I can possibly think of low interest rates as a challenge? After all, don’t we all benefit from exceedingly low mortgage rates, which pays for those extra couple of weeks in Mallorca every year?

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I will discuss those two investment themes in more detail in chapters 4 and 5 respectively. In that respect, low interest rates, in particular when low relative to the level of GDP growth, encourage banks to lend more and borrowers to borrow more. When money is cheap, a significant percentage of new capital is misallocated, i.e. it generates a return below the cost of capital. Capital that is misallocated causes productivity growth to shrink, i.e. one could argue that low interest rates in fact drive productivity lower. There is no doubt that the growing use of advanced robotics will have a positive impact on productivity growth and hence on GDP growth in the years to come (see chapter 10 for more on this).

When the Money Runs Out: The End of Western Affluence
by Stephen D. King
Published 17 Jun 2013

Compared with a typical period of recession, during which interest rates fall rapidly only to rise swiftly thereafter, the absence of meaningful recovery leaves pension funds facing the prospect of permanently lower interest rates and, thus, growing difficulties in meeting their obligations. While low interest rates are not the fault of QE alone, there can be no doubt that the persistence of low interest rates has left many pension funds seriously in deficit. That, in turn, threatens changes in behaviour elsewhere within the economy that are ultimately inconsistent with economic recovery: individuals save more (or borrow less), aware that they are at risk of suffering a pension shortfall; companies choose to divert profits into their pension funds instead of investing in the capital that might kick-start economic growth; and governments have to raise taxes or cut public spending as they bid to satisfy the expectations of the boomers.

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Lower yields may provide a justification for additional government borrowing but, as in Japan's case, there is no guarantee that the additional borrowing will deliver the right results. Worse, instead of being a vote of confidence in a nation's anti-inflation capabilities, persistently low interest rates may simply imply that investors have lost all appetite for risk or for adding to capacity. Riskier assets then lose value, investment is increasingly constrained, the economy slumps and inflation ends up too low. Rather than paving the way towards sustained economic recovery, low interest rates become a symptom of a deep economic and financial malaise. It is tempting to believe that, with remarkably low borrowing costs, the US, UK and German governments are trusted by creditors to spend wisely.

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Keen to avoid a repeat of Japan's ongoing stagnation, and confident that they had the tools to do so, Western policy-makers offered massive monetary and fiscal stimulus: interest rates tumbled, budget deficits rose and the threat of debt deflation – of falling prices that would increase the real value of debt – was averted. However, all was not well. With low interest rates and gossamer-thin regulation, housing markets boomed, as did the issuance of mortgage-backed securities, which offered higher returns than government bonds and, so it seemed, more safety than jittery stock markets. Economic growth returned but millions upon millions of unsuspecting people – whether borrowers or lenders, whether Americans or foreigners – found themselves directly or indirectly owning a stake in an apparently ever rising US housing market.

The Long Good Buy: Analysing Cycles in Markets
by Peter Oppenheimer
Published 3 May 2020

These authors also found that US state and municipal sponsors with weak balance sheets have increased their risk exposure as bond yields have fallen. They estimate that up to a third of funds' total risk was related to underfunding and low interest rates between 2002 and 2016. Also see Lu, L., Pritsker, M., Zlate, A., Anadu, K., and Bohn, J. (2019). Reach for yield by U.S. public pension funds. FRB Boston Risk and Policy Analysis Unit Paper No. RPA 19–2 [online]. Available at https://www.bostonfed.org/publications/risk-and-policy-analysis/2019/reach-for-yield-by-us-public-pension-funds.aspx 10 Lian, C., Ma, Y., and Wang, C. (2018). Low interest rates and risk taking: Evidence from individual investment decisions. The Review of Financial Studies, 32(6), 2107–2148. 11 See Antolin, Schich, and Yermi, (2011).

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The Review of Financial Studies, 32(6), 2107–2148. 11 See Antolin, Schich, and Yermi, (2011). The economic impact of low interest rates on pension funds and insurance companies. 12 See Belke, A. H. (2013). Impact of a low interest rate environment – Global liquidity spillovers and the search-for-yield. Ruhr Economic Paper No. 429. Chapter 11 The Impact of Technology on the Cycle In chapter 9, I discussed the changes to the cycle since the Great Recession of 2008 and the financial crisis that followed. This economic cycle has been weaker but longer than usual. Meanwhile, the equity market cycle has been stronger.

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It is the way in which economic and corporate fundamentals (expected growth, profit, inflation and interest rates, for example) are perceived by investors that is the crucial mix. Academic work has increasingly shown that risk-taking appetite has been a key channel through which supportive policy (for example, low interest rates) can affect cycles (Borio 2013).7 Willingness to take risk and periods of excessive caution (often after a period of weak returns) are factors that tend to amplify the impact of economic fundamentals on financial markets and contribute to cycles and repeated patterns. The emotions of fear and greed, of optimism and despair, and the power of crowd behaviour and consensus can transcend specific periods of time or events, supporting the tendency for patterns to be repeated in financial markets even under very different circumstances and conditions.

The Great Demographic Reversal: Ageing Societies, Waning Inequality, and an Inflation Revival
by Charles Goodhart and Manoj Pradhan
Published 8 Aug 2020

Immigrants, taking up unskilled jobs Immigration Immigration, and productivity Immigration, causes political tension Immigration, impact on public finance Immigration, opposition to Immigration, public opposition to Immigration, targeted for care workers Immigration control Impossible trinity Incentives, of managers, misaligned Income inequality Income percentile Income share, of top percentiles Income taxation, progressive Index tracking, by asset managers India India, abundant supply of labour India, administration and reform India, administrative capital, weak India, airports India, facing decline in world labour supply India, growth decline in 2018/19 India, have the ability to replicate China’s ascent India, inflection of dependency ratio distant India, massive population, an attractive market India, new bankruptcy code (IBC) India, population of India’s growth India’s growth, private sector drives Indirect taxes Indonesia Industrialization Industrial Revolution Inequality Inequality, between countries Inequality, declining Inequality, falling Inequality, global Inequality, within countries Inequality, within economies Inequality of income Inequality of wealth Inflation Inflation, a monetary phenomenon Inflation, consequence of wars Inflation, low in Japan Inflation, reviving Inflation, stronger pressures for Inflation, surge of Inflation target, political pressure to modify Inflation, targets Inflation, unexpected Inflation accelerated Inflation and age-structure of population, linked Inflationary bias, major Inflation expectations, well anchored Inflation indexed bonds Inflation targeting Inflexion Inflexion point Informal care costs Information and communication technology Infrastructure Innovation Insiders Insiders, in Japan Insiders in Japan, having primary loyalty to company Insiders, in labour force Insolvency risks Institute for Fiscal Studies Institutional shareholders, when large can gain information and influence management Intangible investment Intellectual property rights Interest, paid on commercial bank reserves at central bank Interest rates Interest rates, exceptionally low Interest rates, extraordinarily low Interest rates, falling Interest rates, falling to historical lows Interest rates, trending down Interest rate swaps ‘Internal Labour Markets’ in Japan Internal migration International Monetary Fund (IMF) Inter-war period Inventories Inventory accumulation Investment Investment cycle, US Investment, ex ante (expected) Investment, in Japan, collapsing Investment, offshored to Asia Investment, reduced by shift of production via globalization Inward investment, into Japan Ipsos MORI Iran Iraq Ireland Islamic finance Italy J Jackson Hole Jackson Hole Conference Japan Japan, affected by China’s growth Japan, blueprint for ageing societies Japan, collapse of investment growth Japan, conventional analysis flawed Japan, corporate sector, delevering Japan, distinction between output per capita and output per worker Japan, dividend exemption policy Japan, experience of Japan, impressive record of productivity Japan, labour supply decline Japan, lessons of Japan, lost decade Japan, ‘miracle’ decades Japan, no sign of inflationary pressures Japan, owes debt to households Japan, revisionist history Japan, unit labour costs Japan, wage growth Japan, wage inflation in Japan corporate sector Japanese business, offshored production to China Japanese corporates, investing abroad rather than at home Japanese evolution, conventional interpretation Japanese labour market, particular features of Japan’s domestic investment Japan Spillover Report Japan’s Productivity Surge Jetsupphasuk, M.

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Although debt ratios have risen dramatically, there is not enough concern about leverage. That’s because debt service ratios have not risen along with debt ratios, thanks to an almost exact inverse correlation between rising debt ratios and declining interest rates. This is set out in Chapter 11. At the same time, these low interest rates have, naturally, enhanced asset prices. Sometimes the monetary policies of Central Banks have been accused of exacerbating inequality. But if Central Banks had not expanded, other policies being held constant, unemployment would have been worse, which normally hurts the poorest most. So Central Bank policies have, on balance, probably reduced income inequality.

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Let alone receiving protection against inflation on their deposits in the banking sector, the inability to participate in China’s growth through financial investment at home or abroad was a double-digit, inflation-adjusted penalty on households. Households had very few means of protecting themselves financially; buying houses was the investment of choice. Household leverage rose as a result. In other words, low interest rates were effectively a tax on households. As household savings were collected by banks and redirected towards SOEs, the tax on households effectively became a subsidy for SOEs with banks acting as a conduit. But why did households continue to put their money in banks rather than in other financial assets?

The Corona Crash: How the Pandemic Will Change Capitalism
by Grace Blakeley
Published 14 Oct 2020

Crossborder capital flows declined by 65 per cent between 2007 and 2016.9 Global growth was buoyed only by incredibly cheap credit and public investment undertaken by developmental states in the Global South. Central bankers were forced to keep the economy on life support through ultra-low interest rates and quantitative easing. But even with monetary policy so loose, private investment in fixed capital was not forthcoming. Instead, the main effect of low interest rates was to inflate a debt bubble three times the size of global GDP.10 The problem was clear: capitalism had lost all momentum. Many economists were predicting that a recession would hit the US, the UK and the Eurozone by 2022.11 The yield curve, which shows the returns on US Treasuries of different maturities, had inverted for the first time since 2007 – meaning that short-term government bonds had higher yields than long-term bonds.12 An inverted yield curve has augured every major recession for the last half century.

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The fiscal austerity and productivity crisis that kept wages excessively low made it harder for young people to access mortgages.44 Many expected never to retire, given the trends in wages and public policy, and even if they did, pension funds were struggling to meet their liabilities in the context of widespread economic stagnation.45 The financial crisis had generated a unique problem for the neoliberal settlement: why should young people support capitalism when they could never expect to own any capital? In economies fuelled by consumer spending, the decade after the 2008 financial crisis saw a deepening of the regime of privatised Keynesianism developed before it. Households had become so indebted that permanently low interest rates were required to avoid another crisis, yet permanently low interest rates only led to higher levels of indebtedness. This model is most familiar in Japan and Anglo-America, but over the last twelve years it has spread around the world.46 A familiar-looking set of challenges emerged in Australia, New Zealand and Canada before the pandemic – the combination of rising household debt, rising real estate prices and a burgeoning current account deficit.47 Household debt had also started to rise in the Global South, particularly in China.

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The interests of the dominant sections of British capital and the Conservative voter base were largely protected throughout this period by extremely loose monetary policy, which kept the cost of borrowing low. Businesses that otherwise might have gone under were able to stay afloat with cheap credit. Among consumers, those best able to access credit – those with high incomes and existing assets – were the main beneficiaries of low interest rates, which, along with changes to the rules around pensions withdrawals, made it easier for them to acquire more wealth, particularly housing wealth.41 By combining tight fiscal policy and loose monetary policy, the Conservatives achieved the remarkable feat of protecting the interests of British capital at a time of unique fragility while rebuilding an electoral coalition that has made it the largest party in every election since 2010.

Platform Capitalism
by Nick Srnicek
Published 22 Dec 2016

In terms of funding, in 2014 Uber outpaced all the other service companies, taken together, by 39 per cent.85 In 2015 Uber, Airbnb, and Uber’s Chinese competitor, Didi Chuxing, combined to take 59 per cent of all the funding for on-demand start-ups.86 And, while the enthusiasm for new tech start-ups has reached a fever pitch, funding in 2015 ($59 billion) still paled in comparison to the highs of 2000 (nearly $100 billion).87 Where is the money coming from? Broadly speaking, it is surplus capital seeking higher rates of return in a low interest rate environment. The low interest rates have depressed the returns on traditional financial investments, forcing investors to seek out new avenues for yield. Rather than a finance boom or a housing boom, surplus capital today appears to be building a technology boom. Such is the level of compulsion that even non-traditional funding from hedge funds, mutual funds, and investment banks is playing a major role in the tech boom.

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Even the Economist is forced to admit that, since 2008, ‘if the share of domestic gross earnings paid in wages were to rise back to the average level of the 1990s, the profits of American firms would drop by a fifth’.91 An increasingly desperate surplus population has therefore provided a considerable supply of workers in low-wage, low-skill work. This group of exploitable workers has intersected with a vast amount of surplus capital set in a low interest rate world. Tax evasion, high corporate savings, and easy monetary policies have all combined, so that a large amount of capital seeks out returns in various ways. It is no surprise, then, that funding for tech start-ups has massively surged since 2010. Set in context, the lean platform economy ultimately appears as an outlet for surplus capital in an era of ultra-low interest rates and dire investment opportunities rather than the vanguard destined to revive capitalism. While lean platforms seem to be a short-lived phenomenon, the other examples set out in this chapter seem to point to an important shift in how capitalist firms operate.

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Likewise, the Bank of England dropped its primary interest rate from 5.0 per cent in October 2008 to 0.5 per cent by March 2009. October 2008 saw the crisis intensify, which led to an internationally coordinated interest rate cut by six major central banks. By 2016 monetary policymakers had dropped interest rates 637 times.23 This has continued through the postcrisis period and has established a low interest rate environment for the global economy – a key enabling condition for parts of today’s digital economy to arise. But, when the immediate threat of collapse was gone, governments were suddenly left with a massive bill. After decades of increasing government deficits, the 2008 crisis pushed a number of governments into a seemingly more precarious position.

War and Gold: A Five-Hundred-Year History of Empires, Adventures, and Debt
by Kwasi Kwarteng
Published 12 May 2014

Early in his administration, Johnson told him that ‘he came from a part of the country that liked low interest rates’. That was how Johnson believed ‘interest rates should be’. Martin responded in a combative tone to a President known for his bullying manner. ‘I, too, like to see interest rates as low as conditions of inflation . . . permit them to be.’ The difference was just that Johnson ‘liked them to be low . . . all the time’. During his presidential interview Martin cited the traditional tenets of the conservative banker. ‘Mr President, I want to tell you how you can have low interest rates, and the only way you can have low interest rates,’ Martin began. He continued, it ‘is with budgetary responsibility, both in respect to Government spending and taxing, and a fiscal policy that makes that responsibility plain’.

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Hirst airily dismissed Central America, observing that it ‘is hardly possible to speak of “investment” in Central America’, since ‘bankruptcy and repudiation are the rule, payment of interest the exception’.12 The country which, of course, was seared on the consciousness of everybody in the City was Argentina, which had been the cause of the crisis in 1890, in which Barings had been laid low. The years preceding the actual failure of Barings were years of ‘extensive speculation’. This may have been due to the same low-interest-rate environment which had prevailed in 1825, when low interest rates on government debt had prompted investors to seek riskier assets to order to obtain a better return, the ‘search for yield’ often referred to by modern market analysts. Eighteen-eighty-eight was the year of the sensational crimes associated with the name ‘Jack the Ripper’.

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There is a well-known inverse relationship between interest rates and bond prices which follows the simple intuition that the greater the demand for a borrower’s debt, the less interest the borrower will have to pay; only needing to pay low interest rates and having a high price for your debt means the same thing. This is known as an ‘identity relationship’. The low-interest-rate environment created the climate in which there was a search for yield. Investors speculated in higher-interest-yielding securities because traditional investments, like US government bonds, gave such low returns. Historians could look back to the circumstances in 1825, when there was a bubble and panic.

The Great Divide: Unequal Societies and What We Can Do About Them
by Joseph E. Stiglitz
Published 15 Mar 2015

REBUTTING THE DEFENSE Alan Greenspan has tried to shift the blame for low interest rates to China, because of its high savings rate.2 Clearly, Greenspan’s defense is unpersuasive: The Fed had enough control, at least in the short run, to have raised interest rates in spite of China’s willingness to lend to America at a relatively low interest rate. Indeed, the Fed did just that in the middle of the decade, which contributed—predictably—to the popping of the housing bubble. Low interest rates did feed the bubble. But that is not the necessary consequence of low interest rates. Many countries yearn for low interest rates to help finance needed investment.

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Our financial markets failed to do that. Our regulatory authorities allowed the financial markets (including the banks) to use the abundance of funds in ways that were not socially productive. They allowed the low interest rates to feed a housing bubble. They had the tools to stop this. They didn’t use the tools that they had. If we are to blame low interest rates for “feeding” the frenzy, then we have to ask what induced the Fed to pursue low interest rates. It did so, in part, to maintain the strength of the economy, which was suffering from inadequate aggregate demand as a result of the collapse of the tech bubble. In that regard, Bush’s tax cut for the rich was perhaps pivotal.

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HOW WE GOT HERE The troubles we now face were caused largely by the combination of deregulation and low interest rates. After the collapse of the tech bubble, the economy needed a stimulus. But the Bush tax cuts didn’t provide much stimulus to the economy. This put the burden of keeping the economy going on the Fed, and it responded by flooding the economy with liquidity. Under normal circumstances, it’s fine to have money sloshing around in the system, since that helps the economy grow. But the economy had already overinvested, and so the extra money wasn’t put to productive use. Low interest rates and easy access to funds encouraged reckless lending, the infamous interest-only, no-down-payment, no-documentation (“liar”) subprime mortgages.

The Default Line: The Inside Story of People, Banks and Entire Nations on the Edge
by Faisal Islam
Published 28 Aug 2013

His healthy £1100 monthly pension reset in February 2012 to take account of the record low interest rates on UK government borrowing. His pension was cut by £500 per month. This extreme case was as a result of a combination of factors, but there were many millions with some version of this story. ‘It’s dropped off the face of a cliff, it’s halved. It’s driven by low interest rates, QE and government policy,’ he told me in his kitchen on the day another £50 billion of QE was announced. I put to him the Bank of England argument that he had benefited from the fact that QE had kept the economy out of depression. ‘I don’t need low interest rates, because I don’t borrow any money.

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He traces the root cause of the problem to German reunification in 1990, when a 1:1 exchange rate was agreed for the West German and East German mark. This generated a very deep real-estate recession in Germany that lasted a decade. And then the euro arrived with super-low interest rates and a relaxed monetary policy, matching those of the USA. Eurozone interest rates were naturally focused on helping the depressed German economy, by far the biggest economy in the zone, without much heed being paid to the consequences elsewhere within the monetary union. The end result for countries such as Spain was very low interest rates for a very long time – so low, that taking the still-elevated level of inflation into account, such peripheral countries in fact experienced an extended period of negative interest rates.

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By the summer of 2011 it had already become apparent that Greece had no chance of repaying its debts in full. At this point, at the behest of the IMF, the man known as the Red Adair of sovereign debt crises flew into Athens. Lee Buchheit is an expert in helping nations renegotiate the money they owe their bankers. The theory emerging from Berlin was that the idiots who had lent Greece billions at low interest rates, presuming it was guaranteed by the German taxpayer, should lose at least part of their shirts. Why should German taxpayers bail out the private sector? The European Central Bank took a contrary view, partly because of the impact this would have on a fragile European banking system, and partly because of the risk of contagion to other vulnerable economies.

Fault Lines: How Hidden Fractures Still Threaten the World Economy
by Raghuram Rajan
Published 24 May 2010

Moreover, it offers a one-way bet to bankers: plunge the system into trouble, and they will get a great deal on interest rates. Finally, it is not clear that ultralow nominal interest rates (around 0 percent) offer a significantly greater incentive for firms to invest than merely low interest rates (2 to 3 percent), but the difference in risk taking between ultralow and low interest rates could be enormous. More damaging still is the Fed’s ongoing attempt to prop up housing prices, both indirectly through low interest rates and directly by lending into the housing market. Although such support is justified as a way to allow the bubble to deflate slowly, it contributes to prolonged delays in adjustment in the housing market.

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Typically, such a move boosts corporate investment, but corporations had invested too much already during the dot-com boom and had little incentive to do more. Instead, the low interest rates prompted U.S. consumers to buy houses, which in turn raised house prices and led to a surge in housing investment. A significant portion of the additional demand came from segments of the population with low credit ratings or impaired credit histories—the so-called subprime and Alt-A segments—who now obtained access to credit that had hitherto been denied to them. Moreover, rising house prices gave subprime borrowers the ability to keep refinancing into low interest rate mortgages (thus avoiding default) even as they withdrew the home equity they had built up to buy more cars and TV sets.

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Moreover, when unemployment stays high, wage inflation, the primary concern of central bankers today, is unlikely, so the Fed feels justified in its policy of maintaining low interest rates. But there are consequences: one problem is that a variety of other markets, including those abroad, react to easy policy. For instance, prices of commodities such as oil and metals are likely to rise. And the prices of assets, such as houses and stocks and bonds, are also likely to inflate as investors escape low short-term interest rates to invest in anything that offers a decent return. More problematic still, the financial sector is also prone to take greater risks at such times. In the period 2003–2006, low interest rates added to the incentives already provided by government support for low-income housing and fueled an extraordinary housing boom as well as increasing indebtedness.

Paper Money Collapse: The Folly of Elastic Money and the Coming Monetary Breakdown
by Detlev S. Schlichter
Published 21 Sep 2011

This powerful tendency causes rich countries to get richer. For any society that prefers more goods and services to fewer goods and services, a high savings rate and low interest rates are certainly desirable, as these two will help build and maintain the capital stock that allows for high-productivity production processes. Yet, it is also clear that any attempt to force interest rates lower through market intervention is dangerous and ultimately futile. Low interest rates are of no use but, indeed, harmful if they do not correspond with the population’s time preference. If the government of a poor country managed to artificially lower the interest rates on the loan market with the aim of encouraging borrowing, investing, and the expansion of a wealth-enhancing capital stock, they would certainly not do their population any favors.

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Ibid., pp. 483–490; Mises improves the important theory on interest developed by Eugen von Boehm-Bawerk; see Eugen von Boehm-Bawerk Positive Theories des Kapitales (3rd ed., Innsbruck: Verlag der Wagnerschen Universitaets-Buchhandlung, 1909), pp. 426–453; for a short and excellent summary of these theories, see also Joerg Guido Huelsmann Mises: The Last Knight of Liberalism (Auburn, AL: Mises Institute, 2007), pp. 773–779; also: George Reisman, Capitalism, pp. 55–56. 5. Ludwig von Mises, Human Action, p. 526. 6. Ibid., pp. 526–537. 7. It would be more correct to say that low interest rates indicate that the public is happy to see resources allocated to uses where they are at greater distance to immediate consumption. This way, the statement includes investments in long lasting consumption goods, that only expend their use-value over a longer period. The obvious example is houses. Low interest rates encourage investment in productive capacity and in long lasting consumption goods. For ease of presentation, the analysis will focus on productive investment only.

…

Only the state as monopolist of legalized force can sideline these uncooperative economic actors and ensure that resources continue to be allocated to where they created the preceding boom. And to the extent that this state intervention comes in the form of money printing and low interest rates, which it always does, many of these sidelined constituencies are likely to end up the future victims of false market signals themselves. Entrepreneurs will again be disoriented by low interest rates and scale their investment projects to unrealistic assumptions about the availability of voluntary savings. Many of their projects will inevitably end in disappointment, too. The effect of every intervention is necessarily that old dislocations persist and new ones are generated.

The End of Loser Liberalism: Making Markets Progressive
by Dean Baker
Published 1 Jan 2011

With the weak bargaining position of workers in the 1990s, inflation simply was not a problem, and Greenspan was an astute enough observer of the economy (unlike most academic economists) to recognize this fact. Low interest rates have a positive but limited impact in increasing demand. They do lead to somewhat higher investment, but a large body of research shows that investment is not very responsive to lower interest rates. Low interest rates can lead to a fall in the dollar, which would boost net exports, but there were other factors keeping the dollar high during this period. In fact, the main effect of the low interest rates sustained through the late 1990s and the 2000s was to create the possibility for the bubble economy, the dynamics of which are explored in the next chapter.

…

By creating limited liability corporations the government is allowing the individuals who form a corporation to take the property (or even lives) of others without compensation. This is not a free market. Federal Reserve monetary controls A government policy with tremendous influence over economic outcomes is the power of the Federal Reserve Board in determining the level of employment. The Fed can foster growth and employment with low interest rates and expansionary monetary policy. But it can and often does deliberately raise the unemployment rate by raising interest rates. Moreover, the Fed’s policy on holding assets like government bonds has an enormous impact on the government’s debt burden, which in turn has redistributive implications.

…

This is a historically low real interest rate that is not consistent with a story of investors panicking over the ability of the U.S. government to repay its debt. When lenders worry about the solvency of their borrowers, they demand real interest rates of 6, 8, or even 10 percent. If investors are willing to hold vast amounts of government bonds at very low interest rates, it is clear that the people who actually have money on the line are not worried about the creditworthiness of the U.S. government, even if the politicians and the pundits are telling them that they should be. In short, the deficit is not the country’s problem right now. The problem is a lack of demand, pure and simple.

Hubris: Why Economists Failed to Predict the Crisis and How to Avoid the Next One
by Meghnad Desai
Published 15 Feb 2015

The argument that the recession would have been much worse had there not been a sustained policy of keeping interest rates low is a counterfactual which is difficult to disprove. The low interest rates which have persisted have given households room to deleverage slowly rather than being forced into mortgage foreclosures, as has happened in earlier recessions. This may have eased the pain of holding negative equity. Many firms – Zombie firms, as they are called – have avoided bankruptcy thanks to the historically low interest rates. But then, at the same time, it has also postponed the required adjustment to correct the core problem of too much debt. This leads to the problem of a stock disequilibrium.

…

Hayek and Myrdal took Wicksell’s idea of the gap between the natural rate and the market rate as their starting point. Hayek, in his lauded publication Prices and Production, based on a series of lectures given at the LSE in 1931, argued that the explanation for the Depression lay in banks lending money at low interest rates to prospective investors. Low rates made those projects feasible which had a distant payoff. These projects would enhance the productivity of the economy (somewhat like Schumpeter’s innovations, though Hayek did not use that analogy). But the economy was by assumption at full capacity, producing goods with old technology which had a shorter payoff.

…

This leads to the projects with a long-run payoff – in this case the cattle yielding leaner beef – being abandoned, incomplete and with idle but unusable intermediate inputs and idle labor. It takes a long time for the older businesses to reabsorb the idle inputs and hence the recession is prolonged. The low interest rate has distorted the “price gradient” between short- and long-run goods and until that is restored there will be no return to full employment. Hayek’s construction of his argument was vitiated by his reliance on the Austrian capital theory, which proved an obstacle for most of his readers. But the idea that cheap credit causes unsustainable booms by encouraging “mal-investments” was well taken and has a contemporary resonance.

Capitalism 4.0: The Birth of a New Economy in the Aftermath of Crisis
by Anatole Kaletsky
Published 22 Jun 2010

Very low interest rates are the best way to keep demand and supply in balance in an economy where savings are structurally high. Low interest rates, far more than Keynesian policies of deficit spending, were the key to the full employment achieved in the 1940s and 1950s, when Americans and Britons were saving roughly twice as much in relation to their incomes as they do today—and channeling these savings into the enormous investments of postwar reconstruction and the subsequent global boom. The same combination of high rates of savings and investment and structurally very low interest rates can be observed in China today.

…

The United States and Britain experienced even longer periods of very low rates in the 1940s and 1950s. Throughout the twenty-five years from 1930 until 1955, U.S. and British Treasury bills never paid more than 2 percent, and for much of that time they yielded less than 1 percent. These low interest rates were not symptomatic of recession or deflation. In fact, the period of extremely low interest rates from 1930 to 1955 saw some of the fastest growth ever recorded around the world. This historical experience coincided with a world war, as well as with tight financial regulation and rationing of credit and does not prove that near-zero interest rates are desirable.

…

Megatrends in Housing and Finance The most fundamental cause of property inflation all over the world from 1989 onward was the sustained decline in interest rates that resulted from low inflation, economic stability, and globalization. Because houses are mostly purchased with mortgages, interest rates are a powerful driver of property prices. Thus, the interest rate effects of the post-1989 megatrends were almost bound to create house-price booms all over the world, as households and banks gradually realized that low interest rates had become a permanent fact of life. But the interaction of rising house prices with deregulated finance had a further structural effect. As mentioned, the deregulation of finance meant that property investments could be readily turned into cash through the mortgage market. Homeowners who wanted to spend part of the capital they had invested in property no longer had to sell their homes and trade down or become renters.

The Only Game in Town: Central Banks, Instability, and Avoiding the Next Collapse
by Mohamed A. El-Erian
Published 26 Jan 2016

They can take you far and fast, but it’s a lucky few who get behind the wheel.”10 There is a second set of effects also worth mentioning. They involve the direct income effects on borrowers and lenders of persistent highly repressed interest rates, a key component of central banks’ unconventional approach. Clearly low interest rates—and, especially, artificially low interest rates—benefit large net borrowers and debtors at the expense of large net lenders and creditors. As such, the largest beneficiaries have tended to be governments, followed by nonfinancial companies. And the amounts are not immaterial. In a paper published at the end of 2013, researchers at the McKinsey Global Institute estimated $1.6 trillion of savings between 2007 and 2012 for governments in the Eurozone, United Kingdom, and United States, and $710 billion of savings for nonfinancial companies there.11 Households have done less well in those countries.

…

Asset managers’ approach to business risk has also been shown to be a “strong motivator for institutional herding and rational bubble riding.”3 The Minsky financial instability hypothesis is also relevant here, reminding us that long periods of stability tend to encourage behaviors that then fuel instability. All these shifts have been turbocharged by the low interest rate environment. As Jaime Caruana, the general manager of the BIS, put it in a December 2014 speech in Abu Dhabi when commenting on the migration of risks to the nonbank sector: “It is likely, though not undisputed, that the search for yield in a low interest rate environment can contribute to the build-up of financial imbalances. This so-called risk-taking channel of monetary policy could be particularly relevant when economic agents anticipate that the low rate environment will persist or that monetary policy will be eased in the case of market turmoil—a kind of central banker’s put, if you will.”4 Together, these factors add an important element of pro-cyclicality to financial market behaviors, one that will likely fuel overshoots in both directions.

…

This effort entailed careful wording permutations (“linguistic gymnastics”), including various specification of “thresholds” and policy time periods. They evolved from covering triggering economic developments (such as the 2013 reference to a specific level of unemployment) to calendar guidance (such as the phrase “considerable period of time” to signal a minimum six-month period of unchanged and abnormally low interest rates, and, in early 2015, “patient” to signal an interlude of at least two policy meetings before a change in policy stance). Finally, the Fed started publishing the “blue dots,” that is, the individual forecasts of members of its policy-making Federal Open Market Committee, or FOMC. As such, markets were regularly informed of the evolution of these members’ numerical and timing expectations for the evolution of interest rates, including “central tendencies” (though no specific names would be disclosed).

End the Fed
by Ron Paul
Published 5 Feb 2011

And we ignored the fundamental flaw, and that is that not only have we had a subprime market in housing; the whole economic system is subprime, in that we have artificially low interest rates. And it wasn’t under your tenure in office; it’s been going on for ten years and longer and now we’re bearing the fruits of that policy. I mean, a 1 percent interest rate, overnight rates and that’s not a distortion? Instead of looking at these—the consumer prices, which nobody in this country really believes, we need to talk about the distortion, the malinvestment, the misdirection, the bad information that is gotten from artificially low interest rates. In many ways, some people refer to you as a price fixer, you know, because you fix interest rates.

…

That blame will be placed on the current Federal Reserve Board, Congress, the President, the Treasury, but above all on Keynesian economic policy, the same philosophy that gave us the Great Depression of the 1930s. The economic downturn is the necessary correction of the artificial boom period produced by the central bank’s easy credit and artificially low interest rates. The duration itself is a consequence of the interference with the liquidation of debt and malinvestment and adjustment in prices of labor, goods, and services. It’s too much to ask politicians or bureaucrats not to centrally plan the economy, especially when the market is struggling to rectify all the mistakes that come as a consequence of the Federal Reserve Board policy.

…

The current crisis, started in 2007 with the break in the housing mortgage market, is now in full swing and signifies the end of the fiat dollar reserve currency system. It is impossible to understand the current crisis without understanding the international monetary system, which has been dominated by our Federal Reserve. The core of the contemporary problem dates from 2001 when the Fed attempted to forestall recession through low interest rates. Actual interest rates fell well below historical averages and any monetary rule that the Fed claimed to be following. 2 Greenspan slashed the federal funds target from 6.5 percent in January 2001 down to 1 percent by June 2003. He held the rate at this level for a full year before ratcheting them up again to 5.25 percent in June of 2006, a move that popped the bubble he had earlier created.

The End of Alchemy: Money, Banking and the Future of the Global Economy
by Mervyn King
Published 3 Mar 2016

With interest rates so low, financial institutions and investors started to take on more and more risk, in an increasingly desperate hunt for higher returns, without adequate compensation. Investors were slow to adjust and reluctant to accept that, in a world of low interest rates and low inflation, returns on financial assets would also be at historically low levels. Greed and hubris also led them to demand higher returns – such behaviour became known as the ‘search for yield’. Central banks warned about the consequences of low interest rates, but by allowing the amount of money in the economy to expand rapidly did little to prevent the search for yield and increased risk-taking.27 In addition, financial institutions, such as pension funds and insurance companies, were coming under pressure to find ways of making their savings products more attractive and reduce the rising cost of pension provision in the face of falling real interest rates.

…

In countries with trade surpluses, such as China and Germany, spending was too low relative to likely future incomes. And the imbalance between countries – large trade surpluses and deficits – continued. All this reinforced the determination of central banks to maintain extraordinarily low interest rates. Monetary stimulus via low interest rates works largely by giving incentives to bring forward spending from the future to the present. But this is a short-term effect. After a time, tomorrow becomes today. Then we have to repeat the exercise and bring forward spending from the new tomorrow to the new today. As time passes, we will be digging larger and larger holes in future demand.

…

And economic growth requires saving and investment to add to the stock of productive capital and so increase the potential output of the economy in the future. In a healthy growing economy all three rates – the interest rate on saving, the rate of return on investment, and the rate of growth – are well above zero. Today, however, we are stuck with extraordinarily low interest rates, which discourage saving – the source of future demand – and, if maintained indefinitely, will pull down rates of return on investment, diverting resources into unprofitable projects. Both effects will drag down future growth rates. We are already some way down that road. It seems that our market economy today is not providing an effective link between the present and the future.

The Lords of Easy Money: How the Federal Reserve Broke the American Economy
by Christopher Leonard
Published 11 Jan 2022

Hawks hated inflation, and therefore wanted to keep interest rates higher and limit the Fed’s reach. Doves were less afraid of inflation, and therefore more willing to print lots of money. It is unclear exactly who started the hawk-and-dove motif inside the Fed, but it stuck. Janet Yellen, for example, was often described as dovish because she supported low interest rates and more intervention. Tom Hoenig and Richard Fisher, in contrast, were described as hawkish because they sought to raise interest rates and limit the Fed’s reach into markets. Needless to say, among the public, the doves got better press. Who could take issue with a dove? The theory seemed to be that doves were compassionate and wanted to help the economy and working people, while hawks were harsh and severe and wanted to stop the Fed from helping people.

…

He said something that most Fed officials never acknowledged, at least in public. The central bank hadn’t just rescued the economy from the crash of 2008. The Fed bore a great deal of responsibility for it. “The financial and economic shocks we’ve experienced did not just come out of nowhere,” he said. “They followed years of low interest rates, high and increasing leverage, and overly lax financial supervision, as prescribed by both Democratic and Republican administrations.” He was explaining his dissent at that meeting, and warning that the Fed might be making the same mistakes that led to 2008. “The continued use of zero-interest rate will only add the risk to the longer-run outlook,” he said.

…

“I would be optimistic in the results of these actions,” he said. “I think the best indications that I have now in an uncertain world is that it can be accomplished reasonably smoothly.” Volcker was wrong on this point. Nothing went reasonably smoothly. The American economic ecosystem had settled itself around the North Star of low interest rates. Volcker moved the polestar overnight, and everything reoriented. A decade’s worth of resource allocation would change and everything would shift back in from the edge of the yield curve, away from risk. The change was wrenching. It played out very quickly in the Kansas City Federal Reserve’s district.

Global Financial Crisis
by Noah Berlatsky
Published 19 Feb 2010

The crisis originated in the United States. During the 2000s, Americans began to invest heavily in houses. As more and more people purchased houses with borrowed money, the prices of houses rose and rose. This trend was partially fueled by low interest rates, which made it cheaper to borrow money. Thus, Dean Baker, writing in Real-World Economics Review in 2008, noted that “extraordinarily low interest rates accelerated the run-up in house prices.” Price inflation of this sort is often referred to as a “bubble.” William Watson, writing in the Gazette in 2006, said that “A bubble . . . is a run-up in prices going beyond anything that reasonable economic calculation can justify.”

…

The Weakness of Banking Regulations Caused the Crisis Vince Cable Some British banks have grown too big to fail, and perhaps too big for regulators to handle. Yet they want freedom from regulation and freedom to persue high risk investments. But the British taxpayer should not be responsible for financial risks taken outside the nation’s borders. 42 5. Low Interest Rates Caused the Crisis Tito Boeri and Luigi Guiso 53 The housing crisis was fueled by the actions of the chairman of the Federal Reserve, Alan Greenspan, who kept interest rates low. These circumstances encouraged people to borrow too much to pay for homes they could not afford. 6. Abandoning the Gold Standard Caused the Crisis Dominic Lawson 59 If currency is not backed by gold, politicians and bankers will simply print money, resulting in inflation and a cycle of boom and bust.

…

In addition, there will have to be a major structural adjustment out of traded financial services into other services and manufacturing. 51 The Global Financial Crisis Unfortunately a weak, demoralised, delegitimised Labour government is in no shape to face this challenge, and a Tory government pumped up by City donations would have no need or inclination to take it on. The opportunity for reform and renewal is passing us by and, if it does, financial crises will return with even greater ferocity in years to come. 52 5 Viewpoint Low Interest Rates Caused the Crisis Tito Boeri and Luigi Guiso Tito Boeri is a professor of economics at Bocconi University in Milan, Italy. Luigi Guiso is a professor of economics at the European University Institute in Florence, Italy. In the following viewpoint, the authors argue that Alan Greenspan, former chairman of the Federal Reserve, made the wrong decision in drastically lowering interest rates in response to the recession of 2001.

Angrynomics
by Eric Lonergan and Mark Blyth
Published 15 Jun 2020

AfD (Alternative für Deutschland) 114 Afghanistan 6 aging population 10, 13, 14, 95, 106–11 and consumption 109–10 and government bonds 138–9, 152 and inequality 56–7, 58, 107–10 and inter-generational transfer 106–107 and poverty 57, 107 as stressor 57, 91, 106, 110, 111, 116, 118 and technological change 90, 106, 122 AIG 85, 124 Amazon 96, 98, 104, 142, 143–4 Anderson, Elizabeth 176 anger 2–3, 7–9, 10, 11–12, 159, 161 misplaced 13 as opportunity 16 and play 153 private see private anger public see public anger reducing see calming strategies anxiety/stress 9, 13–14, 50, 53, 55–6, 88, 118, 161 and cognitive effort 89–90, 91 and job insecurity 95–6 three causes of 91 and uncertainty see uncertainty Apple 96, 142, 143 Aristotle 59, 153 artificial intelligence (AI) 14, 102–106, 142 Asian financial crisis (1998) 77, 140 asset ownership 130–31, 133, 136, 140–41 Atkinson, Tony 80, 173 austerity policies 2–3, 6, 15, 34–5, 41, 48, 84 and euro crisis 44–5 and low interest rates 135 Australia 125 Austria 3 baby boomers 107–108, 110, 111, 175 Bank of England 84, 103, 120, 145, 148 TFS scheme 149–50, 166 banks 1, 6, 15, 33–5, 42, 44, 48, 145–50 and capital/liquidity ratios 126 and direct support for consumption 145–8 and dual interest rates 149–50 and economic models 3, 4 failure of 119–21, 122 and helicopter money 131, 146 independence of 78, 79 and leverage see financial leverage and problem of low interest rates 120–21, 122, 131, 135 regulations on 125–6, 127, 129, 132 restrictions on 72, 77 see also financial crisis (2008) Beck, Aaron 171–2 Bernanke, Ben 6, 148 Biden, Joe 106 billionaires 4 Bitcoin 102, 103 Blackrock 165 blockchain technology 14, 103 Blyth, Mark 172, 175 bonuses 81, 85, 124 Brazil 11, 127 Brexit 4, 7, 11, 22, 24, 37, 38, 55, 117, 154 and austerity policies 41, 45 and immigration 111, 112, 114, 116 and job insecurity 100–101 Brill, Stephen 175 Britain (UK) 3, 38, 119, 155, 162, 164 aging population in 107, 110 austerity policies in 41 dual interest rates in 149–50 and EU see Brexit fear of immigration in 27 gig economy in 100 and government bonds 135, 140 government spending in 71 immigration in 111, 112, 114, 115–16 inequality in 6 interest rates in 145 nationalism in 23 Thatcherism in 75, 76 Brittan, Samuel 151 Brynjolfsson, Erik 173 budget deficits 71, 75 Buffett, Warren 130 calming strategies 12, 15, 118, 122, 123–57 and data dividend see data dividend and direct support for consumption 145–8 and dual interest rates 149–50 and economic diversity 153–6 and inequality see inequality, strategies to reduce and national wealth fund see NWF and regulations on banks 125–6, 127, 129, 132 and sustainable investment see sustainable investment Canada 125 cancer 53, 87, 88, 106 capital 4 cost of 137, 139, 153 and dispersion 97–98 as “fictitious” commodity 65 formation, rate of 108 global 40, 42, 43, 49, 50, 58 and labour 50, 60, 69, 72 and neoliberalism 75, 76, 77, 79 protection of, following financial crisis 85 versus capital 97, 98 Capital in the Twenty-First Century (Piketty) 49, 108–10 capital/liquidity ratios 126 capitalism 64–5 and commodities 65–6 capitalism as computer 11, 61–72 fixing 124–25 hardware of 62–3, 117 software of 63–4, 68–71 and unemployment/inequality 66–7 version 1.0 68–9 version 1.0 crash 64, 66, 67, 71, 73, 83, 118 version 2.0 69–73, 74, 75, 76, 116 version 2.0 crash 70–71, 73, 83–4, 118 version 3.0 74–80, 98–9, 117, 125, 140–41 version 3.0 crash 116 car industry 100–101 caring industry 104 Case, Anne 54, 176 centrism, political 38, 48, 118–19, 121, 160–61, 162 CEOs (chief executive officers) 4 Chamberlain, Joseph 66 Chile 3 China 42, 63, 64, 78, 93, 137, 151, 156 Citibank 81, 82 cities 55, 56 climate change 104, 111, 121, 129, 131, 153, 159–60 and investment see sustainable investment Clinton, Hillary 160 Coggan, Philip 172 cognitive effort 89–90, 91 Cold War 28, 48 ending/legacy of 5, 23, 26, 29, 30, 37, 116 communism 68, 71 competition/competitiveness 47, 65, 94, 95, 111, 116, 125 and technology 105 see also product market competition computer analogy see capitalism as computer constrained volatility 85 consumption, direct support for 145–8, 150–51, 160 consumption, distribution of 52–3, 58 Corbyn, Jeremy 119 corporations 6, 20, 57 and competition 95, 96 and data dividend see data dividend corruption 8, 29, 61, 130 Covid-19 163 culture 160 Czech Republic 146, 147, 155 data dividend 141–4, 160, 162 and monopolies 142, 143, 144 and privacy 141–2 and property rights 142–3 de-unionization 50, 95, 99 Deaton, Angus 54, 176 debt 75, 84, 120, 132, 145, 150 and demography 109, 111, 131 government 136–7, 151, 152 net 136 deflation 65, 69, 120, 128, 144, 148 demand management 44–5, 47, 126–7 democracy 16, 25, 29, 39, 40, 104, 117, 130 and markets 68 demography see aging population Denmark 64, 164 depression see recession deregulation 28, 40, 48, 50, 58, 75 and inflation 127 as micro-stressor 94, 96, 99, 101, 118 DGSE (dynamic stochastic general equilibrium) models 3–4 Doughnut Economics (Raworth) 131–2, 165 dual interest rates 131–2, 149–50, 174 Dublin (Ireland) 17–18 economic change 9–10, 29, 43, 153 see also fiscal reform; recession economic growth 2, 6, 41, 69, 71, 86 and demography 108–10 and immigration 116 and inequality 76, 79–80 and quality of jobs/wages 46, 47, 85 economic ideology 28 economics 12, 54–5 shortcomings of models 3–5, 6, 7 education 24, 53, 58, 135, 141 tuition fees/student loans 107, 111 electoral politics 5–6, 104 and demographics 107, 110 and tribalism 13, 22, 24–7, 29, 30, 31 electric vehicles 153 elites 2–3, 5, 6, 7, 9, 37 in cities 55, 56 and corruption 8, 29 and ethical norms 20 and financial crisis 43–4 manipulation of tribal identity by 22, 24, 61, 116, 161 policy failures of 48–9 Engbom, Niklas 175–6 environmental degradation 29, 161 see also climate change environmental and social governance 168 ethical norms 20 euro crisis 7, 37, 44, 77, 144 Europe 34, 42, 137, 140 inequality in 41, 53, 56, 58 migrant crisis in 7 tribalism in 30 European Central Bank (ECB) 34, 84, 146, 155, 164–5 TLTRO programme 147–8, 166 European Union (EU) 22, 33, 34–5, 37, 43, 119 austerity policies in 2, 36, 48 and financial crisis (2008) 82 micro-stressors in 47–8 and nationalism 154–6 and neoliberalism 76, 77 unemployment in 44–5 see also Brexit eurozone 45, 65, 83, 148, 151, 155 exchange rates 72, 134 Extinction Rebellion 8, 131–2 Facebook 27, 96, 98, 142, 143 fake news 26 Farage, Nigel 17, 161 Farmer, Roger 174 fascism 45–6, 66, 67–8, 71 fear 16, 17, 94, 113, 117, 150, 161 and media 26, 27 and politics 7, 45 financial crisis (2008) 1–2, 6, 26, 29, 30, 39, 48, 127, 163 and automation 102–103 and bail-out of banks 84 fragility of recovery from 46, 85, 89, 121 further reading on 172–3 and globalized financial system 84 and growth of populism 85 and inequality 79–80 and low interest rates 135 and regulation of banks 129 financial leverage 72, 81–3, 85, 99, 126, 157 and credit crunch 83 and interest rates 81–2 financial market deregulation 77 fiscal councils 150–51 fiscal reform 15, 150–53, 162 Fischer, Stan 148, 165 Florence (Italy) 87–8 foodbanks 6, 53 football fans 8, 19, 56 France 2, 3, 20, 55, 56, 71, 101, 154, 156 and NWF 135 Franklin, Benjamin 87 free markets 30, 69, 118 Friedman, Milton 118 full employment 40, 47, 60, 66, 71–2, 79, 85, 175 and inflation 73–4, 76 without inflation 121, 125, 126 future 101–102, 111 Garcia family, parable of 33–5, 43 Gates, Bill 130 GDP (gross domestic product) 5, 44, 76, 79, 100–101, 106, 151, 152 and NWF 135, 141 Germany 3, 11, 34, 38, 42, 62–3, 66, 151, 154, 156, 167 and migrant crisis 111, 113–14 and NWF 135 Gibley, Bruce Cannon 175 gig economy 94, 98, 99–100 global economy 12, 39–40, 50, 53, 58, 133 and nationalism 154 and neoliberalism 77 globalization 5, 39, 41, 42–3, 48, 77, 117 hyper- 40 and inequality 80 and inflation 127 and insecurity 101 and labour market 42, 43 and nationalism 154 Gold Standard 65, 67 Google 96, 98, 104, 142 government bonds 72, 131, 133, 135, 137, 138–9, 152 as insurance policies 139, 140 government borrowing 134–5, 137, 152–3 and cost of capital 137, 139, 153 and low inflation 128, 138–40, 150 and NWF 136–137, 138–40 Great Depression 40, 44, 66, 69, 120 Great Moderation 6, 120 Greece 35, 38, 44, 45, 106–07, 110, 144 green revolution see sustainable investment gross domestic product see GDP Guilluy, Christophe 55 Gulf States 133, 134 Hayek, Friedrich 118 healthcare 47, 53–4, 58, 123–4, 135, 139 and access to data 141–2 and NWF 141 and uncertainty/probability 92 hedge fund managers 4 helicopter money 131, 146, 166 Hildebrand, Philipp 165 Hong Kong 2–3, 140, 164 Hopkin, Jonathan 172 Hopkins, Ellen 123 housing 71, 113, 114, 135 Hungary 11, 23, 30 Iceland 1–2, 8, 20 immigration 5, 7, 26, 27, 111–17, 164 economic effects of 115–16 and housing/training 113, 114 and income distribution 112, 113, 114–15 and manipulation by media/politicians 111, 115 as stressor 113, 115 and technological change 106 and tribalism 95, 111, 112, 113 income see wages income distribution 43, 50, 51 and Keynesian economics 71 and neoliberalism 80, 81 independent fiscal councils 150–51 India 23, 127 individualism 29, 154 Indonesia 3 inequality 3, 4, 6, 15, 29, 30, 40–41, 43, 49–57, 58, 61, 79, 118 difficulties in measuring 50–53 and distribution of income/consumption 53–4 and financial crisis (2008) 79–80, 83, 85 further reading on 173, 176 intergenerational 56–7, 107–10 and populism 54–5 and uncertainty 49–50 inequality, strategies to reduce 121–2, 129–31, 132, 162 asset ownership 130–31, 133, 136, 140–41 and data dividend 141–4 National Wealth Fund see NWF optimal/effective 132–3 and universal basic income (UBI) 141, 144 wealth tax 130, 132 inflation 5, 40, 51–2, 53, 69 death of 126, 128 and full employment 73–4, 76, 121, 122, 125 and global financial markets 78 and interest rates 75, 81–2, 120 low see low inflation and oil prices 96–7 and printing money 78, 128, 145 and raising taxes 129 and recession 144–5 and regulation of banks 125–6, 127, 132 and stagflation 40, 74, 120, 128 inheritance 132, 133, 160 national 136 innovation see technological change insurance industry 93 interest rates 15, 33–4, 75, 81–2, 165–6 dual, and sustainable investment 131–2, 149–50 low, problem of 120–21, 122, 131, 132, 135, 146–8, 152 negative, problem of 15, 148, 149, 150 and spending 147 internet 25 investment spending 40, 60, 69 and future expectations 103 and global capital flows 77–8 and inflation 74 public sector 67, 70–71 sustainable see sustainable investment IRA (Irish Republican Army) 17 Iraq 6 Ireland 17–18, 23, 24 Islam 27 Italy 35, 37, 38, 39, 44, 66, 71, 87–8, 144, 156, 167 aging population in 110 poverty in 47 tribalism in 45–6 Japan 26, 84, 110, 137, 140, 148 job security/insecurity 34, 50, 56, 61, 94, 95–6, 100–101 and technology 102 Kalecki, Michał 60–61, 73–5, 120, 121, 127 Keynes, John Maynard/Keynesian economics 60, 66–7, 68–70, 92, 103, 118, 127, 151 General Theory of Employment, Interest and Money 66, 175 and inflation 67, 69, 128 labour market 35, 40–41, 42, 43, 44 and automation 102–106 deregulation 50, 95, 99, 122, 127 dispersion in 98–9 and full employment see full employment and immigration 115–16 in Keynesian system 71–2 and labour as commodity 59, 60, 65–6, 73, 85 and protectionism 59–61, 66 and secular stability 125, 126 and training 62–3 see also wages Lagarde, Christine 167 Lerner, Abba 118 libertarianism 63 Lonergan, Eric 174 Los Indignatios 85 low inflation 79, 134, 157 and full employment/secular stability 126 and government spending/borrowing 128, 138–40, 150, 152 and recession 144–5, 150, 162 Luce, Edward 164 Ludd, Ned/Luddites 102 machine learning (MI) 102–104 see also artificial intelligence macroeconomics 9, 13, 47, 89 failure of 119–20 and uncertainty 94 Macron, Emmanuel 162 Mair, Peter 172 markets 30, 59–61, 62, 66–7 and democracy 68 and quantity theory of money 68–9 see also labour market Mauss, Marcel 21–2 Mazzucato, Mariana 156 media 11, 43, 47 and technological change 98, 102–103, 105 and tribalism 24–5, 26–7, 29, 31, 61, 116, 161 Merkel, Angela 114 Mexico 63 micro-stressors 47–8, 53, 84, 91 and aging populations see aging populations and change 94 and fourth industrial revolution 94 and immigration see immigration microeconomics 9, 13–14, 160 migrant crisis 7, 111 Milanovic, Branko 52, 80 minimal group paradigm 21 Minsky, Hyman 128 mobile phones 53, 96, 97, 142 modern monetary theory (MMT) 118, 128–9 money, printing 78, 128, 145 monopolies 142, 143, 144 moral outrage 8, 13, 15, 35–6, 57–8, 117, 130, 161 and inequality see inequality as rational 36 and tribalism, compared 19, 20, 22, 29, 30–31, 36 triggers for 36 mortgages 34, 35, 38, 82, 111, 137, 145 nation state 39–40, 48, 50, 117, 119 national wealth fund see NWF nationalism 5, 11, 23, 29, 31, 39, 41, 116, 119 as positive 153–6 neoliberalism 4, 28–9, 37, 75–8, 122 and global capital flows 77–8 and inequality 51, 52, 53 NHS (National Health Service) 107 Nissan 100–101 Nixon, Richard 26 Northern Ireland 17–18, 23, 24 Norway 133, 134 Nussbaum, Martha 16, 35, 36 NWF (national wealth fund) 15, 132, 133–41, 143, 152, 168 and aging population 138–9 and asset ownership 133, 136, 140–41 and government borrowing/debt 136–7, 138–40 and growth of global stock market 137–8 and individual trust funds 135 and negative interest rates 134–5, 136 and risk 136, 137–8 sovereign 133–4 and trade surplus 134 Obama, Barack 29, 46 oil prices 96–7 Orban, Viktor 23, 30, 161 “Panama Papers” 2, 20 pensions 57, 63, 106–107, 138 perpetual loans 147–8 Philadelphia Eagles 20 Pickett, Kate 168 Piketty, Thomas 49, 52, 80, 108–10 play 153 Poland 11, 30 Polanyi, Karl 59–61, 64–5, 67, 175 political centrism 38, 48, 118–19, 121, 160–61, 162 political disengagement 29 political economy 12, 13 political identity 22–3, 29–30, 37, 48, 116, 117 further reading on 172 political parties 5–6, 7, 28 politics, new 15–16, 58, 160 populism 11, 27, 39 and financial crisis 86 three genres of 54–5 Portugal 35, 38, 44, 144 poverty 47, 67, 72, 80, 115 and demographics 57, 107 power 4, 48 powerlessness 9, 41 price stability 76, 79, 128, 147 private anger 7, 8, 9, 10, 13–14, 36, 117 and cognitive effort 89–90, 91 see also anxiety/stress private sector debt 131, 145 and government borrowing 134–5, 137, 138–40 investment 67, 70, 149–50, 151 liability in financial crisis 85, 127 privatization 28, 40, 96, 107 probability 91–3 product market competition 94, 95–8, 116, 125 and deregulation/privatization 96–7 and dispersion 97, 98–9 intensification of 96, 101 and technological change 96, 97–8, 99 productivity 40 and technological innovation 9, 10, 15, 102, 104–105 and wages 71, 72, 74, 76 profit margins 98, 101, 105, 143 property prices 34, 38 property rights 142, 143, 154 protectionism 59–60, 61, 66 public anger 7, 8–9, 10, 89, 98, 117–18 economic causes of 13 see also moral outrage; tribalism/tribal anger public housing 71, 113, 114 public sector investment 67, 70–71 public services 24, 115, 116 quantitative easing (QE) 146–7, 167 quantity theory of money 68–9, 78 racism 26, 54, 55, 115 Raworth, Kate 131–2, 173 Reagan, Ronald 26, 75, 118 recession 15, 29, 30, 34–5, 44, 49, 55, 58, 84, 152, 153 and dual interest rates 150 and interest rates 75, 120–21 and investment spending 60, 70, 71 and low inflation 144–5, 150, 162 and MMT 128–9 and stock markets 139, 140 see also euro crisis referenda 37 regeneration, economic 132 regional development 15, 115, 116, 149, 153, 156 Renzi, Matteo 37 risk 91–2, 127, 136, 137, 153 Roberts, Carys 174 robotics see artificial intelligence Rodrik, Dani 4, 39, 40 Russia 11, 41 Sahm, Claudia 150–51 Salvo, Francesca 87–8 Sandbu, Martin 174 Sanders, Bernie 128, 164 savings 93 scale economies 98, 99, 142 Scottish nationalism 7, 119 secular stability 125, 126, 127 service-based economy 52 Singapore 133, 134, 162 SMEs (small- and medium-sized enterprises) 164–5, 166 social democracy 63–4 social media 26, 27, 90, 98 Solow growth model 109 sovereign wealth funds 133–4 sovereignty 39 Spain 33–5, 38, 44, 45, 144 protests against austerity in 85 spending increasing 145, 147, 151 investment 40, 60 power 145 public sector 67, 70–71, 128, 151 restrictions on 41, 44, 149 sports fans 8, 19–20, 21, 25 sports industry 99 stagflation 40, 74, 120, 128 status-injury 36, 54 stock markets 63, 137–8, 139–40 stress see anxiety/stress strikes 73, 74 student loans 111 supply–demand 60, 96, 104 sustainable investment 131–2, 149–50, 152, 153 Sweden 63–4, 72–3 Syria 111, 113 Tavris, Carol 36, 171 taxes 40, 50, 57, 108, 116, 124 cuts in 34, 44, 111, 151 dodging 2, 6, 20, 132–3, 143 political opposition to 129, 130, 132, 133 raising 152 on wealth 129, 130, 132, 140 Tea Party movement 85 technocracy 37, 42–3, 48, 160–61 technological change 29, 58, 96, 109 and aging population 90, 106, 122 and competition 96, 97–8 and dispersion of returns 97 and fourth industrial revolution 94 further reading on 173–4 and inequality 50, 53 and labour market 102–104 and media 24–5, 27 as micro-stressor 88, 91, 94, 96, 97–8, 99, 101–102, 105, 116, 118 and productivity 9, 10, 15, 105, 122 and rate of diffusion 14 and uncertainty 101–102 telecommunications 96, 97, 142 terrorism 17, 18, 27 Thatcher, Margaret 75, 76, 118, 131 Thunberg, Greta 150 TLTRO programme (European Central Bank) 147–8 trade 21–2, 26, 42, 78, 154 and neoliberalism 78 trade surplus 134 trade unions 28, 42, 63, 66, 72, 73, 76, 79 trade wars 21–2, 26 training 62–3, 93, 113, 114, 141 tribalism/tribal anger 8–9, 11, 18–31, 41, 45–6, 117 and central/eastern Europe 23, 30 destructiveness of 24 and ethical norms 20 and fascism 68 and financial crisis 86, 89 and global politics 21–2, 26, 28–9 and immigration 95, 111, 112, 113 manipulation by politicians/media of 13, 22, 24–7, 29, 30, 31, 35, 61, 95, 116, 161 and minimal group paradigm 21 and moral outrage, compared 19, 20, 22, 29, 30–31, 36 and political identity 22–23, 29–30 social function of 20–21 and sport fans 19–20, 25 see also nationalism trickling down/up 79–80 trilemma, political 39 trucking industry 103 Trump, Donald 11, 22, 23, 25–6, 27, 33, 38, 119, 126, 161 and deregulation 129 election of 41–2, 54 tax cuts of 11 Turkey 11 universal basic income (UBI) 141, 144 Ukraine 11 uncertainty 9–10, 43, 49–50, 65, 91–4, 99, 118, 161 and aging populations see aging populations and emerging technologies 102–103, 106 and healthcare 92 and immigration see immigration reducing 93–4 and risk/probability 91–3 and skills development 93 unemployment 2, 30, 34, 44–5, 48, 58, 66, 72, 84, 167 and inflation/interest rates 74, 75, 125 unfairness 25, 36, 105 United States (US) 3, 38, 93, 118, 129, 164 aging population in 107–108, 110, 111 automation in 103, 104–105 financial crisis in (2008) 82–3, 84, 85 gig economy in 100 healthcare in 47–8, 53–4, 58, 106, 123–4 independent fiscal councils in 150–51 inequality in 50, 51, 53–4, 58, 80–81 Keynesian system in 71, 72–3 labour market in 42, 44, 46, 62 micro-stressors in 47–8 neoliberalism in 76 and NWF 135 stock market in 63 tribalism in 23, 25, 29 wealth tax in 130 US Federal Reserve 6, 46, 84, 108, 110, 120, 148, 151 voice, loss of 37–9, 43, 48, 58 Volcker, Paul 75, 81–2 voting 37–8 see also electoral politics wages 2, 60 and automation 105 and competition 96–7, 98 and consumption 53–4, 58, 72 distribution of see income distribution growth in, without inflation 125 and immigration 115–16 and inequality 4, 50–53, 58 and neoliberalism 76, 77 and oil prices 96–7 and productivity 72, 76 stagnation in 34, 47, 58, 80–81, 83, 84, 85 and supply/demand 65–6 Wall Street Crash 67 Warren, Elizabeth 130, 132 Watson’s Analytics 19 wealth, distribution of 4, 15, 29, 30 welfare state 71 WhatsApp 2 Wilkinson, Richard 176 wind power, investment in 150 Wolf, Martin 80, 173 World Trade Organization (WTO) 42 Wren-Lewis, Simon 151 Yates, Tony 151 “Yellow Jackets” protests 2, 20, 55, 56

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We need to simultaneously unleash the productivity potential of technological change to cope with the challenges of demography and aging, while addressing extreme and corrupting inequality of wealth and income. We also need to revisit the labour market – can we keep the benefits of deregulation, but mitigate or eliminate the stressors? We agree that the supposed impotence of central banks in a world of low interest rates, is in fact a huge opportunity, both for a more effective monetary policy and for a smart expansion of the state’s balance sheet. The unexpected post-crisis success of high employment, no inflation, and negative real interest rates in fact frees government up to make some critical interventions.

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Our new software needs to address wealth inequality so that our societies become more adaptive to change, and a broader asset ownership is key. And by that I mean something way more than Margaret Thatcher’s famous “property-owning democracy”. We need fundamentally new ideas about who owns what and who gets the returns to assets. The second more technical problem is low interest rates. This is partly a legacy of v.3.0’s success in controlling inflation, but it is also a consequence of demographic change and high private sector debt levels. The problem posed by close-to-zero interest rates is that central banks are impotent in the face of an economic shock that threatens recession.

How an Economy Grows and Why It Crashes
by Peter D. Schiff and Andrew J. Schiff
Published 2 May 2010

When they first burst onto the scene in the 1920s and 1930s, the disciples of Keynes (called Keynesians), came into conflict with the “Austrian School” which followed the views of economists such as Ludwig von Mises. The Austrians argued that recessions are necessary to compensate for unwise decisions made during the booms that always precede the bursts. Austrians believe that the booms are created in the first place by the false signals sent to businesses when government’s “stimulate” economies with low interest rates. So whereas the Keynesians look to mitigate the busts, Austrians look to prevent artificial booms. In the economic showdown that followed, the Keynesians had a key advantage. Because it offers the hope of pain-free solutions, Keynesianism was an instant hit with politicians. By promising to increase employment and boost growth without raising taxes or cutting government services, the policies advocated by Keynes were the economic equivalent of miracle weight-loss programs that required no dieting or exercise.

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The Americans do well: they get stuff without producing it and they get to borrow money without having to save. For their part, the Chinese get to work without consuming what they produce. They save, but they don’t get to borrow. Where’s the benefit there? Most contemporary economic pundits also fail to appreciate the degree to which low interest rates in the United States are made possible by high savings rates abroad. Remember, in order to lend, someone has to save. Fortunately for the United States, the global economy allows these relationships to go beyond borders. The trump card for the United States thus far has been the status of the U.S. dollar.

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Sensing a potent campaign issue, the Senate got into the game to fix the problem. Arguing that hut ownership lay at the very core of the Usonian Dream, Senator Cliff Cod devised a plan where the government would ensure that everyone could get a hut loan. Not only would the Senate mandate ultra-low interest rates with very low down payment requirements, but it would stand behind the loans and pay the bank back if the borrower couldn’t. In order to facilitate the process, Cod created two agencies—Finnie Mae and Fishy Mac—to buy hut loans from the bank. The hut buyer would then pay back the agencies directly.

The Alchemists: Three Central Bankers and a World on Fire
by Neil Irwin
Published 4 Apr 2013

October 23—Mervyn King delivers a speech saying that “printing money is not . . . simply manna from heaven.” He also says that “there are no shortcuts to the necessary adjustments in our economy,” as the Bank of England largely sits on its hands amid the new activism from the Fed and ECB. December 12—The Fed announces it expects to keep low-interest-rate policies in place until either the U.S. unemployment rate falls to 6.5 percent or inflation is poised to exceed 2.5 percent. Introduction: Opening the Spigot On August 9, 2007, Jean-Claude Trichet awoke at his childhood home of Saint-Malo, on the coast of Brittany, ready for a day puttering about in his motorboat and enjoying the company of his grandchildren.

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This creates a conflict of interest between countries with weak economies and populist governments—read Italy, or Spain, or anyway someone from Europe’s slovenly south—and those with strong economies and a steely-eyed commitment to disciplined economic policy—read Germany. The weak economies want low interest rates, and wouldn’t mind a bit of inflation; but Germany is dead set on maintaining price stability at all cost. Nor can Europe deal with “asymmetric shocks” the way the United States does, by transferring workers from depressed areas to prosperous ones. . . . The result is a ferocious political argument, and perhaps a financial crisis, as markets start to discount the bonds of weaker European governments.

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In a milder version of the deflation that paralyzed the world economy in the early 1930s, prices were stagnant to falling. That made the overhang of debt incurred in the boom years even more onerous, as the yen being used to repay loans were more valuable than those that had been originally lent out. Steady deflation even made the BOJ’s low-interest-rate policies less effective at boosting growth, because it meant that “real,” or inflation-adjusted, interest rates were higher than they would have been during a time of inflation. On March 20, 1998, Masaru Hayami, a longtime corporate executive who had worked at the BOJ many years earlier, became the central bank’s twenty-eighth governor.

The Death of Money: The Coming Collapse of the International Monetary System
by James Rickards
Published 7 Apr 2014

Asset swaps are just one of many ways financial institutions increase risk in the search for higher yields in low-interest-rate environments. A definitive study conducted by the IMF covering the period 1997–2011 showed that Federal Reserve low-interest-rate policy is consistently associated with greater risk taking by banks. The IMF study also demonstrated that the longer rates are held low, the greater the amount of risk taking by the banks. The study concludes that extended periods of exceptionally low interest rates of the kind the Fed has engineered since 2008 are a recipe for increased systemic risk. By manipulating interest rates to zero, the Fed encourages this search for yield and all the off-balance-sheet tricks and asset swaps that go with it.

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-Iran financial war and, 55, 57 Indonesia, 45 inflation, 3–4, 7–9, 75–83 alternative measures of, 3 Berlin Consensus and, 122–23 versus deflation, in depression of 2007 to present, 243–52, 260, 290–91 export of, through exchange-rate mechanism, 75, 155 Federal Reserve’s targeting of, 186–87 money illusion and, 7–8 in 1960s and 1970s, 7–8 in 1977 to 1981, 1 in 1981 to 1986, 2 in PDS framework, 183 pro-inflation (easy-money) policy of Federal Reserve (See easy-money policy of Federal Reserve) in 2008 to present, 3, 75, 76, 77 information asymmetry, 83–88 information warfare, 44 infrastructure spending Berlin Consensus and, 123 in China, 98–101, 107 In-Q-Tel, 34, 35 insider trading Stewart’s trading of ImClone Systems, 25 by terrorists (See terrorist insider trading) interest rates bank risk taking in low-interest-rate environment, 80–81 low-interest-rate policy, of Greenspan, 76, 260 negative real rates, 183–84 zero-interest-rate policy, of Bernanke, 185, 260 internal adjustment of unit labor costs, 131 International Emergency Economic Powers Act (IEEPA), 295 International Monetary Fund (IMF), 12, 81, 190–214 Articles of Agreement, 199, 212–14, 235 Asian financial crisis and, 45, 120 C-20 project, 235 cluster paradigm and, 192–93, 194, 198 commitments to expand lending capacity of, 202–6 as de facto central bank, 199–207 deposit-taking function of, 201 financial transmission and, 193–94 gold dispositions by, 235–36, 277 governance reforms, implications of, 296 historical roles of, 191 lending role of, 199–201 leverage of, 201–6 management of, 194–95 special drawing rights (SDRs) issued by (See special drawing rights [SDRs]) spillover effects of national policy, 193, 194, 198 international monetary system, 1, 12, 118–21 Beijing Consensus, 118, 120–21 Bretton Woods system, 118, 208–9, 235, 290 C-20 project and IMF reforms, 235–36 collapses of, 5 debt and deflation as problems of, since 2009, 290–91 gold reserve rebalancing and potential reform of, 279–84 Washington Consensus, 118–19 Internet, 174 interstate highway system, 174–75 investment Berlin Consensus and, 123 Bernanke’s monetary policies aimed at increasing, 86 Chinese economic growth and, 95–101, 107–110 gold as not constituting an investment, 218–19 infrastructure (See infrastructure spending) lack of, and duration of Great Depression, 84 regime uncertainty and, 84–86 investment portfolio recommendations, 298–301 alternative funds, 299–300 cash, 300 fine art, 299 gold, 298–99 land, 299 Iran, 12, 30, 151, 152, 153, 156 cyberattacks conducted by, 60 U.S.

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It was this deflation scare that prompted then Fed chairman Alan Greenspan to sharply lower interest rates. In 2002 the average Federal Funds effective rate was 1.67 percent, then the lowest in forty-four years. In 2003 the average Federal Funds rate was even lower, 1.13 percent, and it remained low through 2004, averaging 1.35 percent for the year. The extraordinarily low interest-rate policy during this three-year period was designed to fend off deflation, and it worked. After the usual lag, the consumer price index rose 2.7 percent in 2004 and 3.4 percent in 2005. Greenspan was like the pilot of a crashing plane who pulls the aircraft out of a nosedive just before it hits the ground, stabilizes the aerodynamics, then regains altitude.

Boom and Bust: A Global History of Financial Bubbles
by William Quinn and John D. Turner
Published 5 Aug 2020

Instead, a series of tax breaks, subsidies and financing initiatives were granted to private real-estate companies, while the Ministry of Construction heavily deregulated the process of urban planning.18 This, combined with the liberalisation of mortgage lending and ultra-low interest rates, massively increased real-estate investment. The subsequent effect on urban land prices can be seen in Figure 8.1. Between 1985 and 1987, the price of land in the six major Japanese cities rose by 44 per cent. This attracted the attention of Japanese corporations, who found that capital gains on land were dwarfing the profits from their main operations. These corporations responded by shifting funds from core operations to land, creating an additional influx of money into the sector. Much of this money was borrowed to take advantage of the prevailing low interest rates.19 As a result, prices continued to rise, and the price of land was soon completely out of proportion with the income it could generate.

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However, some economists have dismissed the role of global imbalances in driving down interest rates and have suggested that loose monetary policy and low central bank interest rates were more of a problem.47 The interest rates of the Eurozone were set to suit the core economies and, as a result, were too low for economies like Ireland and Spain. The Federal Reserve kept interest rates low after the dot-com bust and 2001 recession in order to stimulate the economy by encouraging housing starts and home sales with low mortgage rates.48 In one sense this worked too well, because low interest rates prompted US consumers to buy houses in an unprecedented fashion. 182 THE SUBPRIME BUBBLE Low interest rates, however, would not have been such a problem had they not been accompanied by such a dramatic extension of mortgage credit. The ratio of residential loans to GDP in the European Union as a whole was 36.4 in 2007; the equivalent figures for Ireland, Spain, the United Kingdom and the United States were 71.4, 59.8, 74.8 and 63.4 respectively.49 The ratio of mortgage debt to GDP in these four countries was higher than in any other country in the world, and they all had a relatively high proportion of lower-income households with mortgages.50 In the United States, mortgage debt climbed from $5.3 trillion in 2001 to $10.5 trillion in 2007 and mortgage debt per household rose from $91,500 in 2001 to $149,500 in 2007.51 To put this in context, mortgage debt in the United States rose almost as much in 6 years as it had in the period from 1776 to 2000!

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However, just as one would not keep oxygen tanks beside an open fire, there are times and places where too much marketability can be dangerous.17 The fuel for the bubble is money and credit. A bubble can form only when the public has sufficient capital to invest in the asset, and is therefore much more likely to occur when there is abundant money and credit in the economy. Low interest rates and loose credit conditions stimulate the growth of bubbles in two ways. First, the bubble assets themselves may be purchased with borrowed money, driving up their prices. Because banks are lending other people’s money and borrowers are borrowing other people’s money, neither are fully on the hook for losses if an investment in a bubble asset fails.18 The greater the expansion of bank lending, the greater the amount of funds available to invest in the bubble, and the higher the price of bubble assets will rise.

The Levelling: What’s Next After Globalization
by Michael O’sullivan
Published 28 May 2019

However, in the context of a toughening regulatory regime, the effect of the credit crisis on lending standards of banks and the fact that many households and businesses were already overburdened with debt or were risk averse meant that very few households could get access to loans at low interest rates or had the spare capital to buy cheap post-crisis assets.17 For example, in September 2016 Italian government bonds traded at a yield of 1.1 percent but Italian mortgage rates were closer to 7 percent. In essence, this meant that only those who already had access to capital could benefit from QE by borrowing at low interest rates to buy cheap assets; ordinary households had to borrow at 7 percent. In some cases, the purchase of real estate by property funds (which were also able to access cheap capital) drove up property prices, putting pressure on affordability.

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A Westphalia for Finance Since 2009 central banks have aggressively pursued quantitative easing (and “zero” interest rates) in the hope of lowering borrowing costs and pushing up investment by companies and households. This has helped forestall financial crises but has done little else. It has not cured underlying economic problems and at the same time has fostered an addiction to low interest rates and accommodative central banks. Even the start of QE decommissioning by the US Federal Reserve is proving difficult for markets to digest. My proposal for provoking change is a framework to level debt and risk taking through a global conference leading to a treaty on debt and risk. The assumption, unfortunately, is that the only way governments would agree to this is if they were in the midst of a nasty market crisis and were facing a deep recession.

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One could build a picture of a (Western) world where class mobility is slowing and where access to education, capital, and health care, to name a few, is increasingly restricted. Each of these sustains inequalities in different ways. Access to capital is one route by which wealth inequalities are perpetuated and around which sociodemographic changes occur. In more recent years, those with access to capital have been able to take advantage of low interest rates and the flatteringly positive effect of quantitative easing on asset prices, while also being less exposed to some of QE’s negative consequences (such as rising pension deficits).24 This has fueled explosive growth in property prices in prestigious metropolitan areas, which, among many other things, now means that middle wealth / middle income households are being forced out of city centers.

How Will Capitalism End?
by Wolfgang Streeck
Published 8 Nov 2016

This, however, was beyond the capacities of central banks, which: cannot enact the structural economic and financial reforms needed to return economies to the real growth paths authorities and their publics both want and expect. What central-bank accommodation has done during the recovery is to borrow time … But the time has not been well used, as continued low interest rates and unconventional policies have made it easy for the private sector to postpone deleveraging, easy for the government to finance deficits, and easy for the authorities to delay needed reforms in the real economy and in the financial system. After all, cheap money makes it easier to borrow than to save, easier to spend than to tax, easier to remain the same than to change.

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Instead of inflating the currency, governments began to borrow on an increasing scale to accommodate demands for benefits and services as a citizen’s right, together with competing claims for incomes to reflect the judgement of the market and thereby help maximize the profitable use of productive resources. Low inflation was helpful in this, since it assured creditors that government bonds would keep their value over the long haul; so were the low interest rates that followed when inflation had been stamped out. Just like inflation, however, accumulation of public debt cannot go on forever. Economists had long warned of public deficit spending ‘crowding out’ private investment, causing high interest rates and low growth; but they were never able to specify where exactly the critical threshold was.

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Individual debt replaced public debt, and individual demand, constructed for high fees by a rapidly growing money-making industry, took the place of state-governed collective demand in supporting employment and profits in construction and other sectors (Figure 2.4). These dynamics accelerated after 2001, when the Federal Reserve switched to very low interest rates to prevent an economic slump and the return of high unemployment this implied. In addition to unprecedented profits in the financial sector, privatized Keynesianism sustained a booming economy that became the envy not least of European labour movements. In fact, Alan Greenspan’s policy of easy money supporting the rapidly growing indebtedness of American society was held up as a model by European trade-union leaders, who noted with great excitement that, unlike the European Central Bank, the Federal Reserve was bound by law not just to provide monetary stability but also high levels of employment.

What Would the Great Economists Do?: How Twelve Brilliant Minds Would Solve Today's Biggest Problems
by Linda Yueh
Published 4 Jun 2018

During the economic boom of the 1950s in the United States, the top 1 per cent did only a little better than the rest, gaining some 5 per cent of the increased income. But since the Great Recession, the top 1 per cent have accounted for 95 per cent of the income gain, leaving the bottom 99 per cent with just 5 per cent of the gain between them. During recessionary periods, low interest rates make borrowing cheap and drive a recovery which typically boosts stocks. US markets have hit numerous record highs since the 2008 crisis, and such gains predominately go to the half of US households who own stocks. Of the richest 10 per cent of US households, 93 per cent own shares while it’s just 11 per cent among the poorest quintile of households.

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Roosevelt’s US National Industrial Recovery Act of 1933, commonly known as the New Deal, would improve the banking system and transport infrastructure of America, but the amount of government spending or fiscal stimulus injected under FDR’s plan was much smaller than the 11 per cent of GDP or national output Keynes believed was needed. Thus, he was critical of the legislation for putting reform before recovery. Britain was even worse in Keynes’s view. The UK government balanced the budget. Despite the lack of government support, a combination of exchange depreciation and low interest rates brought about a recovery. But it was temporary. In 1937–38, both economies once again fell into sharp recession. Like now, there was a heated debate over what more spending would mean for the budget deficit and high levels of government debt. A budget deficit arises if the government spends more than it receives in a given year.

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The combination of slow growth and low borrowing costs has added a new dimension to the austerity debate. Should governments be taking greater advantage of cheap rates to invest? Should budget deficits and debt be a secondary consideration when economic growth remains sluggish? Investment and low interest rates This question is being asked in both Europe and the US. In America, there is a push for more infrastructure investment, although the Republicans in Congress remain concerned about adding to the fiscal deficit. Of course, Republicans traditionally follow a non-interventionist philosophy, and are suspicious about the role of government in both investment and the economy in general.

I.O.U.: Why Everyone Owes Everyone and No One Can Pay
by John Lanchester
Published 14 Dec 2009

It will suddenly be cheaper for companies to issue new bonds, so existing bonds with higher rates of interest will spike in value. Notice that both these states are, or should be, self-correcting. High interest rates will slow things down and gradually bring inflation down, which in turn will exert downward pressure on interest rates; low interest rates, which governments use to boost the economy, will heat things up in a way which causes inflation and leads to a rise in the interest rate. So the movement is self-correcting in both directions. Stocks and bonds are the two biggest single fields of global investment, reaching into every corner of economic life.

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Greenspan surveyed this landscape, took in the imminence of war and the certainty of sharply spiking oil and commodity prices at a time of what looked like a general slowdown, and made what with the benefit of hindsight was a major mistake: he continued to cut interest rates. This process carried on until June 2003, when the rate hit 1 percent, exceptionally low by historic standards. It stayed at that level way into 2004. The low interest rates meant that it was easy for businesses to raise money cheaply; and also easy for consumers to borrow money; and also easy for construction companies to raise money; and also easy for borrowers to take out mortgages. Bond prices stayed low: by historic standards, very low. I’ve said that this would normally be a self-correcting phenomenon.

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Chinese factories kept down inflation by keeping goods cheap at a time when prices would normally have begun to rise; Chinese investments kept the U.S. government able to borrow money cheaply and spend more, at a time when that borrowing would normally have become more expensive. It bought T-bills, and kept on buying them, at a time when their low yield would normally have kept investors away—which would in turn have driven up the yield that T-bills were paying. So low interest rates were bad for the bond market. But there was one place where they were pure catnip: the housing market. It was cheaper than ever to raise the money to buy yourself a first house, if you didn’t already have one, or a bigger and better house if you already did. It had never been cheaper or easier to borrow money.

Financial Fiasco: How America's Infatuation With Homeownership and Easy Money Created the Economic Crisis
by Johan Norberg
Published 14 Sep 2009

In the words he used back then, "It's a heavy tax on your markets and your society if you don't let institutions fail."34 The Second Time as Farce There is a broad consensus that the way was paved for this financial crisis by record-low interest rates, huge deficits, and large-scale, credit-financed consumption. Today, governments across the world are trying to solve the crisis-by means of record-low interest rates, huge deficits, and large-scale, credit-financed consumption. Many people now agree that the Fed's record-low rates in 2001-2005 contributed to the crisis. Many observers now think it was utterly senseless of Alan Greenspan to cut rates drastically without worrying about the credit boom that might ensue.

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We wanted to shut down the possibility of corrosive deflation; we were willing to chance that by cutting rates we might foster a bubble, an inflationary boom of some sort, which we would subsequently have to address.' One percent was the lowest the rate had been in half a century, and in August the Fed promised it would remain at that level "for a considerable period." In December, promises were again made about very low interest rates for a long time to come.' The most ardent defender of the record-low rates was Bernanke. The Fed ended up keeping its benchmark rate as low as 1 percent for a full year; once it finally began edging it upward, it did so in tiny, cautious steps even though the wheels of the economy were by then turning very fast.

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The economic columnist Robert Samuelson suddenly discovered that his wife understood the housing market vastly better than he did. Houses in their neighborhood were being sold for one-fourth more than he thought they were worth, but his wife was not in the least surprised. Americans had started exploiting the low interest rates to take out new and bigger loans. My home was no longer my castle, but my ATM. Since homes were suddenly worth more, their owners could go back to the bank and borrow even more money against the same collateral. In the past, most people used to take out loans that they would actually pay off, but now more and more borrowers were obtaining loan agreements under which they would only have to pay interest or at least would not have to pay back any of the principal until after a decade or so.

Rethinking the Economics of Land and Housing
by Josh Ryan-Collins , Toby Lloyd and Laurie Macfarlane
Published 28 Feb 2017

As a result of direct state action to build council homes, by 1939 the percentage of households socially renting had risen to 10% (ONS, 2013b). The interwar period also saw the beginnings of the growth in homeownership that was to continue for the rest of the century. While in 1918 23% of households were owner-occupiers, by 1939 this had increased to 32% (ONS, 2013b). In the 1930s low interest rates, rising living standards and greater availability of affordable mortgages – mainly from mutually owned building societies – created a boom in private sector housing development. This was the period when the speculative model of private house building got going: relatively small-scale builders could buy agricultural land around cities and towns, and develop it as new suburban retail and housing for sale (see Box 4.2 below).

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In fact, once prices had stabilised and both buyers’ and lenders’ appetite had returned, each crash brought prices within reach of a new generation of homeowners. In the mid-1990s, the ratio of house prices to earnings was five, as it had been in 1969 (see Figure 4.3), while the proportion of homeowners had gone from around 50% to nearly 70%. But the fourth price boom that began in the mid-1990s was different. This time, consistently low interest rates and low inflation enabled prices to triple in the ten years up to 2007, sending the price/earnings ratio up to over ten (Jefferys and Lloyd, 2015). The severity of this decline in affordability was masked, for a while at least, by low mortgage rates, which kept monthly repayments within reasonable bounds for those buyers able to find sufficient capital for a deposit (Wilcox, 2006).

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Today nearly one in five households in Britain is reliant on housing benefit,6 despite repeated attempts by government to scale it back. 4.6 Conclusion As a result of these changes to the housing landscape since 2000, two sets of lines on the tenure graph have now crossed. Firstly, the decline of mortgaged homeownership among younger generations, coupled with low interest rates and increased life expectancy among older people, has meant outright ownership has overtaken mortgage-holding. And secondly, private renting has overtaken social renting for the first time since the 1960s (Figure 4.5). Projecting these trends forwards, it would seem that the nineteenth century picture of the land economy is beginning to reassert itself in the twenty-first: sooner or later, the majority will find themselves renting from a small, wealthy minority of property owners.

Saudi America: The Truth About Fracking and How It's Changing the World
by Bethany McLean
Published 10 Sep 2018

The most vital ingredient in fracking isn’t chemicals, but capital, with companies relying on Wall Street’s willingness to fund them. If it weren’t for historically low interest rates, it’s not clear there would even have been a fracking boom. “You can make an argument that the Federal Reserve is entirely responsible for the fracking boom,” one private equity titan told me. That view is echoed by Amir Azar, a fellow at Columbia University’s Center on Global Energy Policy. “The real catalyst of the shale revolution was . . . the 2008 financial crisis and the era of unprecedentedly low interest rates it ushered in,” he wrote in a recent report. Another investor puts it this way: “If companies were forced to live within the cash flow they produce, U.S. oil would not be a factor in the rest of the world, and would have grown at a quarter to half the rate that it has.”

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In 2017, U.S. frackers raised $60 billion in debt, up almost 30 percent since 2016, according to Dealogic. Wall Street’s willingness to fund money-losing shale operators is, in turn, a reflection of ultra-low interest rates. That poses a twofold risk to shale companies. In his paper for Columbia’s Center on Global Energy Policy, Amir Azar noted that if interest rates rose, it would wipe out a significant portion of the improvement in break-even costs. But low interest rates haven’t just meant lower borrowing costs for debt-laden companies. The lack of return elsewhere also led pension funds, which need to be able to pay retirees, to invest massive amounts of money with hedge funds that invest in high yield debt, like that of energy firms, and with private equity firms—which, in turn, shoveled money into shale companies, because in a world devoid of growth, shale at least was growing.

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Another skeptical investor named Jonathan Tepper, who founded a firm called Variant Perception that provides research to hedge funds and family offices, put together a presentation in which likened the dynamics of fracking to the Red Queen’s race in Alice in Wonderland: “The Red Queen has to run faster and faster in order to keep still where she is.” Because the Red Queen’s race requires so much money, it wouldn’t have been possible without the ultra-low interest rate policy that the Federal Reserve has had for the last decade. Amir Azar, a fellow at Columbia’s Center on Global Energy Policy, wrote that by 2014, the industry’s net debt exceeded $175 billion, a 250 percent increase from its 2005 level. But interest expense increased at less than half the rate debt did, because interest rates kept falling.

The AI Economy: Work, Wealth and Welfare in the Robot Age
by Roger Bootle
Published 4 Sep 2019

So, if deficient demand is the normal state of affairs in the AI economy, expansionary fiscal policy does not offer a way out. Ultra-low interest rates would probably be more sustainable but they carry a series of risks and costs. Most importantly, ultra-low rates sustained for a long period would severely distort both financial markets and the real economy. This would potentially impair the economy’s productive potential. Moreover, by boosting asset prices, sustained low interest rates tend to lead to a more unequal distribution of wealth. Similar points apply to a sustained policy of QE. The rate of inflation I frequently come across people who believe that the age of robots and AI is bound to be an epoch of low inflation, or even deflation (i.e., falling prices).

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• There was a hangover of inventions and developments from the 1930s and the war years that had not been put to full commercial use. This, and the drip-feed of new advances, led to a steady stream of technological improvements. • The economy was run at a very high level of aggregate demand and high employment. • Thanks to the above factors, and low interest rates, investment was high. • The international trading system was gradually liberalized, with the result that international trade took off, thereby realizing the gains from specialization that economists from Adam Smith and David Ricardo onward had lauded. Accordingly, it is unsurprising that the years after the Second World War were a boom time for most of the developed world.

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Indeed, the whole robot and AI revolution begins to look like a rerun of what happened to the Western world thanks to globalization and the rise of China. These effectively added a few billion extra workers to the workforce but (initially at least) hardly any extra capital. The results were downward pressure on real wages in the West, lower prices, and a tendency to weak aggregate demand, leading to a regime of extremely low interest rates. This culminated in the Global Financial Crisis (GFC), followed by the Great Recession, the worst downturn since the Great Depression of the 1930s. In fact, it is easy to understand why people thinking along these lines would believe that the robot shock will be worse than the China shock.

Fed Up: An Insider's Take on Why the Federal Reserve Is Bad for America
by Danielle Dimartino Booth
Published 14 Feb 2017

The second stated goal of ultralow interest rates was job creation. “Healthy investment returns cannot be sustained in a weak economy and of course it is difficult to save for retirement or other goals without the income from a job,” Bernanke said at the same press conference. “Thus, while low interest rates do impose some costs, Americans will ultimately benefit most from the healthy and growing economy that low interest rates help promote.” But that healthy and growing economy didn’t happen. So savers were getting hammered for no good reason for the benefit of rich people. By December 2012, the Fed was pumping $85 billion a month into the economy: $40 billion in mortgage-backed securities and $45 billion in Treasuries.

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Though they might not be able to name the Fed as the party rigging the game, their instincts remind them about the old adage: Fool me once, shame on you. Fool me twice, shame on me. As for those mom-and-pop investors who remain in the market, they have little chance of escaping Fed policy because their assets are tied up in expensive and rigid 401(k) plans that emphasize index funds. The Fed’s artificially low interest-rate level has distorted the relationship between stocks and bonds. Rather than one providing cover when the other is in distress, asset classes have increasingly moved in concert. And though portfolio advisers make it sound safe, index investing will prove disastrous when markets finally correct.

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But by August 2003, I was truly alarmed. The greatest real estate market in history, on a tear since 1991, had peaked in July 2003, with annual sales of existing homes reaching a record high of 6.12 million. The Fed’s fingerprints were all over this boom, and not just because of Greenspan’s low interest rates. In 1993, in response to initiatives by the Clinton administration to make housing more affordable for minorities and the poor, the Boston Fed produced a widely circulated paper called “Closing the Gap: A Guide to Equal Opportunity Lending.” “Lack of credit history should not be seen as a negative factor” in obtaining a mortgage, the Boston Fed guide noted.

The Great Economists: How Their Ideas Can Help Us Today
by Linda Yueh
Published 15 Mar 2018

During the economic boom of the 1950s in the United States, the top 1 per cent did only a little better than the rest, gaining some 5 per cent of the increased income. But since the Great Recession, the top 1 per cent have accounted for 95 per cent of the income gain, leaving the bottom 99 per cent with just 5 per cent of the gain between them. During recessionary periods, low interest rates make borrowing cheap and drive a recovery which typically boosts stocks. US markets have hit numerous record highs since the 2008 crisis, and such gains predominately go to the half of US households who own stocks. Of the richest 10 per cent of US households, 93 per cent own shares while it’s just 11 per cent among the poorest quintile of households.

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Roosevelt’s US National Industrial Recovery Act of 1933, commonly known as the New Deal, would improve the banking system and transport infrastructure of America, but the amount of government spending or fiscal stimulus injected under FDR’s plan was much smaller than the 11 per cent of GDP or national output Keynes believed was needed. Thus, he was critical of the legislation for putting reform before recovery. Britain was even worse in Keynes’s view. The UK government balanced the budget. Despite the lack of government support, a combination of exchange depreciation and low interest rates brought about a recovery. But it was temporary. In 1937–38, both economies once again fell into sharp recession. Like now, there was a heated debate over what more spending would mean for the budget deficit and high levels of government debt. A budget deficit arises if the government spends more than it receives in a given year.

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The combination of slow growth and low borrowing costs has added a new dimension to the austerity debate. Should governments be taking greater advantage of cheap rates to invest? Should budget deficits and debt be a secondary consideration when economic growth remains sluggish? Investment and low interest rates This question is being asked in both Europe and the US. In America, there is a push for more infrastructure investment, although the Republicans in Congress remain concerned about adding to the fiscal deficit. Of course, Republicans traditionally follow a non-interventionist philosophy, and are suspicious about the role of government in both investment and the economy in general.

The Production of Money: How to Break the Power of Banks
by Ann Pettifor
Published 27 Mar 2017

The OECD warned policy-makers several times in 2016 to ‘act now! To keep promises’ – and to expand public spending and investment. In June 2016 the OECD made the sensible case that ‘monetary policy alone cannot break out of [the] low-growth trap and may be overburdened. Fiscal space is eased with low interest rates.’ Governments were urged to use ‘public investment to support growth’.6 But these new, late converts to fiscal expansion may just as well have banged their heads against a brick wall, for all the listening done by the US Congress and by neoliberal finance ministers such as Germany’s Wolfgang Schäuble, Finland’s Alexander Stubb, or Britain’s George Osborne.

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In Spain and Portugal, the recognised losses are already more than 10 percent, but the numbers will almost certainly be higher. Non-performing loans are also rising rapidly in Italy. Germany is an interesting case. The German banking system appears healthy at first sight. It certainly fulfils its function of providing the private sector with credit at low interest rates. But I still find it hard to believe that the German banking system as a whole is solvent.18 Instead, Münchau wrote, regulators ‘pretend not to see the losses, and extend the crisis’. As a result, speculation by the private finance sector was once again unleashed and new asset bubbles created – these inflated the prices of stocks and shares, bonds, property, works of art, and the like.

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The task he set himself in his General Theory of Employment, Interest and Money was to devise a theory of an economy based on a correct understanding of money.10 In it, Keynes’s conclusions about practical policy were vastly different from those of his contemporaries, and from their successors in today’s economic establishment. Keynes recognised that the monetary system should be steered away from serving particular vested or class interests, and be repositioned to serve the needs of society as a whole. This understanding led to policies for permanently low interest rates during the Second World War, near full employment after the war, a thriving private and public sector, financial stability in the post-war period, and the unprecedented narrowing of income distribution. Predictably perhaps, his policies did not endure. And with his policies, went his theory and, once more, the understanding of money.

Limitless: The Federal Reserve Takes on a New Age of Crisis
by Jeanna Smialek
Published 27 Feb 2023

New York Times, October 31. Kelly, Kate, Andrew Ross Sorkin, and Jeanna Smialek. 2020. “As Market Convulses, Big Banks Plan to Borrow Funds from Fed.” New York Times, March 16. Kiley, Michael T., and John M. Roberts. 2017. “Monetary Policy in a Low Interest Rate World.” Brookings Institution, March 23. https://www.brookings.edu/​bpea-articles/​monetary-policy-in-a-low-interest-rate-world/. Kornblut, Anne E. 2008. “At Sidwell Friends School, Obamas Will Encounter Parents from Clinton Campaign.” Washington Post, December 12. Krugman, Paul. 2001. “Reckonings; Et Tu, Alan?” New York Times, January 28. Kuttner, Robert. 2020.

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Powell, a man with flawless gray suits and an extra eight or nine inches, evidently fit the mold better. Whether Yellen’s appearance really weighed heavily on the president’s mind is hard to know. It is more clearly the case that Trump liked Yellen but felt from the outset that it would be better to have his own person in the job. At the same time, Trump liked low interest rates: He was a property developer, after all, and real estate was one of the biggest beneficiaries of cheap money. It was hard to find someone with conservative credentials who could match Yellen’s stance on monetary policy. Powell more or less fit that bill. While he was not an unwavering fan of extensive help for the economy—during his early years as a Fed governor, he had internally questioned the Fed’s policy of buying huge quantities of bonds out of concern that it might fuel financial instability—he was mostly aligned with the chair by 2017.

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He could charge less, trade more, and earn bigger profits by leveraging his capital, helping to expand not only his own economic pie but also that of the nation to which he belonged. To unleash that prosperity machine, a country needed a stable banking system that could make large amounts of capital available at relatively low interest rates. It was America’s combination of financial inefficiency and regular meltdowns that helped to spur another attempt at central banking. The catalyst came in 1906, when a massive earthquake tore San Francisco asunder, killing three thousand people, leaving sections of the city in ruins, and touching off instability in global money markets as foreign insurers scrambled for cash so that they could pay claims on California policies.

The Shifts and the Shocks: What We've Learned--And Have Still to Learn--From the Financial Crisis
by Martin Wolf
Published 24 Nov 2015

That, as we will see in Chapter Eight, makes good sense if interest rates are close to zero and yet are inducing no strong recovery in demand. Figure 29. Central Bank Short-term Policy Rates (per cent) Source: Thomson Reuters Datastream In brief, Mr Bernanke’s global savings glut would be visible in a combination of two phenomena: weak economies and/or low interest rates. Today, this combination is precisely what we see in the high-income countries: ultra-low interest rates and recessionary conditions, with high unemployment. A global savings glut is also a condition of chronic excess supply. In a provocative recent book, Daniel Alpert, an investment banker, properly calls the present ‘the age of oversupply’.12 The ultra-low short-term interest rates are offered by the central banks.

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It could take many more years to finish an orderly deleveraging in the UK and Spain.’29 In brief, what is needed to handle the debt overhang is a strategy for demand expansion, low interest rates, reconstruction of the financial system, and restructuring and reduction of non-financial debts. Of the big countries, the US has come closest to this combination, though the others have been slowly and painfully following behind. Inevitably, creditors do not like the strategy of low interest rates and debt restructuring. Yet what they want – all borrowers to pay high interest rates in full and punctually – they cannot now have. If a boom has created more credit and debt than can be sustained, the stock of claims, the returns upon them, or both, must be reduced.

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The great nineteenth-century British journalist, Walter Bagehot, describes what happens perfectly: ‘at particular times a great deal of stupid people have a great deal of stupid money … At intervals … the money of these people – the blind capital, as we call it, of the country – is particularly large and craving; it seeks for someone to devour it, and there is a “plethora”; it finds someone, and there is “speculation”; it is devoured, and there is “panic”.’51 As I have noted above, the main feature the deficit countries had in common was the ability to fund large and, in some cases, enormous current-account deficits at very low interest rates. It turned out that it did not make that much difference if the domestic counterpart of these deficits was entirely a huge private-sector financial deficit (as in Ireland and Spain) or a mixture of private and public deficits (as in Greece and Portugal). Italy did not have large external or fiscal deficits: its problems were mainly due to the scale of the public debt accumulated in the 1980s and 1990s, before it joined the euro.

The New Depression: The Breakdown of the Paper Money Economy
by Richard Duncan
Published 2 Apr 2012

How much money the Fed prints during 2013 and 2014 will be determined by how much of the government’s budget deficit the private sector is willing to finance at low interest rates. The Fed will have to monetize the shortfall. This question cannot be answered with any degree of certainty. However, one of the lessons that should be understood from the economic crisis in Japan is that when big economic bubbles pop, the private sector has nowhere safe to invest all the money that it made during the bubble years. Therefore, the private sector is happy to invest that money (as well as its large annual cash flow) into government bonds even at very low interest rates. That explains why the Japanese government has been able to increase its level of debt relative to GDP from 60 percent when the crisis began in 1990 to approximately 230 percent at the end of 2011, while the interest rate it pays to borrow money for 10 years is still only around 1 percent a year.

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Over the following five quarters, credit contracted by $936 billion to $51.8 trillion. (See Exhibit 5.1.) It then began to expand again as the result of an extraordinary increase in government debt and an astonishing expansion of the central bank’s balance sheet (which was needed to finance the increase in the government’s debt at low interest rates). At the time of writing, TCMD had not quite expanded to its previous peak. Neither has U.S. GDP. EXHIBIT 5.1 Total Credit Market Debt Not Yet Back to Its Peak Source: Federal Reserve, Flow of Funds Accounts of the United States, second quarter 2011 The federal government expanded its debt by $4.4 trillion (by 83 percent) between mid-2008 and the first quarter of 2011.

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At a time when a large section of American society is demanding that the government spend less, it is crucial for everyone to understand that less government spending means that the U.S. economy will become smaller and that unemployment will rise. The economy no longer functions as it did when gold was money. The Role of the Trade Deficit For 12 years the U.S. current account deficit financed the U.S. budget deficit, and financed it at low interest rates. (The current account is composed primarily of the balance of trade, but also includes the balance of income and current transfers.) As described in Chapter 2, every country’s balance of payments must balance. Therefore, a country with a large current account deficit will also have a large, offsetting inflow of capital on its financial account.

Broken Markets: A User's Guide to the Post-Finance Economy
by Kevin Mellyn
Published 18 Jun 2012

Besides the Great Depression, we have the benefit of several smaller B movies—banking implosions limited to one country. (The biggest headliner is the Japanese financial crisis of the 1990s.) Finally, we have the most recent version, the financial market meltdown of 2008, though the shooting is not yet complete. The plot summary goes like this. Download from Wow! eBook <www.wowebook.com> Scene One Low interest rates and easy money encourage overinvestment and speculation that gradually builds into a boom or mania. Usually this is led by one investment type or asset class, such as common stock in the 1920s. But as optimism spreads through the economy, all asset prices go up. There are no bad investments in a boom.

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The first thing that has to happen after a financial meltdown is that banks, which had basically burned through their capital before being rescued by the state, need to make lots of money. They need to rebuild their capital out of earnings before investors feel comfortable buying their shares. And they need to do so safely, since they can’t be seen returning to the casino to restore their fortunes. As I said above, the policy of ultra-low interest rates and massive government borrowing built in a chance to make piles of risk-free money for the big banks that play in the bond market. However, treasury and trading are not big sources of profits at the average regional banks, much less the thousands of smaller institutions. With unemployment high and households buried in debt, lending to consumers was too risky, and banks were under pressure from their regulators to tighten standards even as the politicians demanded they lend.

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Even doubling the value of the RMB in dollar terms would change none of that. On the other hand, removing Chinese savings and reserves from the global financial economy could be catastrophic. The same politicians who bang on about getting tough with China routinely vote for spending that depends on Chinese purchases of US Treasury debt. The super-low interest rates of the Great Moderation sowed the seeds of the asset-price bubbles that led up to the financial market meltdown of 2008 were in part a reflection of too much Chinese money chasing dollar investments. However, going forward, the lack of Chinese investment flows could prove far more dangerous in the current state of the world.

Trillion Dollar Triage: How Jay Powell and the Fed Battled a President and a Pandemic---And Prevented Economic Disaster
by Nick Timiraos
Published 1 Mar 2022

Productivity growth was on an upswing after a two-decade lull, allowing the Fed to hold off on raising interest rates even as the unemployment rate fell to lower levels. Nonetheless, the idea of the natural rate lived on. More than a decade later, Yellen showed no fears about keeping interest rates low. She was a fierce advocate for Bernanke’s easy-money, low-interest-rate policies. In late 2012, when Powell grew nervous that the risks of continued stimulus were outweighing the benefits, Yellen reminded her colleagues of the promises they had made to support a stronger jobs recovery: “We communicated that we will at least keep refilling the punch bowl until the guests have all arrived and will not remove it prematurely before the party is well underway.”23 As vice-chair and then chair, Yellen had borne the brunt of years of unhappiness with the Fed’s post-crisis policies, including at a testy three-hour congressional hearing in February 2015.

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Trump announced tariffs on China, claiming “trade wars are good and easy to win.” Cohn quit. His departure removed the strongest shield between the White House and the Fed. It was a sobering reminder that the staff could not ultimately shake Trump from what he believed: Tariffs were good. Trade deficits were bad. Low interest rates were good. High interest rates were bad. In April 2018, outgoing New York Fed President William Dudley spoke for most of the FOMC: “I don’t really think a trade war is a winnable proposition.”12 Cohn’s replacement, the courtly TV host Larry Kudlow, also opposed tariffs, but he was eager to be in a White House job after being passed over for one at the start of the administration.

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Trump wasn’t picking up the phone to yell at Powell, but he was effectively doing the same thing through the media—turning what Truman, Johnson, and Nixon had done privately into a public spectacle. “Every time we do something great, he raises the interest rates,” Trump said of Powell in an interview with The Wall Street Journal on October 23. “How the hell do you compete with that?… He was supposed to be a low-interest rate guy. It’s turned out that he’s not.”4 At Oval Office meetings, Trump erupted at Mnuchin for recommending Powell: “I thought you told me he was going to be good.”5 Even Trump’s advisers ignored these initial verbal broadsides. Powell’s first few rate increases had been widely telegraphed and were universally expected by financial markets.

The End of Wall Street
by Roger Lowenstein
Published 15 Jan 2010

See also credit default swaps premiums on AIG on CDOs purchased by Citigroup premiums on General Electric premiums on Goldman Sachs premiums on Lehman Brothers premiums on Morgan Stanley on mortgage-backed securities premiums on Wachovia insurers, bond. See also specific insurers interest rates adjustable. See adjustable rate mortgages on auto loans Federal Reserve’s on high-yield (junk bond) debt on investment-grade bonds low. See low interest rates short-term for subprime mortgages Internet bubble. See dot-com bubble investing, low interest rates and investment banking death of decline of Ireland Jackson, Michael Japan J.C. Flowers &. Co. Jensen, Michael Jester, Dan Johnson, James Johnson, Lyndon JPMorgan Chase AIG and as banker to Wall Street Bear Stearns and history of Lehman Brothers and Merrill Lynch and Morgan Stanley and subprime mortgages and Washington Mutual and Kaufman, Henry Kelleher, Colm Kelly, Pete Kelly, Robert Keynes, John Maynard Killinger, Kerry Kindler, Robert King, William Kirk, Alex Kohlberg Kravis Roberts Kohn, Donald Korea Korea Development Bank Kovacevich, Richard Kraus, Peter Kronthal, Jeff Kuroyanagi, Nobuo Kyl, Jon Lay, Kenneth Lee, James (Jimmy) Lehman Brothers Alternative-A loans Archstone-Smith Trust and attempt to convert to bank holding company Bank of America and bankruptcy.

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Consumers exhausted their savings and kept on spending (the total of household savings plummeted from 4 percent of the GDP when Clinton took office to negative 4 percent of the GDP by the end of Bush’s first term). Whatever the purpose—a home, a car, a lifestyle enhancement—credit sustained it. If this blissful-seeming period had a downside, it was that investors, who were penalized by low interest rates, which lowered their returns, struggled to find higher-yielding securities. Not just professional investors and corporate CEOs, who routinely complained of a lack of opportunities, but hospital funds, school boards from remote Whitefish Bay, Wisconsin, to those in big cities, university endowments from Harvard’s on down, state pension funds such as California’s—all reached for securities that offered a smidgeon of extra yield.

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Investors did not think of themselves as “reaching,” a term that implies a degree of incaution. They were assured that loans to private equity deals were safe and, certainly, that mortgage pools were safe. But when interest rates are low, the only way for investors as a group to earn more is to assume more risk. The phenomenon of low interest rates was worldwide, but in the search for yield, investors tilted west. China, Japan, Germany and various oil-exporting nations spent less than their income and thus had money to lend. It was their dollars that fueled the credit binge. The United States, the United Kingdom, Spain, and Australia absorbed more than half of the world’s surplus capital; at the manic peak of its borrowing, in the late 2000s, the United States alone sopped up 70 percent.6 The U.S. current account deficit was a perpetual source of worry in international financial circles.

MegaThreats: Ten Dangerous Trends That Imperil Our Future, and How to Survive Them
by Nouriel Roubini
Published 17 Oct 2022

History may not repeat itself—but it often rhymes. Signs abound of another Roaring Twenties. Massive monetary, fiscal, and credit stimulus is feeding financial asset bubbles in global markets. The real economy that produces goods and services is poised to boom for a while, fed by debt arising from low interest rates, ample credit, and enormous economic stimulus by governments. The party will go on until reckless speculation becomes unsustainable, ending with the inevitable collapse in bullish sentiment, a phenomenon called a Minsky moment, named for economist Hyman Minsky. It’s what happens when market watchers suddenly begin to wake up and worry about irrational exuberance.

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By dissecting tendencies on the left and the right to pump up budgets before elections, we discovered that such a practice leads to large budget excesses in industrial economies no matter who’s in charge. Since then, these biases have become much more pronounced and rigid. It’s hard to see how borrowers and lenders will break a habit that scratches an irresistible itch. High interest rates used to give borrowers pause. Sustained low interest rates erased until recently the harsh memory of double-digit inflation last seen four decades ago. Few consumers under sixty years old recall such a climate. In 1981, home buyers signed up for mortgage rates pegged at 10 percent. Since those days, amnesia set in. As inflation receded, attitudes toward cheap debt began to echo MAD magazine’s devil-may-care mascot, Alfred E.

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If I lend to a government at 2 percent for ten years when inflation is 1 percent, then the real return on my investment is 1 percent. But if ex-post (after the fact) inflation turns out to be 10 percent the real return is negative 8 percent. Sensitivity to interest rates governs monetary policy. Sitting on top of towering debt with low interest rates restrains the inclination to raise rates, a step that would cause the value of bonds to fall. But those low rates encourage borrowing and reckless leverage, causing a bigger debt problem down the line. Alternatively, policy makers can impose “financial repression.” The mechanism is complex, but the bottom line answers the prayers of politicians who want to raise cash without riling too many voters.

Stolen: How to Save the World From Financialisation
by Grace Blakeley
Published 9 Sep 2019

The growing attractiveness of monetarism emerged out of Keynesianism’s failure to explain the concurrent increases in inflation and unemployment of the 1970s.18 According to the Phillips Curve, there should have been a trade-off between these two variables — and for most of the post-war period there was — but this relationship broke down in the 1970s. Expanding government spending would have been the solution to rising unemployment, but reducing it would have been the response to inflation — with both happening at the same time, the Keynesians were stuck. Monetarists explained this phenomenon by attributing the rise in inflation to low interest rates and too much government spending. The only way to tackle stagflation was to reduce government spending and raise interest rates to reduce inflation. They argued that, whilst such a course of action might create mass unemployment or cause a recession, this was the price that had to be paid for the greater good of controlling the money supply.

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Some argued that central bank independence was supposed to bring about high interest rates, which would damage industrial capital and promote the interests of finance capital — but under the conditions of financialisation, the situation is much more nuanced. Histori- cally, there has been an assumed dichotomy between the interests of finance capital and those of industrial capital.36 The former has been assumed to prefer high interest rates to maximise the returns on lending, whilst the latter are assumed to prefer low interest rates to allow them to borrow cheaply. But as firms have become financialised, the interests of these two groups have merged.37 Amongst businesses committed to shareholder value, high profits mean high returns for investors, eroding investors’ commitment to high interest rates. Bankers themselves also tend to rely less on high interest rates to make their profits in modern financial systems.

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The guarantee that inflation would be kept relatively low meant that monetary policy could be directed towards inflating asset prices.38 With central bank policy effectively captured by the finance sector, interest rates remained low throughout the 1990s, supporting an expansion in lending and an increase in asset prices. Most commentators agree that low interest rates were a central cause of the dot-com bubble that emerged towards the end of the 1990s, culminating in the crash in the early Noughties. Under financialisation, independent central banks have been able to provide the two macroeconomic conditions that benefitted investors most: low consumer price inflation, and high asset price inflation.

Restarting the Future: How to Fix the Intangible Economy
by Jonathan Haskel and Stian Westlake
Published 4 Apr 2022

As a result, rich countries earn about 25 percent less per capita than they would have earned if twenty-first-century growth had continued at trend rates. Periods of low growth are not in themselves unusual, but our current slump is both protracted and puzzling. It has proved resistant to ultra-low interest rates and a host of unconventional attempts to stimulate the economy. And it coexists with widespread enthusiasm about new technologies and new businesses that exploit them. Inequality. Whether you measure it in terms of wealth or income, inequality has increased considerably since the 1980s and has stayed constant.

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None of these promises were kept, but the fact that they were made at all strongly indicates the popularity of the idea that we should return to “making things” and the suspicion that a lot of modern economic activity is somehow not genuine. Economies and societies have often gone through periods of unease. But the coexistence of the five problems listed here is particularly puzzling and paradoxical. Economic stagnation has affected us before. But today it coexists with low interest rates, high business profits, and a widespread belief that we live in an age of dizzying technological progress. The rise of material inequality has slowed down, but its consequences and sequelae—inequality of status, political polarisation, geographical divides, blighted communities, and premature deaths6—continue to grow.

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In 1930, when he wrote “Economic Possibilities for Our Grandchildren,” he estimated that GDP would grow eightfold between 1930 and 2030.5 Based on growth to date, even excluding the effect of the COVID-19 pandemic, the UK and US economies have managed to grow by a factor of 5 and 6.4, respectively. But the problem with economic growth is not just that it has slowed down. It has slowed down in a way that has defied many standard economic explanations. The weak growth of the early twenty-first century coexisted with low interest rates and, until the COVID-19 crisis, high corporate valuations. Economists call this phenomenon secular stagnation. We can see those high valuations in figure 1.2: Tobin’s Q (a measure of how optimistic investors are about future corporate profits) is not quite at the dizzying heights of the dot-com boom, but it is way above its 1980s lows.

EuroTragedy: A Drama in Nine Acts
by Ashoka Mody
Published 7 May 2018

As could be expected, banks particularly short of capital were the most active in playing this “extend and pretend” game.158 Low interest rates made this cozy “extend and pretend” arrangement especially convenient for “zombie” borrowers, the borrowers who were de facto bankrupt but continued operating simply because their creditors chose not to foreclose on them. Unfortunately, the low interest rates came too late to kick-​start the Japanese economy and, in particular, they did little to revive the zombie borrowers. Such borrowers stayed on life support, happy to have their loans renewed at low interest rates and play along with the fiction that they would eventually repay their debts.

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Dijsselbloem, Jeroen, Olli Rehn, Jörg Asmussen, Klaus Regling, and Werner Hoyer. 2013. “Europe’s Crisis Response Is Showing Results.” Wall Street Journal, October 9. Di Lucido, Katherine, Anna Kovner, and Samantha Zeller. 2017. “Low Interest Rates and Bank Profits.” Liberty Street Economics Blog, Federal Reserve Board of New York, June 21. http://​libertystreeteconomics.newyorkfed.org/​2017/​06/​ low-​interest-​rates-​and-​bank-​profits.html. Dinan, Desmond. 2005. Ever Closer Union: An Introduction to European Integration. 3rd ed. Boulder: Lynne Reinner. Dinmore, Guy. 2012. “Italy Stands Firm in Face of Markets Crisis.”

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The ECB’s focus on price stability was less controversial than the simple fiscal rules were. Some prominent voices, however, did object. Franco Modigliani, an MIT economics professor and Nobel laureate, along with his colleague and fellow Nobel laureate Robert Solow, warned that the ECB’s mandate would make it focus obsessively on keeping inflation low. Interest rates, therefore, would be too high. This, they said, was a problem because European unemployment rates were worryingly high, and a monetary policy that overemphasized price stability would make the unemployment problem worse. They recommended that the ECB follow the Fed and adopt a “dual” mandate so that monetary policy not 90   e u r o t r a g e d y only would reflect inflation concerns but would also proactively (“on an equal footing” with the price-​stability goal) work to increase employment opportunities.

Getting Back to Full Employment: A Better Bargain for Working People
by Dean Baker and Jared Bernstein
Published 14 Nov 2013

We must defund Head Start, public schools, universities, libraries – not to mention our own employment opportunities. This absurdity is accepted wisdom in today’s fiscal debates, even though the extraordinarily low interest rates at which the government can borrow money would be taken as a signal by any private investor that now is a good time to borrow. If government were run like a business, it would be taking advantage of low interest rates to finance a wide variety of public investments. Franklin Roosevelt did that during the New Deal, undertaking infrastructure projects that still support the economy today. What kinds of work does the federal government need to get done today?

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And it would have prevented the world from recognizing that the economics profession was wrong, since its estimate of the structural rate of unemployment would otherwise never have been tested.[14] As the unemployment rate falls in the years ahead we will face similar controversies. Indeed, prominent voices in the profession claim that the unemployment rates we are now seeing are consistent with the structural rate of unemployment in the economy.[15] From this perspective, efforts by the Fed to boost the economy with low interest rates and quantitative easing, or by Congress to use spending and tax cuts to increase demand, are foolhardy, since they will primarily have the effect of raising the inflation rate while having little impact on output and employment. Their argument is that the downturn represents a fundamental shift in the economy.

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[43] The relationship between interest rates and bond prices can be illustrated with a simple bond calculator such as the one at Smart Money (http://www.smartmoney.com/calculator/bonds/bonds-calculator--bonds--bond-funds-1309988621833/). Since the market value of the bonds issued during the period of low interest rates will fall when interest rates rise, the market value of that portion of the government’s debt will fall, even though the interest burden will be unchanged. If it wanted the government could buy back those bonds, reducing the value of its debt. There would be no real reason to carry through this sort of bond flipping, but if we felt that the value of our debt was an important factor affecting the health of the economy, then buying back bonds at sharp discounts would be a nearly costless way to shave hundreds of billions of dollars off of the national debt

Profiting Without Producing: How Finance Exploits Us All
by Costas Lapavitsas
Published 14 Aug 2013

The affinities with Marxist theory are evident in the writings of Crotty, Pollin, and Epstein, although the strongest influence has come from Keynes rather than Marx.51 In Keynes’s General Theory the rentier is a parasitical economic entity that extracts profits due to the scarcity of capital, and might thus depress investment and profitability for active capitalists.52 Successful capitalism requires the ‘euthanasia of the rentier’ that could be attained through low interest rates. In Marx’s writings, the rentier makes only fleeting appearances, and there are no clear references to a social stratum of rentiers. However, Marx discusses extensively the character and functioning of ‘monied’ capitalists, a category that is strongly reminiscent of rentiers, as is shown in detail in Chapter 5.

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However, these classification problems do not affect the gist of the analysis. 52 See also Federal Reserve Bulletin, ‘The Use of Checks and Other Noncash Payment Instruments in the United States’, December 2002; Federal Reserve Bulletin, ‘Trends in the Use of Payment Instruments in the United States’, Spring 2005; Federal Reserve, ‘The Future of Retail Electronic Payments Systems: Industry Interviews and Analysis’, Staff Study 175, December 2002. 53 See European Central Bank, ‘Electronification of Payments in Europe’, Monthly Bulletin, May 2003. 54 For further analysis of this point, see Costas Lapavitsas and Paulo Dos Santos, ‘Globalization and Contemporary Banking: On the Impact of New Technology’, Contributions to Political Economy 27, 2008, pp. 31–56. 55 Some replacement has of course taken place, though the extent of it remains empirically unclear; see Willem Boeschoten and Gerrit E. Hebbink, ‘Electronic Money, Currency Demand and Seignorage Loss in the G10 Countries’, De Nederlandsche Bank, 1996; Sheri Markose and Yiing Jia Loke, ‘Network Effects on Cash-Card Substitution in Transactions and Low Interest Rate Regimes’, Economic Journal 113, April 2003; Helmut Stix, ‘How Do Debit Cards Affect Cash Demand?’, Working Paper 82, Oesterreichische Nationalbank, 2003; Gene Amromin and Sujit Chakravorti, ‘Debit Card and Cash Usage: A Cross-Country Analysis’, WP 2007–04, Federal Reserve bank of Chicago, 2007. 56 There is much official concern about this issue, see, selectively, BIS, ‘Security of Electronic Money’, August 1996; BIS, ‘International Convergence of Capital Measurement and Capital Standards’, July 1988; and European Central Bank, Electronic Money System Security Objectives, May 2003. 57 See Mathias Drehmann et al., ‘Challenges to Currency’, Economic Policy, April 2002. 58 The possibility of introducing micro-payments has led to lively exchanges often revealing strong ideological opposition to the rule of money on the internet; see, for instance, Clay Shirky, ‘Fame vs Fortune: Micropayments and Free Content’, 5 September 2003, at shirky.com; and Scott McCloud, ‘Misunderstanding Micropayments’, 11 September 2003, at scottmccloud.com. 59 See Article 1(3) of the European Monetary Institute’s Directive 2000/46/EC, which regulates the issuing of e-money in the European Union.

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Unlike lending to particular enterprises, furthermore, the risk premium attached would tend to be low, reflecting the social character of the creditworthiness of the state. On the other hand, fluctuations of state indebtedness would also typically affect the rate of interest and could induce capital gains for bondholders. A rapid switch to a low-interest rate regime, in particular, could be the cause of sudden escalation of financial profits, and thus of enrichment of state bondholders out of the money income of society as a whole. Even more difficult problems, finally, would emerge for profits relating to financial securities that were the liabilities of workers.

Endless Money: The Moral Hazards of Socialism
by William Baker and Addison Wiggin
Published 2 Nov 2009

But by then the U.K. held just 3 percent of world gold reserves, setting the stage for the spectacular failure of the gold exchange standard in 1931.38 Still, this conventional conclusion fails to account for what would follow, a tectonic shift to America, which through unsound policy likewise would gradually debase gold during the interwar years. Most observers date the global end of the gold standard at 1931. Actually the United States and Britain merely substituted devaluation (and at least initially sterilization with low interest rates) for the old rules of the game that had demanded a pro-cyclical interest rate policy. This was followed by gold hoarding. From 1925 to 1945 Britain’s central bank gold holdings rose 64 percent, and those of the U.S. Treasury nearly tripled.39 The United States and French sterilization of their abundant gold inflows in particular forced other countries to abandon gold altogether or feel a disproportionate transmission of deflation.

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While the observations of Higgs are trenchant, if one instead views the period through the simpler explanation of Fisher’s debt deflation theory, the recovery from the Great Depression can be explained by economic actors having repaid debt or had debt extinguished through bankruptcy by 1942, making them feel freer to make use of low interest rates and exploit profitable business expansion. In 1942 total debt including federal, state, and household had fallen to less than 160 percent of GDP from a peak of 300 percent in 1932. That low level had not been seen since 1918, well before the roaring twenties. No econometric regression analysis could detect this sort of causation, because in the years leading up to the big turn in the economy decreasing leverage would be coincident with weakening consumer demand and increasing savings.

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And the ideology, mentalité and rhetoric of the gold standard led policy makers to take actions that only accentuated economic distress in the 1930s. 108 ENDLESS MONEY Central bankers continued to kick the world economy while it was down until it lost consciousness.”34 Having gained notoriety for helping to solve the riddle by being one of the several economists who jumped on the exchange rate transmission thesis bandwagon, in 2003 Eichengreen joined forces with another economist, Kris Mitchener, to pen The Great Depression as a Credit Boom Gone Wrong, which sets about to put to bed a competing thesis gaining attention in the wake of the bursting of the Internet bubble at the turn of the millennium. That thesis comes from the Austrian School, which instead squares the blame on the Depression and on the role of cheap (low-interest rate) money encouraging a massive credit bubble that would implode of its own weight. Rearranging regression variables as deftly as Martha Arguerich would play notes in a piano concerto, the duo vainly struggled to produce statistical significance that credit accumulation explicates the Depression, and at best conclude that “the point is evident in the fact that the credit boom indicator explains less than a third of the cross-country variation in the post-1929 slump in economic activity.”35 Case closed: A managed money system beats gold.

Borrow: The American Way of Debt
by Louis Hyman
Published 24 Jan 2012

For business and religious reasons, during most of Western history, though loans existed, charging interest on them—usury—was a sin, forbidden to most members of society. Our country was born into a world already capitalist, and the authority of our federal government, in one sense, emerged from the need for somebody to deal with the debts incurred during the Revolution. For everyday people, however, usury laws remained, and an untenably low interest rate ceiling restricted the flow of legal cash loans to a trickle. This debt—installment credit, ethnic lending circles, and loan sharks—existed outside the main flows of capital, yet for the borrowers involved—whether from rural Illinois or rural Sicily—access to credit made their lives in the city possible.

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By 1983, stock prices had barely recovered to their pre-1973 crash height, and, after adjusting for inflation, they actually hadn’t. For home owners, the late 1970s were a tremendous boon. Most home owners made a bucket of cash during the 1970s from the rapid inflation. Home owners who borrowed in the late 1960s with low interest rates had enjoyed a decade or more of inflation. Inflation might be bad for creditors, but it is great for debtors. Nominally, the house bought for $25,000 in 1970 would be worth $75,000 in 1985, but the home owner would still only be paying the mortgage on $25,000. The $50,000 just sat there. Though the rising price of houses made for a good “investment,” houses were not investments in the classic meaning of the word.

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While unions struggled to keep jobs in the United States and many American businesses found it hard to get a bank loan, unions and businesses could agree on one thing: credit cards for everyone. In the mid-1990s, the Bank of New York pitched members of the AFL-CIO a special card. Offered through Union Privilege, which negotiated discounts for union members, the card featured the profitable lack of a grace period but had a relatively low interest rate of prime plus 5 percent (13.25 percent in 1996).21 In 1996, for $575 million, Bank of New York sold the union credit card debt—with $3.4 billion in receivables—to the subprime lender Household International, a deal that elevated Household to the seventh largest credit card issuer in the U.S.22 Though the 2.2 million unionists who held the card may have found it difficult to organize for better wages, they could at least be sure of getting a gold card with “free car-rental insurance, roadside emergency auto service, a retail purchase-protection plan, and extended product warranties” that protected them as consumers in a way that Reagan-era unions could not protect them as workers.23 And of course, all those hard-won union pension funds earned a good return by investing in their own members’ debt.

How Boards Work: And How They Can Work Better in a Chaotic World
by Dambisa Moyo
Published 3 May 2021

Management might opine, for example, on upcoming interest-rate hikes that could increase the company’s cost of operation, inflationary pressures that threaten to raise the costs of wages and production, and economic growth improvements that could improve the trajectory of the company’s revenue. One illustration of how macroeconomic shifts can create threats, opportunities, and crucial decision points can be seen in boards’ responses to the historically low interest rates that have persisted in the United States and Europe since the 2008 global financial crisis. These low rates have forced boards to decide whether they should borrow cheaply to invest in growing the business through innovation or entering new markets. However, given the unusual economic circumstances that companies have faced in this period—including the dim prospects for global growth and unsustainable levels of government borrowing—boards were obliged to think long and hard about the wisdom of borrowing so aggressively, knowing full well that their corporations could soon face higher tax bills from overstretched governments.

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Taking this information into account, board members must also discern whether a business unit is of long-term strategic value to ensure that the company remains profitable through economic cycles. For example, universal banking is a business model where banks maintain both retail and corporate clients, allowing them to make profits through periods of both high and low interest rates. In periods of high rates, individuals tend to borrow less, taking out fewer loans and mortgages and spending less on credit cards. The retail arm suffers as a result. However, high rates tend to produce higher M&A activity, as stronger companies acquire weaker ones, to the benefit of investment banks.

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If a government simply imposes too many restrictive conditions, competition in a local market can become untenable. Google effectively shut down its Chinese search engine in 2010 after a cyberattack from within the country targeted it and dozens of other companies. The increasingly siloed world also threatens how companies fund themselves. A “carry trade” is a strategy of borrowing at low interest rates in developed countries and investing in higher-yielding emerging markets. It is a strategy that many businesses engage in, but it may become increasingly untenable in the years ahead. The climate of global retrenchment has led to rising capital controls, which can hamper a company’s ability to move money to its business units in other countries and repatriate any profits to pay its shareholders.

The Euro: How a Common Currency Threatens the Future of Europe
by Joseph E. Stiglitz and Alex Hyde-White
Published 24 Oct 2016

Lenders somehow thought that the elimination of exchange-rate risk meant the elimination of all risk. This was reflected in the low interest rates that these countries had to pay to borrow. By 2005, the risk premium on Greek bonds (relative to German bonds—that is, the amount extra that had to be paid to compensate for market participants’ perception of the higher risk of Greek bonds) fell to a miniscule 0.2 percent; on Italian bonds, it also dropped to 0.2 percent; on Spanish bonds, to 0.001 percent.34 The low interest rates at which funds were available in Spain (combined with the euro-euphoria, the belief that the euro had opened up a new era of prosperity and stability) helped create a real estate bubble; in the years before the 2008 crisis, more homes were constructed in Spain than in France, Germany, and Ireland combined.35 The real estate bubble distorted the Spanish economy.

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But the individual US states differ markedly—there are agricultural states and industrial ones; there are those that are helped by a fall in oil prices and those that are hurt; there are states that are chronically borrowing from others and some that are net lenders. These differences give rise to major differences in perspectives about economic policy: states that are net debtors and in which manufacturing is important typically argue for low interest rates, while the creditor states, with a large financial sector, argue for high interest rates. There is a long-standing distinction between Wall Street and Main Street. So while similarity might be sufficient for the success of a currency area, it is hardly necessary. There are three important adjustment mechanisms within the United States that enable the single-currency system to work.

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There could be a requirement, too, that, except when the economy is in recession, any increase in debt over a certain level be subject to a referendum within the country. The position of some in Europe against such mutualization—claiming that Europe is not a transfer union—is wrong on two counts: 1. It exaggerates the risk of default, at least the risks of default if debt is mutualized. At low interest rates, most of the crisis countries should have no trouble servicing their debts. Of course, in the absence of debt mutualization, there is a serious risk of partial default (which has already happened in the case of Greece). The irony is that existing arrangements may actually lead to larger losses on the part of creditor countries than a system of well-designed mutualization. 2.

How to Kick Ass on Wall Street
by Andy Kessler
Published 4 Jun 2012

The neat thing about derivatives is that no one but the person who created them knows what they’re worth, so you can sell them at huge markups. Woo-hoo. Huge departments were created and staffed up all over Wall Street to securitize anything that moved. This is why over half of Princeton’s graduating classes in the mid 2000’s ended up on Wall Street. With the Fed forcing low interest rates, the higher the yield of these funky new securities, the better. Sub-prime home mortgages, because of higher risk (ooh, don’t say that word) had high yields and moved to the top of the list. When not enough of these loans could be bought from banks, firms like Bear Stearns and Lehman set up entire loan origination subsidiaries, and in true Wall Street style, were aggressive and quickly rose to the top of the market share tables.

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What the heck do you do with $700 billion and still make 70% margins on revenues (with that 50-20 employee-shareholder split)? Their customers were making great money buying Wall Street’s derivatives. Why should banks and pension funds and hedge funds have all the fun? What a perfect use for all that capital on their huge balance sheets and cheap financing from low interest rates. Wall Street, en masse, just bought these high yielding derivatives for their own account. Ate their own dog food, if you will. This, of course, was a major dumb shit move. The sausage maker, who knows what goes into the sausage, never eats his own sausage. * * * It was the easy trade.

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Momentum investing. I’ll invest in Pets.com because dotcom stocks only go up (because there wasn’t much liquidity and every growth fund piled in). I’ll make take on another sub-prime loan derivative in my portfolio because home prices can’t go down, (because the Fed is so accommodative with low interest rates and this whole housing finance monstrosity is too big to fail, or so went the thinking.) Momo-ism almost always leads to losses. As efficient as markets are, there are always misallocation all over the place. You can always find political entrepreneurs who create attractive profits even though they are killing the economic engine.

The Making of Global Capitalism
by Leo Panitch and Sam Gindin
Published 8 Oct 2012

Despite the sheer tenacity of the view, going back to the theories of imperialism a century earlier, that overaccumulation is the source of all capitalist crises, the crisis that erupted in the US in 2007 was not caused by a profit squeeze or collapse of investment due to general overaccumulation in the economy.54 In the US, in particular, profits and investments had recovered strongly since the early 1980s. Nor was it caused by a weakening of the dollar due to the recycling of China’s trade surpluses, as so many had predicted. On the contrary, the enormous foreign purchases of US Treasuries had allowed a low-interest-rate policy to be sustained in the US after the bursting of the “new economy” stock bubble at the beginning of the new century. While this stoked an even greater real-estate bubble, after a brief downturn economic growth and non-residential investment resumed. Indeed, investment was growing significantly in the two years before the onset of the crisis, profits were at a peak, and capacity-utilization in industry had just moved above the historic average.

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Moreover, since unemployment caused by deflation increasingly provoked popular resistance, proclamations by governments that they would adhere to the gold standard no longer evoked confidence from capital itself.31 This contradiction between capitalism and democracy was aggravated by the uncertainties created by the shift in the hierarchy of capitalist states, as the US replaced Britain as the world’s creditor, as well as by the seemingly never-ending negotiations over World War I reparations payments.32 There were tariff adjustments to allow for European imports to the US, but these “were never low enough for the continental countries to manage their balance of payments without serious deflationary consequences”; and the private bank loans that were encouraged and indeed orchestrated by the American state certainly “helped the Europeans to make ends meet until 1929,” but they were not structured in such a way as “to guarantee reproductive investment.”33 In this context, speculation on exchange rates became more common, and economies were consequently left more vulnerable to destabilizing capital outflows. After 1926 the Federal Reserve kept US interest rates low, in order to support sterling following Britain’s return to the gold standard; yet the main effect of low interest rates was to shift funds from bonds to further speculation in already overheated US stock and real-estate markets. Then, when in 1928 the Fed undertook a relatively modest interest-rate increase to dampen this down, it triggered a massive diversion of funds away from foreign loans, with immediate deflationary effects abroad.

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The doubling of productive capacity during the war—and the seven-fold increase that was achieved in machine-tool production—involved many goods and components that could be readily converted to civilian production (from military trucks and airplanes to cars, civilian aircraft, and household appliances). The transition was further aided by easy access to investment funds from banks with wartime savings to lend at low interest rates. By the beginning of 1947 the President’s Report to Congress proudly announced that “profits in most lines of industry and business have been highly rewarding.”63 But since real disposable income had fallen between 1945 and 1947, and increased government expenditures on civilian items compensated for only 11 percent of the decrease in the military budget, the question arose of how the economy’s enormous productive capacity could be sustained.

Extreme Money: Masters of the Universe and the Cult of Risk
by Satyajit Das
Published 14 Oct 2011

Watanabes now wielded similar influence in currency markets. Professional traders, hedge funds, and banks followed Mrs. Watanabe’s actions and mimicked them via the yen carry trade—investors borrowed in yen at low interest rates, converted it into foreign currencies and invested the money at higher rates. Investors enjoyed the carry—the difference between the income (high interest rates in the foreign currency) and the cost of borrowing (low interest rates in yen). Investors played these games with borrowed money. Larry the Liquidator in the film Other People’s Money confesses that he loves one thing more than money: other people’s money.

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In 2007, U.S. citizens were falling behind in payments on their mortgages in record numbers in Gravity Iowa; Mars, Pennsylvania; Paris, Texas; Venus Texas; Earth, Texas; and Saturn, Texas. Since 2000, housing prices in the United States had increased dramatically, driven by a combination of low interest rates, a strong and growing economy, and an innate desire for home ownership. U.S. President George Walker Bush, a former investment banker, set out his administration’s agenda for “an ownership society in America” clearly on December 16, 2003: “We want more people owning their own home. It is in our national interest that more people own their own home.

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You don’t own the tickets but you think that ticket prices will fall before you have to deliver them. If they do, then you buy the ticket for say $160 before the week is out and deliver to the person who bought it for $200, making $40. The carry trade entails borrowing in a currency that has low interest rates. The Japanese yen is a perennial favorite as interest rates there have been close to an anorexic 0.00 percent for many years. You take the money and invest it in something earning more than the interest rate you pay and pocket the difference. You can lose—that’s risk. The thing that you thought would go up comes down, and the thing you thought would come down goes up.

Why Your World Is About to Get a Whole Lot Smaller: Oil and the End of Globalization
by Jeff Rubin
Published 19 May 2009

When low-income workers were getting approved for subprime mortgages, regular folks with better-paying jobs were already getting preapproved credit cards in the mail with twice the spending limit of their existing cards. These types of extravagances exist only in a credit bubble, which in turn requires very low interest rates to finance. Record low interest rates were not only essential to the supply of subprime mortgages, but also in generating the demand for such mortgages in financial markets. The attraction from exotic derivative instruments like CDOs, funded by subprime mortgage payments, were created by the record low interest rates that government securities like Treasury bills were paying. The low inflation dividend from globalization and cheap oil was great if you were a borrower, since it meant you could buy your house with a minimal down payment.

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In Australia, the ratio rose even more dramatically, soaring from just under 100 percent in 2000 to almost 160 percent by 2008, while in Canada, the ratio leapt from just under 100 percent to over 130 percent. In all four countries, not only did household debt grow measurably against income, it did so at an unprecedented pace. And the one thing that all these countries shared in common was a combination of record low interest rates and easy credit. Consumer spending is good for the economy. That’s why governments around the world are begging people to go out and buy fridges. But the thing about high oil prices is that while they raise the price of everything, they transfer those trillions of dollars of new money out of the oil-importing countries, where people spend their entire paychecks each month, to the oil-exporting countries, particularly OPEC countries, where savings rates are as high as 50 percent.

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We saw in the last chapter how cheap energy means cheap transportation, which in turn gives Western consumers access to cheap labor. And that means little inflation. It was cheap oil and the trade negotiators, not the central bankers like Allan Greenspan, that actually wrestled inflation to the ground. Low interest rates come from low inflation, and low inflation comes from globalization. But globalization requires cheap transport costs, and hence cheap oil. As globalization expunged the world of inflation, central banks were free to bring down interest rates, which they quickly did. In that way, not only did falling inflation boost your purchasing power, it also fundamentally boosted your borrowing power.

The Price of Inequality: How Today's Divided Society Endangers Our Future
by Joseph E. Stiglitz
Published 10 Jun 2012

We’ve already mentioned some, but there are many others: taking advantage of asymmetries of information (selling securities that they had designed to fail, but knowing that buyers didn’t know that);10 taking excessive risk—with the government holding a lifeline, bailing them out and assuming the losses, the knowledge of which, incidentally, allows them to borrow at a lower interest rate than they otherwise could; and getting money from the Federal Reserve at low interest rates, now almost zero. But the form of rent seeking that is most egregious—and that has been most perfected in recent years—has been the ability of those in the financial sector to take advantage of the poor and uninformed, as they made enormous amounts of money by preying upon these groups with predatory lending and abusive credit card practices.11 Each poor person might have only a little, but there are so many poor that a little from each amounts to a great deal.

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So too, stronger unions and better education might mitigate the consequences of skill-biased technological change. And it’s not even inevitable that technological change continues in this direction: making firms pay for the environmental consequences of their production might encourage firms to shift away from skill-biased technological change to resource-saving technological change. Low interest rates may encourage firms to robotize, replacing unskilled jobs that can easily be routinized; so alternative macroeconomic and investment policies could slow the pace of the deskilling of our economy. So too, while economists may disagree about the precise role that globalization has played in the increase in inequality, the asymmetries in globalization to which we call attention put workers at a particular disadvantage; and we can manage globalization better, in ways that might lead to less inequality.

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While it is not inevitable that policy makers will respond to the deficiency in demand brought about by the growth in inequality in ways that lead to instability and a waste of resources, it happens often. How the government’s response to weak demand from inequality led to a bubble and even more inequality For instance, the Federal Reserve responded to the 1991 recession with low interest rates and the ready availability of credit, helping to create the tech bubble, a phenomenal increase in the price of technology stocks accompanied by heavy investment in the sector. There was, of course, something real underlying that bubble—technological change, brought about by the communications and computer revolution.

The Asian Financial Crisis 1995–98: Birth of the Age of Debt
by Russell Napier
Published 19 Jul 2021

Changes in the value of the yen had become particularly important at this time because it was the main source of something called ‘carry’. In the age of free capital flows, which had dawned through the 1980s, it was possible to borrow in one currency to invest in the assets of another. This form of investment is known as ‘carry’ and it manifests itself primarily through investors borrowing in currencies with low interest rates to invest in currencies with high interest rates. The investor earns more income than they have to pay in interest, but of course is very vulnerable to loss should the exchange rate of the currency they borrow in appreciate relative to the currency they invest in. For many investors such a form of investment would be classified as too dangerous.

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The consequence was a steady decline in inflation and the BOJ was reducing interest rates in an attempt to bolster economic growth and reverse a recent deflation. For many investors the aggressive scale of this monetary response was likely to continue and as Japanese interest rates declined well below US interest rates, the yen was likely to fall relative to the US dollar. This created an opportunity to borrow yen at very low interest rates and invest them in US dollar-denominated assets and pick up the extra income as profit with limited prospects of currency losses. As long as the yen declined relative to the US dollar, these investors would also secure capital gains from the currency adjustment. What surprised investors was that the yen could weaken while the carry trade also reversed.

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However, the fact that this rally pushed interest rates higher in Thailand, as the local authorities intervened to prevent the capital exodus pushing the baht down relative to the US dollar, should have served as a warning to investors still seeking to profit from the Asian economic miracle. If ‘the miracle’ relied upon low interest rates creating high economic growth, just a change in the direction of capital flows was evidently capable of pushing interest rates higher. The rise in the yen was not the only catalyst that could trigger a reverse of capital flows and tighter monetary policy in Asia. Capital losses on the investments that carry traders held in Asia could also quickly wipe out any profits from an investment that was largely funded by debt.

Paper Promises
by Philip Coggan
Published 1 Dec 2011

In his book The Death of Inflation, economist Roger Bootle cites the cost of a taxi ride, or Hackney carriage, as it was then known.2 In 1694, the same year the Bank of England was founded, the cost was set at one shilling (a twentieth of a pound) a mile. Two centuries later, the rate was at the same level. In 1932, the average level of prices in Britain was slightly below what it had been in 1795, during the Napoleonic Wars. Low inflation also meant low interest rates. In 1888, George Goschen, the British Chancellor of the Exchequer, converted Consols (then the name for government debt) paying 3 per cent into bonds paying 2.5 per cent, reducing the government’s interest bill. In 1896, while William Jennings Bryan was leading his campaign for debtors on the other side of the Atlantic, the yield on Consols fell to its lowest level in history – 2.2 per cent.3 Creditors had no inkling of the problems to come in the twentieth century; they would never be so complacent again.

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And when investors buy the government bonds of another country, their primary motivation may be the soundness of the government’s finances, rather than the likely exchange-rate movement. For those who are depositing money in a foreign bank, or investing very short term, the level of interest rates is likely to be the primary consideration. In the early days of floating exchange rates, low interest rates were associated with strong currencies, and high interest rates with weak ones. That was because high interest rates were usually needed to cope with high inflation and, on a PPP basis, one would expect high inflation currencies to depreciate. The high interest rates were thus needed to compensate investors for the risk of depreciation.

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The penalties designed under the Stability and Growth pact were not applied, not least because the big countries like France and Germany also broke the rules. The ‘one size fits all’ monetary policy led to interest rates that were too low for some countries, creating property booms in both Ireland and Spain. These booms were part of the bubble process that we shall explore in the next chapter. Low interest rates encouraged asset prices to rise in many countries. They created a feeling of euphoria that may have made economic performance look better than it was by masking underlying problems of competitiveness. Crucially, the euro area lacked any mechanism to put pressure on countries that were running a trade deficit.

The Bitcoin Standard: The Decentralized Alternative to Central Banking
by Saifedean Ammous
Published 23 Mar 2018

The constant monetary and fiscal management would naturally lead to the fluctuation of the value of national currencies, resulting in imbalances in trade and capital flows. When a country's currency is devalued, its products become cheaper to foreigners, leading to more goods leaving the country, while holders of the currency seek to purchase foreign currencies to protect themselves from devaluation. As devaluation is usually accompanied by artificially low interest rates, capital seeks exit from the country to go where it can be better rewarded, exacerbating the devaluation of the currency. On the other hand, countries which maintained their currency better than others would thus witness an influx of capital whenever their neighbors devalued, leading to their currency appreciating further.

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When it comes to investment, sound money creates an economic environment where any positive rate of return will be favorable to the investor, as the monetary unit is likely to hold onto its value, if not appreciate, thus strengthening the incentive to invest. With unsound money, on the other hand, only returns that are higher than the rate of depreciation of the currency will be positive in real terms, creating incentives for high‐return but high‐risk investment and spending. Further, as increases in the money supply effectively mean low interest rates, the incentive to save and invest is diminished while the incentive to borrow increases. The track record of the 46‐year experiment with unsound money bears out this conclusion. Savings rates have been declining across the developed countries, dropping to very low levels, while personal, municipal, and national debts have increased to levels which would have seemed unimaginable in the past.

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As the central bank manages the money supply and interest rate, there will inevitably be a discrepancy between savings and loanable funds. Central banks are generally trying to spur economic growth and investment and to increase consumption, so they tend to increase the money supply and lower the interest rate, resulting in a larger quantity of loanable funds than savings. At these artificially low interest rates, businesses take on more debt to start projects than savers put aside to finance these investments. In other words, the value of consumption deferred is less than the value of the capital borrowed. Without enough consumption deferred, there will not be enough capital, land, and labor resources diverted away from consumption goods toward higher‐order capital goods at the earliest stages of production.

Stakeholder Capitalism: A Global Economy That Works for Progress, People and Planet
by Klaus Schwab
Published 7 Jan 2021

But if low growth does remain the new normal, which seems likely, there is no easy mechanism for countries to repay their historical debt. Looking away certainly will not solve this problem. Low-Interest Rates and Low Inflation There was one life buoy for low growth and debt until now: low interest rates. Having a low interest on your loan, as many homeowners or student borrowers know, is a blessing. It allows you to pay back your debt without having to worry about the debt load getting larger. Since the financial crisis, central banks have ushered in an era of low lending rates, giving governments, companies, and consumers low interest rates as a form of relief. The goal is to, ultimately, restore higher growth as people consume more, companies invest more, and governments spend more.

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High-quality debt is typically paid back over time—and can likely even provide a return on the investment. Such projects should be encouraged. By contrast, low-quality debt, such as deficit spending to boost consumption, generates no returns, even over time. This type of debt should be avoided. Overall, it is safe to say low-quality debt is on the rise. In part, this is because low interest rates in the West incentivize lending, which discourages borrowers from being careful with their spending. For governments, deficit spending has become the norm in recent decades, rather than the exception. The COVID crisis that erupted in the early months of 2020 hasn't made that picture any rosier.

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Historically, interest rates and inflation tended to be inversely correlated, and central banks used their power to set interest rates as a tool to either curb inflation or stimulate it. By setting high interest rates, central banks gave people, companies, and governments an incentive to save money rather than spend it, easing upward pressure on prices. By setting low interest rates, they gave people the reverse incentive, namely to spend money and push up prices, since saving it wouldn't yield interest anyway. Since about a decade, however, this inverse correlation has all but ceased to exist in the West, with the situation particularly dire in Europe and Japan. Despite years of near-zero interest rates, inflation often remained close to zero as well.

Stakeholder Capitalism: A Global Economy That Works for Progress, People and Planet
by Klaus Schwab and Peter Vanham
Published 27 Jan 2021

But if low growth does remain the new normal, which seems likely, there is no easy mechanism for countries to repay their historical debt. Looking away certainly will not solve this problem. Low-Interest Rates and Low Inflation There was one life buoy for low growth and debt until now: low interest rates. Having a low interest on your loan, as many homeowners or student borrowers know, is a blessing. It allows you to pay back your debt without having to worry about the debt load getting larger. Since the financial crisis, central banks have ushered in an era of low lending rates, giving governments, companies, and consumers low interest rates as a form of relief. The goal is to, ultimately, restore higher growth as people consume more, companies invest more, and governments spend more.

…

High-quality debt is typically paid back over time—and can likely even provide a return on the investment. Such projects should be encouraged. By contrast, low-quality debt, such as deficit spending to boost consumption, generates no returns, even over time. This type of debt should be avoided. Overall, it is safe to say low-quality debt is on the rise. In part, this is because low interest rates in the West incentivize lending, which discourages borrowers from being careful with their spending. For governments, deficit spending has become the norm in recent decades, rather than the exception. The COVID crisis that erupted in the early months of 2020 hasn't made that picture any rosier.

…

Historically, interest rates and inflation tended to be inversely correlated, and central banks used their power to set interest rates as a tool to either curb inflation or stimulate it. By setting high interest rates, central banks gave people, companies, and governments an incentive to save money rather than spend it, easing upward pressure on prices. By setting low interest rates, they gave people the reverse incentive, namely to spend money and push up prices, since saving it wouldn't yield interest anyway. Since about a decade, however, this inverse correlation has all but ceased to exist in the West, with the situation particularly dire in Europe and Japan. Despite years of near-zero interest rates, inflation often remained close to zero as well.

Walk Away
by Douglas E. French
Published 1 Mar 2011

A hot land market will dictate short escrows of 90 to 180 days, whereas in a typical market, escrows of a year or more are not uncommon. A key factor in how much is offered in price for the land is the interest rate to be paid on the loan used to purchase the parcel. Low interest rates allow the developer to pay higher prices. Low interest rates also allow for the developer to take on more political and development risk. The political risk is the uncertainty that the builder will obtain the zoning necessary to build the number and type of units contemplated when the land was being considered for purchase.

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Horizontal development costs can change dramatically during this process, as city hall may impose improvements that hadn’t been contemplated as well as cost increases caused by increased demand for dirt moving, utility trenching, and street paving. And since most of the costs of developing finished building lots is financed, low interest rates make more projects feasible than high interest rates, not only from a cost standpoint but also from a time standpoint. The interest for development and construction projects is financed—it is borrowed—just like the soft and hard costs associated with the development, thus the lower the interest rate, the longer the project has before it must be converted to a consumer good.

Slouching Towards Utopia: An Economic History of the Twentieth Century
by J. Bradford Delong
Published 6 Apr 2020

v=HZCcSTz1qLo. 27. Lawrence Summers, “The Age of Secular Stagnation,” Foreign Affairs, March/April 2016, www.foreignaffairs.com/articles/united-states/2016-02-15/age-secular-stagnation. 28. See Olivier J. Blanchard, “Public Debt and Low Interest Rates,” American Economic Association, January 4, 2019, www.aeaweb.org/webcasts/2019/aea-presidential-address-public-debt-and-low-interest-rates. 29. Barack Obama, “Remarks by the President in State of the Union Address,” White House, President Barack Obama, January 27, 2010, https://obamawhitehouse.archives.gov/the-press-office/remarks-president-state-union-address. 30.

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The world’s governments, with their national economies, were all poorer than they had been in 1914, but the urge to spend was strong. The right did not dare resist it. The left did not have enough of an electoral mandate to make the rich pay. Financiers did not have the confidence to fill the gap by holding the resulting debt at low interest rates. The result was that the fiscal theory of the price level came into play—and inflation. From a narrow economists’ perspective, inflation is simply a tax, a rearrangement, and a confusion. It is a tax on cash, because your cash becomes worth less between when you acquire it and when you spend it.

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Fourth, divide the current payout of the asset—its bond coupon or stock dividend payment—by the adjusted yield factor. This gives the price the asset should sell for. Americans in the 1920s who bothered to do all four steps did so with presumptions that told them the asset’s price had to go up. The result was widespread faith in the permanent “new era” of low risks, low-interest rates produced by successful macroeconomic stabilization, rapid growth produced by new technology, and confidence that in the future, depressions would be few and small. Concretely, this meant very high prices for financial assets, especially stocks, and especially stock in high-tech companies. Monetary economist (and Prohibition enthusiast) Irving Fisher ruined his reputation as an economic forecaster for all time with his late-1929 declaration that “stock prices have reached what looks like a permanently high plateau.”

What's Next?: Unconventional Wisdom on the Future of the World Economy
by David Hale and Lyric Hughes Hale
Published 23 May 2011

Joshua Mendelsohn believes that Canada’s economy is showing clear signs of recovery that will continue. Canada has benefitted from having a stronger banking system than the United States and has avoided reckless property lending. The Canadian household sector is less leveraged than US households. Home sales rose sharply in early 2010 because of record low interest rates. Canada is also in a far better fiscal position than the United States. After several years of the government running fiscal surpluses, the public debt share of GDP fell to 21.7 percent in 2008, which is the lowest of any OECD (Organization for Economic Cooperation and Development) country.

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When these factors converge, they generate network effects in which the greater the number of people that are using the currency, the more beneficial it becomes for the users, and the more dominant it becomes. He thinks that the euro is not fully competitive with the dollar because there is no market for European government debt. Instead, investors have to choose between the debts of individual nation-states, of which the largest debtor is Italy. The yen suffers from the low interest rates in Japan and growing investor concern about the credit quality of Japanese government debt. The public debt will soon exceed 200 percent of GDP, and massive fiscal deficits will loom in the future. Greenwood does not regard the Special Drawing Rights (SDR) as a serious alternative to the dollar because there is no market for SDR securities.

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South African output has slumped while China, Australia, and other African countries have been producing more, but total output has been static. There are three factors that will determine the intermediate-term outlook for the gold price. The first will be how long central banks restrain interest rates to promote economic recovery. Low interest rates have traditionally been positive for gold. The second factor will be investor confidence in the dollar. Investors will be very concerned about how the United States resolves the problem of its fiscal deficits and how the Fed conducts monetary policy. The third factor will be Chinese demand for gold.

Arguing With Zombies: Economics, Politics, and the Fight for a Better Future
by Paul Krugman
Published 28 Jan 2020

Rents rose much more slowly than prices: the Bureau of Labor Statistics index of “owners’ equivalent rent” rose only 27 percent from late 1999 to late 2004. Business Week reports that by 2004 the cost of renting a house in San Diego was only 40 percent of the cost of owning a similar house—even taking into account low interest rates on mortgages. So it makes sense to buy in San Diego only if you believe that prices will keep rising rapidly, generating big capital gains. That’s pretty much the definition of a bubble. Bubbles end when people stop believing that big capital gains are a sure thing. That’s what happened in San Diego at the end of its last housing bubble: after a rapid rise, house prices peaked in 1990.

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But some economists, led by John Maynard Keynes, argued that the failure had much shallower causes than, say, Marxists insisted—that they were fairly narrow and had what amounted to technocratic solutions. “We have magneto [alternator] trouble,” he insisted, not a defunct engine. He also declared that his analysis was “moderately conservative” in its implications. Slumps could be fought with appropriate government policies: low interest rates for relatively mild recessions, deficit spending for deeper downturns. And given these policies, much of the rest of the economy could be left up to markets. Indeed, this position—call it free-market Keynesianism—became more or less the standard view of U.S. economists, especially after the publication of Paul Samuelson’s groundbreaking textbook in 1948.

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A complete cynic might have expected economists who denounced budget deficits and easy money under a Democrat to suddenly reverse position under a Republican president. And that total cynic would have been exactly right. After years of hysteria about the evils of debt, establishment Republican economists enthusiastically endorsed a budget-busting tax cut. After denouncing easy-money policies when unemployment was sky-high, some echoed Trump’s demands for low interest rates with unemployment under 4 percent—and the rest remained conspicuously silent. What explains this epidemic of bad faith? Some of it is clearly ambition on the part of conservative economists still hoping for high-profile appointments. Some of it, I suspect, may be just the desire to stay on the inside with powerful people.

Who Needs the Fed?: What Taylor Swift, Uber, and Robots Tell Us About Money, Credit, and Why We Should Abolish America's Central Bank
by John Tamny
Published 30 Apr 2016

The page’s editors marveled at how Swift taught them “a good lesson about intellectual property rights—and the danger of taking on a woman who knows what she’s worth.”1 Swift also provided the world with a great lesson about credit. Economists frequently act as though cheap credit can be decreed through an announcement from the Fed of a “low” interest rate. Swift’s pointedly open letter to Apple was a reminder that when it comes to credit there’s always and everywhere a buyer and a seller. Apple learned in embarrassing fashion that which doesn’t seem to concern central bankers, who are apparently less sensitive to ridicule. It’s one thing to declare from the commanding heights of government the supply of a market good inexpensive, but it’s the height of folly to assume that those in possession of that market good will give it to buyers for nothing.

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Credit is, again, real resources created in the real economy. At best the Fed’s machinations distorted where certain resources went, but as this chapter will argue, this did not occur nearly as powerfully as is commonly thought. With respect to the housing boom, recent economic history reveals that the low-interest-rate argument offered up by Woods and many others is a poor one. It also signals that something separate from a low fed funds rate was the source of a growth-sapping rush into housing consumption. Indeed, if a low fed funds rate had driven housing health in the 2000s, then the 1970s, when the rate soared from under 4 percent to more than 17 percent by the close of the decade, would surely have been a disaster for housing.4 Yet housing skyrocketed in the 1970s, thus raising the question about what really drives housing vitality.

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In response to a fairly rapid decline in the price of oil, credit for oil-exploration companies became more expensive. The Dallas Morning News report about a rapidly rising “cost to borrow” was the newspaper correctly reporting the obvious. What is also notable about the rising cost of credit for the energy sector was how toothless the Fed’s policies of low interest rates were. While it was holding its fed funds rate at “zero” in order to allegedly keep credit “easy,” those with credit on offer had different opinions about the oil patch. With the price per barrel at $54, credit for oil exploration companies would be expensive no matter what. The Fed was thankfully irrelevant.

Reinventing Capitalism in the Age of Big Data
by Viktor Mayer-Schönberger and Thomas Ramge
Published 27 Feb 2018

Central banks in many nations responded to economic woes by lowering interest rates, and as rates hit rock bottom, banks in some countries even charged negative interest for deposits. Savers were not the only ones affected. In practice interest rates on deposits cannot be lowered much beyond zero (negative rates are highly unpopular and may lead to withdrawal of deposits). These low interest rates also reduce the interest spread—the difference between the rate banks pay their creditors and the rate they charge their customers—and thus banks’ margins. Banks were already suffering from the increased competition that has shrunk banks’ margins in the United States from almost 5 percent (in 1994) to around 3 percent (in 2016).

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To remedy this, a whole ecosystem of new loan providers has sprung up that not only ingests, but also provides, a lot of information. For example, SoFi, a fintech start-up, which originally focused on student loans, factors many data points into its prediction of creditworthiness, allowing it to offer low interest rates to individuals with limited credit history; Kabbage offers a similar service to small businesses. Shifting from conventional credit scores to a risk model that analyzes more numerous and diverse data points is like moving from money-based markets to data-rich markets: in both cases, we abandon the idea of condensing complexities and instead use technology and automation to guide decisions based on comprehensive and rich data sets from a wide variety of sources.

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If entry is very difficult, regulatory action may be in order. The scale effect once presented a huge hurdle for new entrants in markets like manufacturing or chain retailing, in which scale matters. In these markets, achieving scale traditionally required prohibitive initial investments. But with the rise of venture capital and low interest rates, raising funds has gotten easier, enabling start-ups to grow swiftly in both scale and scope. Moreover, thanks to the plummeting cost of information processing and storage, especially through cloud computing, the initial investment necessary for start-ups is often much lower than it was in the industrial age.

Rethinking Capitalism: Economics and Policy for Sustainable and Inclusive Growth
by Michael Jacobs and Mariana Mazzucato
Published 31 Jul 2016

The financial crisis exposed the uncomfortable truth that much of the apparently benign growth which had occurred in the previous decade did not in fact represent a sustainable expansion of productive capacity and national income. Rather, it reflected an unprecedented increase in household and corporate debt (see Figure 2). Low interest rates and lax lending practices, particularly for land and property, had fuelled an asset price bubble which would inevitably burst. In this sense the pre-crisis growth of output can be judged only alongside its post-crisis collapse. Figure 1: Percentage of countries experiencing a banking crisis (1945–2008) (weighted by their share of world income) Note: Sample size includes all countries that were independent states in the given year.

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Criticising the inadequate response of European Union policy-makers to the slow recovery after the financial crash, the authors propose a five-year investment stimulus package based on additional lending by the European Investment Bank (the EU’s state investment bank). Taking issue with the orthodox economic view that public investment will ultimately ‘crowd out’ private, they argue that at very low interest rates, with a glut of capital looking for returns, the opposite is in fact the case: public investment will leverage greater private capital. They use a macroeconomic model to compare their investment package to ‘business as usual’: they find that not only would it increase European growth rates and employment, it would also reduce public deficits more rapidly.

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Lerner, ‘The economic steering wheel’, University of Kansas Review, June 1941; ‘Functional finance and the federal debt’, Social Research, vol. 10, no. 1, 1943, pp. 38–51; The Economics of Control, New York, Macmillan, 1944; The Economics of Employment, New York, McGraw Hill, 1951. 3. Understanding Money and Macroeconomic Policy L. RANDALL WRAY AND YEVA NERSISYAN Introduction MACROECONOMIC POLICY is not working. The best part of a decade after the financial crisis, developed economies have still not returned to anything like normal conditions. Unprecedentedly low interest rates, continuing high deficits, weak growth in most countries and anxieties over the risks of deflation indicate painfully that policy-makers have not been successful in restoring their economies to health. Yet it is not for want of trying. Though initially governments reacted to the crisis by introducing fiscal stimulus packages, these were short-lived.

The Theft of a Decade: How the Baby Boomers Stole the Millennials' Economic Future
by Joseph C. Sternberg
Published 13 May 2019

“Responsible” fiscal policy following a tax increase in 1993 allowed the Federal Reserve, now led by Alan Greenspan, to keep the federal funds rate, the key interest rate set by the Fed at its meetings eight times a year, at around 5 percent for years at a time, a virtually unprecedented level of stability. The economy boomed. But Washington was still focused on maintaining unusually low interest rates as the best (and maybe only) way to stimulate productive investment. The Clinton era saw the same divergence between high taxes on corporate profits and personal incomes (the fruits of productive investment and hard work) versus low taxes on capital gains that were more prone to unproductive gamesmanship.

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In 1989, only 1 in 230 buyers made a down payment of 3 percent or less. By 2003, it was 1 in 7 and on the eve of the crisis in 2007, it was just less than 1 in 3.34 Those pro-debt policies lit a fire under the housing market, and the Federal Reserve poured on the accelerant. The 1990s was the era of Rubinomics and unusually low interest rates from the Alan Greenspan–run Federal Reserve—a policy that was supposed to stimulate more business investment to bolster the Boomer job market. But the short-term rate the Fed sets is intended to serve as a benchmark for all other interest rates, and sure enough the low federal funds rate in this era filtered through to the housing market one way or another.

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But precisely because those two generations were in such dire personal financial straits, Boomers in Washington obsessed over saving the housing market for those who already owned homes. No one spared a thought for the rising generation of Millennial first-time buyers who would hit the market in the following decade. And sure enough, subsequent research has found that while low interest rates and quantitative easing did boost mortgage lending, most of that was for refinancing, not new purchases. In the depth of the crisis, lending for both new purchases and refinancing plunged, but after the crisis, only refinancing recovered significantly.49 That phenomenon created many unintended consequences for Millennials.

Panderer to Power
by Frederick Sheehan
Published 21 Oct 2009

Deregulation of the industry permitted a panorama of investment classes that had previously been forbidden. William Seidman, who had interviewed Greenspan before his Council of Economic Advisers appointment, learned that “S&Ls could raise nearly unlimited amounts of funds through brokered deposits at low [interest] rates because the money was insured by the government. They could … make their profit on the spread between the low and high rates of interest.”16 Charles Keating needed money. He needed yield from the securities bought by Lincoln. He needed capital gains from the trading of land and securities.

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Greenspan was living for the moment: “I believe that equity extractions from homes will continue to be a source of positive growth in personal consumption expenditures.”36 Greenspan then extolled some Fed model (Greenspan ignored them, blamed them, cited them, or cited and then dismissed models as opportunities to salvage a hypothesis as his reputation arose) that calculated 20 percent of personal consumption came from consumers cashing out their “wealth.” Rising house prices were essential to America’s continuous shopping spree. Through the summer and fall meetings, some members of the FOMC worried about low interest rates. This was often expressed as a concern about house prices. Federal Reserve Governor Edward Gramlich described his growing fears. At the August 13 meeting, he was “uncomfortable that the refinancing of housing should be the source of so much of the support for our recovery.”37 Greenspan was having none of that: “You sound like a true conservative.”38 House-flipping stories grew more bizarre.

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Awakened to this moneymaking market, Wall Street looked for other opportunities it might exploit. The Community Reinvestment Act was revised in 1995.38 Banks now had an “affirmative obligation” to meet the housing needs of the poor. By 2000, U.S. banks had committed $1 trillion for inner-city and lowincome mortgages.39 36 Martha Irvine, “Sold! Low Interest Rates Affording Savvy 20somethings Their Piece of the American Dream,” Associated Press, January 17, 2003. 37 Gloria Irwin, “Nonprofit Group Helps Disadvantaged Home Buyers Get Federal Loans,” Acron Beacon Journal, August 24, 2003; survey conducted by U.S. Department of Housing and Urban Development.

How to Stop Brexit (And Make Britain Great Again)
by Nick Clegg
Published 11 Oct 2017

The dominance of the German economy meant that the interest rate set by the European Central Bank tended to respond to the rhythm of the German economy, while ignoring the weaknesses and the overheating in others. A weak euro meant that Germany, as a major exporter, could sell more successfully to the rest of the world, and low interest rates helped to keep the value of the currency down. But in a currency union the same interest rate has to apply across every participating country. So low interest rates in Germany meant excessively low interest rates in Spain, Portugal and Ireland. And when those countries’ economies started to overheat, their governments suddenly realised that one of their most important levers – the ability to cool the froth by raising interest rates – was no longer available to them.

Age of Greed: The Triumph of Finance and the Decline of America, 1970 to the Present
by Jeff Madrick
Published 11 Jun 2012

When the economy was strong again, and inflation an issue after World War II, adjusting the level of interest rates was a powerful policy tool, and more easily implemented than adjusting government spending. In the 1930s, when Keynes wrote his General Theory, monetary policy was not potent because business would, as noted, often neither borrow nor banks lend no matter how low interest rates fell. Keynes’s view was simply conceived in wholly different economic circumstance when inflation was not a priority. Friedman’s major lasting theoretical contribution was his claim that there is a natural rate of unemployment below which inflation would be stimulated—a concept widely accepted by mainstream economists in later years.

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But debt levels were so high for LBOs, management almost always sharply reduced annual expenses, especially labor and research investment, or sold subsidiaries, to pay the annual interest rates and amortization. Academic studies of LBOs alone, where the levels of debt were typically higher than on even hostile takeovers, found that profits on average rose in the short run but fell over time, research and development funding was cut substantially, and the level of debt remained high. Low interest rates in the late 1990s and most of the early 2000s led to a renewed boom in these LBOs. Institutional investors, from pension and trust funds to university endowments, replaced individuals as the leading investors in the partnerships. These LBO partnerships became known by the more innocent-sounding name “private equity firms.”

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His shining hour was his willingness to let interest rates remain low in the late 1990s, when the unemployment rate fell to what almost all economists thought was too low to be sustained without creating inflation. For much of his tenure, however, he suppressed growth too much in his battle against inflation while neglecting employment and ignoring the rampant overspeculation in high-technology stocks and housing that low-interest-rate policies supported. Under Greenspan, banks and other banklike financial institutions were far more free from government oversight and regulatory enforcement than at any time since the 1920s. A large body of American opinion supported this development, and was mostly uncriticized by mainstream economists and the media.

The Crisis of Crowding: Quant Copycats, Ugly Models, and the New Crash Normal
by Ludwig B. Chincarini
Published 29 Jul 2012

They make money on the spread: the difference between the two returns over time.6 Banking is also known as the maturity transformation business,7 because banks take short-term liabilities and transform them into long-term assets. This provides credit to grow the economy, but also carries risk, because banks use leverage. Wall Street firms also borrow money on a short-term basis at relatively low interest rates and invest in a variety of securities that are a bit riskier, but provide higher rates of return. Because they are not officially banks and do not take consumer deposits, they are not regulated as banks. They’re like banks in many respects, though, in that they transform short-term borrowing into long-term lending without a government backstop.

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Both felt political pressure to support lower-income housing, an important part of both organizations’ charters.49 Freddie and Fannie’s push in this direction was so extreme that they even enlisted churches to initiate faith-based efforts to help low-income minorities buy a home.50 Politicians care about being reelected and oftentimes either neglect or do not understand the economic implications of their actions.51 The government found that housing was the major source of growth for the U.S. economy. In a congressional hearing in November 2002, Greenspan stated that the low interest-rate policy had stimulated the economy with low mortgage rates and “…mortgage markets have also been a powerful stabilizing force over the past two years of economic distress…” Anything that might hamper growth would not have been popular with either Republicans or Democrats. They were thinking short-term, not long-term.

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In 2002, Lawrence White of NYU was interviewed.81 This means if housing prices crash or either company stumbles, the taxpayers could be on the hook for hundreds of billions. It’s as if the public had cosigned Fannie and Freddie’s debt…” —Lawrence White, NYU professor, August 2002 Alan Greenspan, who had promoted the low interest rates that helped cause the housing boom, may have offered the most direct discussion of the threats posed by Freddie and Fannie. In February 2005, he testified to the House Financial Services Committee and argued against Freddie and Fannie’s excessive portfolios. If [Fannie and Freddie] continue to grow, continue to have the low capital that they have, continue to engage in the dynamic hedging of their portfolios, which they need to do for interest rate risk aversion, they potentially create ever-growing potential systemic risk down the road…One way the Congress could contain the size of these balance sheets is to alter the composition of Fannie and Freddie’s mortgage financing by limiting the dollar amount of their debt relative to the dollar amount of mortgages securitized and held by other investors.

The Cost of Inequality: Why Economic Equality Is Essential for Recovery
by Stewart Lansley
Published 19 Jan 2012

In the United States, the Chairman of the Federal Reserve, Alan Greenspan, reduced interest rates steadily from the millennium —when they stood at 6.5 per cent—to an all-time low of one per cent in June 2003. Greenspan—a man lauded by bankers and ordinary Americans alike and awarded the Presidential Medal of Freedom, a British Knighthood and the French Legion of Honour—was pumping money into the economy. Low interest rates helped drive the increase in credit but what caused it was the economic necessity to compensate for low wages. Without the low interest rate strategy, credit expansion would have been more subdued, and growth would have faltered. If growth had been more evenly shared with wages rising in line with rising productivity, as in the 1950s and 1960s, the British and American economies would have been able to grow without such a heavy reliance on debt.

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This money derived from the increase in the foreign exchange reserves accruing to countries with large export surpluses, from China to the Middle-Eastern oil producers. As most of these surpluses ended up being invested in American Treasury Bills, this helped to allow the United States to run a large trade deficit simultaneously with a cheap money policy. By helping to perpetuate low interest rates, it is argued by some, the cash transfer contributed to the American debt bubble. Such flows have inevitably played a role in adding to global imbalances, but are of secondary importance, small beer compared with the rise of other sources of international credit and liquidity which grew to levels that were greatly in excess of that needed to run economies productively.

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One historian described this policy as a ‘notorious example of self and class interest … saving millions for himself and his companies, and hundreds of millions for his peers in the highest circles of wealth and commerce’ . 309 Looking back at the decade from the 1930s, the historian Arthur Schlesinger Sr noted that ‘America, in an ironical perversion of Lincoln’s words at Gettysburg, had become a government of the corporations, by the corporations and for the corporations’.310 As the portfolios of the wealthiest swelled, an orgy of economic extravagance followed. Money poured into assets, first property and then the stock market. The great real estate boom of the mid-1920s began in Florida but spread across much of America. A classic speculative bubble, it was encouraged by low interest rates, a reduction in lending standards, and weak banking supervision. Construction companies, property entrepreneurs and thousands of Americans tried to join in the rush to get rich off the back of appreciating land and property values. As contemporary accounts reported, a collective madness consumed Florida investors.

Losing Control: The Emerging Threats to Western Prosperity
by Stephen D. King
Published 14 Jun 2010

In other words, US interest rates should have gone up to attract the additional funds US borrowers wanted to suck in from abroad. This didn’t happen. For the most part, US interest rates have not only been low but persistently lower than the vast majority of economists expected.3 Put another way, the US borrowed in size precisely because interest rates were so low. Interest rates were low, in turn, because countries elsewhere in the world were generating huge amounts of surplus savings. It wasn’t so much, then, that a rising demand for loans in the US was driving interest rates up, but, rather, that a rising supply of loans outside the US was driving interest rates down.

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But, rather than sitting on the ropes being pummelled by George Foreman, they instead allowed their foreign-exchange reserves to rise. This approach had two broad consequences. First, resistance to exchange-rate appreciation meant that emerging economies were left with too much money swilling around, the result of low interest rates and high foreign-exchange reserves. Arguably, the rapid increases in emerging-market domestic demand which followed contributed to huge gains in commodity prices. Second, because foreign-exchange reserves were heavily invested in ‘low-risk’ dollar assets, notably Treasuries, the price of these assets went up and the yield came down, as explained in Chapter 4.

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The same applied in the UK where, as noted earlier, rising official interest rates were associated with falling yields on junk bonds. The global housing boom of recent years was partly the result of this distortion in the level of interest rates. Other countries also lost their grip on the monetary reins. Low interest rates in the US, combined with even lower interest rates in Japan and relatively high risk in some of the emerging markets, persuaded many investors to take advantage of so-called carry trades, borrowing in dollars or yen and reinvesting in higher-yielding currencies like sterling, the New Zealand dollar and the Icelandic krona.

13 Bankers: The Wall Street Takeover and the Next Financial Meltdown
by Simon Johnson and James Kwak
Published 29 Mar 2010

And a third factor was the cheap money being pumped into the economy by the Federal Reserve. Banks’ primary raw material is money. Less competition and cheap money meant higher revenues and lower costs at the same time. With low interest rates, banks could raise money from depositors virtually for free; they could borrow cheaply from each other; they could borrow cheaply at the Fed’s discount window; they could sell bonds at low interest rates because of FDIC debt guarantees; they could swap their asset-backed securities for cash with the Fed; they could sell their mortgages to Fannie and Freddie, which could in turn sell debt to the Fed; and on and on.

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Wells Fargo CEO John Stumpf repeated the mantra: “The basic message is, we’re all in this together.”5 What did that mean, “we’re all in this together”? It was clear that the thirteen bankers needed the government. Only massive government intervention, in the form of direct investments of taxpayer money, government guarantees for multiple markets, practically unlimited emergency lending by the Federal Reserve, and historically low interest rates, had prevented their banks from following Bear Stearns, Lehman Brothers, Merrill Lynch, Washington Mutual, and Wachovia into bankruptcy or acquisition in extremis. But why did the government need the bankers? Any modern economy needs a financial system, not only to process payments, but also to transform savings in one part of the economy into productive investment in another part of the economy.

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Investor protection was minimal; small investors could be lured into complex financial vehicles they didn’t understand, and were offered large margin loans to leverage their positions.80 While the market rose, everyone benefited. But the result was a stock market bubble fueled by borrowing and psychological momentum.81 Low interest rates set by the Federal Reserve also fueled an economic boom for much of the decade and encouraged increased borrowing by companies and individuals.82 By 1929, financial assets were at all-time highs, sustained by high levels of leverage throughout the economy. The stock market crash of October 1929 not only destroyed billions of dollars of paper wealth and wiped out many small investors; it also triggered an unprecedented wave of de-leveraging as financial institutions, companies, and investors sold anything they could in an attempt to pay off their debts, sending prices spiraling downward.83 The Federal Reserve could have slowed down the boom and avoided the sharp crash of 1929 if it had been willing early enough to “take away the punch bowl” (in the words of later Fed chair William McChesney Martin)84 by raising interest rates to discourage borrowing and slow down economic growth.

Austerity: The History of a Dangerous Idea
by Mark Blyth
Published 24 Apr 2013

The Generator: Repo Markets and Bank Runs The repo market is a part of what is called the “shadow banking” system: “shadow,” since its activities support and often replicate those of the normal banks, and “banking” in that it provides financial services to both the normal (regulated) banks and the real economy. Take paychecks, for example. It would be hugely impractical for big businesses to truck in enormous amounts of cash every weekend to pay their employees out of retained earnings held at their local bank. So companies borrow and lend money to each other over very short periods at very low interest rates, typically swapping assets for cash and then repurchasing those assets the next day for a fee—hence “sale” and “repurchase”—or “repo.” It is cheaper than borrowing from the local bank and doesn’t involve fleets of armored trucks. What happened in 2007 and 2008 was a bank run through this repo market.5 A bank run occurs when all the depositors in a bank want their cash back at the same time and the bank doesn’t have enough cash on hand to give it to them.

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Second, government spending was notoriously uncoordinated, with the result that in October 2009 the Greek government revealed that the reported fiscal deficit of 6.5 percent of GDP was in fact closer to 13 percent of GDP. Unsurprisingly, investors regarded this as the ringing of a rather loud alarm bell over the true state of Greek public finances. The low interest rates that Greek debt had enjoyed since adopting the euro via that borrowed German credit rating shot up, which made a difficult interest-payment environment very suddenly awful. Piling on the pressure, the ratings agencies took notice and downgraded Greek bonds from A to BBB−, which compounded the debt burden by lowering prices and further spiking yields.

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In contrast, Germany’s debt sat at 50 percent of GDP.26 Why, then, did Ireland and Spain have a crisis when Germany did not? The answer, as usual, begins and ends with the banks, in this case via real-estate lending. If Greece had dug itself a long-term fiscal hole that was covered over with low interest rates, then Ireland was unaware that the hole even existed and built houses right on top of it. Spain, as we shall see, is Ireland moved up a few orders of magnitude. Italy is Portugal moved up a few orders of magnitude. The song remains the same in both cases. Ireland, like Germany, did well prior to the crisis.

Shutdown: How COVID Shook the World's Economy
by Adam Tooze
Published 15 Nov 2021

Moody’s Analytics, “Financial Markets Have Largely Priced-In 2021’s Positive Outlook,” www.moodysanalytics.com/-/media/article/2020/weekly-market-outlook-financial-markets-have-largely-priced-in-2021s-positive-outlook.pdf. 49. L. H. Summers, “Why Stagnation Might Prove to Be the New Normal,” December 15, 2013. J. Furman and L. Summers, “A Reconsideration of Fiscal Policy in the Era of Low Interest Rates,” November 30, 2020; www.brookings.edu/wp-content/uploads/2020/11/furman-summers-fiscal-reconsideration-discussion-draft.pdf. 50. O. Blanchard, “Public Debt and Low Interest Rates,” American Economic Review 109, no. 4 (2019): 1197–229. 51. O. Blanchard, “Italian Debt Is Sustainable,” Peterson Institute for International Economics, March 18, 2020. 52. Indeed, the Treasury itself built up a cash hoard in the process: L.

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U.S. banks’ equity tier ratios and risk-adjusted assets https://www.economist.com/finance-and-economics/2020/07/02/how-resilient-are-the-banks In 2020, real estate was solid. Indeed, in many locations in 2020, house prices went up.8 People wanted to move to the suburbs. The market for home improvements boomed. Banks, on the other hand, would face losses on their loan books. Low interest rates would be bad for their profit margins on lending. So their shares sold off hard. The setback to the banks was so severe that it caused a ripple of anxiety among the regulators.9 If the banks had been as weak in 2020 as they had been in 2008, the situation might well have been catastrophic. How catastrophic a coronavirus banking crisis might have been can be gauged by applying, hypothetically, the losses expected in the spring of 2020 to the balance sheets of the major U.S. banks as they were in 2008 at the time of the mortgage crisis.

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It was a roundabout mechanism, but the net effect was that in 2020 the central banks on both sides of the Atlantic were monetizing the government debt on a gigantic scale. Indeed, in the case of the UK, there was an embarrassingly close one-to-one correlation between the government borrowing requirement and the Bank of England’s additional debt purchases.53 * * * — The constellation of low interest rates, large government deficits, and bond buying by the central bank had first emerged in Japan in the 1990s. It went hand in hand with a downward trend in price increases that ultimately resulted in deflation. After 2008, it had become common to the euro area and the United States as well—though in the U.S. the deflationary tendency was less pronounced.

The Euro and the Battle of Ideas
by Markus K. Brunnermeier , Harold James and Jean-Pierre Landau
Published 3 Aug 2016

From then onward, the crisis countries primarily became worried about their funding costs and lost influence in policy debate. France now played a double game, pushing its economic views through numerous policy initiatives but at the same time not willing to make an open break with Germany out of fear of losing the low interest rates on its debt. Any real move to policy heterodoxy would lead to a surge in debt service costs, as markets would push bond prices down and yields up. Germany was in the driver’s seat, and not only because everyone wanted to extract financial support from Germany. The European institutions in Brussels did not have a good crisis.

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The German Bundesbank acquired a reputation for achieving monetary stability at a time when the economy had to overcome two oil price shocks. The idea of the fathers of the EMU was to transfer the stellar reputation of the independent Bundesbank to the new European Central Bank so that all euro-member countries could enjoy the same low-interest rate environment. Legally, the ECB became one of the most independent central banks in the world. Its president and the executive board are elected for eight years, without the possibility of renewal. Chapter 15 describes the institutional features of the ECB in detail. MONETARY AND FISCAL DOMINANCE Central bank independence should shield the ECB from undue fiscal influence.

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Low output and austerity may well leave lasting scars if unemployment is already very high, possibly due to the continued erosion of human capital, a hypothesis that some have called the “hysteresis” effect.5 A sudden fiscal contraction can hence give an economy growing at stall speed the final push into recession. Finally, in an environment of extremely low interest rates, government investment projects become more profitable as they can be funded more cheaply. All of these arguments were among the key motivations underlying the initial calls for government stimulus back in 2008. Interest Rate Credit Spreads There is yet an important dimension to the interest rate debate when a country borrows in a foreign or common currency: borrowing interest rates on government debt are not necessarily risk-free rates.

The Blockchain Alternative: Rethinking Macroeconomic Policy and Economic Theory
by Kariappa Bheemaiah
Published 26 Feb 2017

The number of deposits that are created by commercial banks is significanlty influenced by the interest rate set by central banks (other factors include inflation rate, net interest margin, etc.). If the interest rate is high, it leads to an unprofitable lending opportunity, as the loans offered by a commercial bank are recorded as how much the bank owes it clients. Hence, deposit creation is lower at high interest rates and higher at low interest rates. If bank deposits are created by the issuance of loans, then the repayment of loans, in the form of currency or existing assets, leads to their destruction. Thus, a second factor that affects the number of deposits being made is the market. If the market sentiment is not friendly for investment, consumers could prefer to not take out loans or to pay existing loans back to stave off risk.

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The characters are based on the novel House of Cards, written by Michael Dobbs. 3The “real” economy is defined as the part of the economy that is concerned with actually producing goods and services, as opposed to the part of the economy that is concerned with buying and selling on the financial markets (FT Lexicon) 4A CLO is debt-based security comprised of various corporate loans. 5Governor of the Reserve Bank of India (till September 2016)—Rajan questioned the “worrisome” actions of the banks when he served as an economic counsellor at the International Monetary Fund (IMF) in 2005. In a 2014 article in Time magazine, he stated that he now fears long-term low interest rates and unorthodox programs to stimulate economies, such as quantitative easing, may lead to more turmoil in financial markets. 6Co-director of the Centre for Economic and Policy Research—In 2004, in an article in The Nation titled “Bush’s House of Cards”, he wrote: “The crash of the housing market will not be pretty….”.

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Firstly, having a slightly positive inflation rate makes it easier to service debts. If prices were to fall, then the value of the debt would increase and reduce investor investment. Second, if prices were to fall, i.e., inflation is too low, then borrowing goes down and it becomes difficult for the central bank to stimulate the economy with low interest rates (see the note below on liquidity trap*). The only option in this situation would be that central banks would begin to apply negative interest rates. But if consumers can convert their bank funds into cash, such a measure would turn out to be ineffective. This is known as the zero lower bound for interest rates and can cause a liquidity trap.

End This Depression Now!
by Paul Krugman
Published 30 Apr 2012

The main limit on this kind of borrowing is the concern of those patient lenders about whether they will be repaid, which sets some kind of ceiling on each individual’s ability to borrow. What happened in 2008 was a sudden downward revision of those ceilings. This downward revision has forced the debtors to pay down their debt, rapidly, which means spending much less. And the problem is that the creditors don’t face any equivalent incentive to spend more. Low interest rates help, but because of the severity of the “deleveraging shock,” even a zero interest rate isn’t low enough to get them to fill the hole left by the collapse in debtors’ demand. The result isn’t just a depressed economy: low incomes and low inflation (or even deflation) make it that much harder for the debtors to pay down their debt.

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Meanwhile, actual investors seemed not at all worried: interest rates on long-term U.S. bonds were low by historical standards as Bowles and Simpson spoke, and proceeded to fall to record lows over the course of 2011. Three other points are worth mentioning. First, in early 2011 alarmists had a favorite excuse for the apparent contradiction between their dire warnings of imminent catastrophe and the persistence of low interest rates: the Federal Reserve, they claimed, was keeping rates artificially low by buying debt under its program of “quantitative easing.” Rates would spike, they said, when that program ended in June. They didn’t. Second, the preachers of imminent debt crisis claimed vindication in August 2011, when Standard & Poor’s, the rating agency, downgraded the U.S. government, taking away its AAA status.

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Second, the ECB famously overreacted to a temporary, commodity-driven bump in inflation back in 2008, raising interest rates just as the world economy was plunging into recession. Surely it wouldn’t make exactly the same mistake just a few years later? But it did. Why did the ECB act with such wrongheaded determination? The answer, I suspect, is that in the world of finance there was a general dislike of low interest rates that had nothing to do with inflation fears; inflation fears were invoked largely to support this preexisting desire to see interest rates rise. Why would anyone want to raise rates despite high unemployment and low inflation? Well, there were a few attempts to provide a rationale, but they were confusing at best.

A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing (Eleventh Edition)
by Burton G. Malkiel
Published 5 Jan 2015

The emerging economies are also growing faster. Hence, a diversified portfolio of higher-yielding foreign bonds, including those from emerging markets, can be a useful part of a fixed-income portfolio in a period of very low interest rates. EXERCISE 7A: USE BOND SUBSTITUTES FOR PART OF THE AGGREGATE BOND PORTFOLIO DURING ERAS OF FINANCIAL REPRESSION Extremely low interest rates present a daunting challenge for bond investors. All the developed countries of the world are burdened with excessive amounts of debt. Like that of the United States, governments around the world are having an extraordinarily difficult time reining in entitlement programs in the face of aging populations.

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“Japanese earnings are understated relative to U.S. earnings because depreciation charges are overstated and earnings do not include the earnings of partially owned affiliated firms.” Price-earnings multiples adjusted for these effects would be much lower. Were yields, at well under ½ of 1 percent, unconscionably low? The answer was that this simply reflected the low interest rates at the time in Japan. Was it dangerous that stock prices were five times the value of assets? Not at all. The book values did not reflect the dramatic appreciation of the land owned by Japanese companies. And the high value of Japanese land was “explained” by both the density of Japanese population and the various regulations and tax laws restricting the use of habitable land.

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Although land was scarce in Japan, its manufacturers, such as its auto makers, were finding abundant land for new plants at attractive prices in foreign lands. And rental income had been rising far more slowly than land values, indicating a falling rate of return on real estate. Finally, the low interest rates that had been underpinning the market had already begun to rise in 1989. Much to the distress of those speculators who had concluded that the fundamental laws of financial gravity were not applicable to Japan, Isaac Newton arrived there in 1990. Interestingly, it was the government itself that dropped the apple.

The Curse of Cash
by Kenneth S Rogoff
Published 29 Aug 2016

Yes, if secular stagnation turns out to imply that equilibrium real policy interest rates must remain below –2.0% for years on end (implying nominal rates below zero), then great adaptation will be necessary, but for the moment, this is certainly not the central long-term scenario. 8. See Chris Kimball and Miles Kimball, “However Low Interest Rates Might Go, the IRS Will Never Act Like a Bank,” Quartz blog, April 15, 2015, available at http://qz.com/383737/however-low-interest-rates-might-go-the-irs-will-never-act-like-a-bank/. CHAPTER 12: NEGATIVE INTEREST RATES AS A VIOLATION OF TRUST AND A STEP AWAY FROM RULE-BASED SYSTEMS 1. If Ricardian equivalence holds (Barro 1974), the public does not respond to debt-financed transfers, because it views the future taxes as fully offsetting the benefits of the transfers.

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FINANCIAL STABILITY AND NEGATIVE RATES One of the central debates in monetary theory over the past 20 years has been to what extent the central bank should focus solely on stabilizing output and inflation when setting interest rates, and to what extent interest rate policy should take into account broader financial stability considerations. Many finance economists have argued that due to a mix of psychology and market imperfections, long periods of ultra-easy monetary policy—whether through ultra-low interest rates or quantitative easing or both—invariably lead to speculative excesses that can reach systemic proportions. Presumably, those already concerned about quantitative easing or extended periods of near-zero interest rates will be even more concerned about deeply negative interest rates. This is an old debate, going back at least to the 1990s, when Alan Greenspan was chair of the Federal Reserve.

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Paving the way for unfettered and fully effective negative interest rate policy ought to be thought of as a major collateral benefit of phasing out paper currency. It certainly would put countries in a much better position to deal with the next financial crisis, and it would be very helpful for freeing up monetary policy in ordinary recessions in a low interest rate world. I have made the case that it is not necessary to completely eliminate cash to have sufficient scope for negative rates at any level they might realistically be needed. If problems do arise, I have illustrated ways to pretty much eliminate any fears that negative rates will provoke a run into small bills, for example, by instituting a charge for banks to tender paper currency at the central bank.

The Man Who Knew: The Life and Times of Alan Greenspan
by Sebastian Mallaby
Published 10 Oct 2016

Some wrangling ensued about how to put Bernanke’s insight into practice, and the committee converged on the idea of extending the FOMC’s postmeeting statement. The staff was ready with a draft that said low interest rates were likely to be maintained “for a considerable period.” Not everyone was happy. The statement had already stipulated that the FOMC viewed “undesirably low” inflation as the main risk for the foreseeable future. Why take the additional step of spelling out that low inflation called for low interest rates? “I would appeal to the Committee to retain the sentence because in my view it makes a very big difference,” Bernanke insisted. Once upon a time, an earlier generation of central bankers had swayed gentleman financiers with the flicker of eyebrows.

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By the time Kennedy promised to lead America to a New Frontier, advances in economic understanding seemed to promise growth that would be not only higher but more stable. Keynes had taught how to combat economic slowdowns by running a government budget deficit, and neo-Keynesians had grasped how slumps could be averted by the central bank as well: low interest rates, hitherto regarded principally as a means of helping the government to borrow, were now understood as a tool of economic management.2 “The supply of money, its availability to investor borrowers, and the interest cost of such borrowings can have important effects on [GNP],” Paul Samuelson instructed in the 1961 edition of his bestselling textbook, revising the dismissal of monetary policy in his 1948 edition.3 “The worst consequences of the business cycle . . . are probably a thing of the past,” Samuelson wrote confidently, and conservative economists agreed.4 At the end of 1959, Greenspan’s mentor Arthur Burns proclaimed, “The business cycle is unlikely to be as disturbing or troublesome to our children as it was to us and our fathers.”5 It was not just that economists understood how to prevent recessions.

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Seizing on this happy verdict, the Kennedy administration promised “full employment,” an objective that would benefit workers, salve racial tensions, and bolster America in its apocalyptic rivalry with the Soviet Union. In order to make good on this project, the administration proposed tax cuts and low interest rates. It was time “to get the country moving again,” as Kennedy’s campaign slogan had insisted.6 The Kennedy team proceeded to implement its experiment. Where it saw signs of price pressure, it treated them as the side effect of the economy’s concentrated structure, not as evidence that all-out stimulus might stoke more inflation than intended.

Financial Market Meltdown: Everything You Need to Know to Understand and Survive the Global Credit Crisis
by Kevin Mellyn
Published 30 Sep 2009

The ‘‘sell side’’ of the market may be greedier at heart, but the demand for high returns by the ‘‘buy side’’ is what drives the market. Decades ago, most pension plans and insurance companies limited themselves to nice, safe investments like A Tour of the Financial World and Its Inhabitants government bonds and blue-chip (big-company, low-risk) stocks. Against a background of a quarter of a century of relatively low interest rates, institutional investors learned to take on bigger risks for higher returns. THE SEARCH FOR YIELD The upshot of its hunger for high returns is that the ‘‘buy side’’ got what it was looking for in the form of new products and new providers from the ‘‘sell side.’’ In terms of products, the sell side learned to slice and dice loans (especially consumer loans like mortgages, car loans, student loans, and credit card debt) and turn them into high-yield but highly rated securities.

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Institutional investors hungry for high returns were more likely to put money into the second model than the first, and banks hungry for lending opportunities were more than happy until quite recently to provide the OPM. The common thread of all these alternative investments is that in a period of low interest rates and rising prices for financial assets, debt (or as the financial professionals say ‘‘leverage’’) was really their ‘‘secret sauce.’’ Hedge funds and private equity firms both took advantage of cheap and plentiful bank credit to super-charge their returns. Remember, if I can operate a business on other people’s money rather than my own, I make more returns on my capital.

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The boom in housing that was based on cheap mortgages allowed people to make up their losses in the tech bubble burst that preceded it. So, even when effective, the availability cheap money is always dangerous. However, sometimes the problem is deeper, and even very cheap money doesn’t restore market confidence. Low interest rates are like a string the central bank can use to draw entrepreneurs and investors back into taking the kind of risks that produce jobs and generate wealth. As has often been noted, you can’t push on a string. Flooding the market with cheap money is totally ineffective if risks outweigh any obvious opportunities to make money.

Unhappy Union: How the Euro Crisis - and Europe - Can Be Fixed
by John Peet , Anton La Guardia and The Economist
Published 15 Feb 2014

In the early 2000s, years that became known as the “great moderation”, when money was cheap, euro-zone countries were able to build up large external imbalances (15% of GDP in Greece). Had they still had national currencies, this would surely have provoked a response from markets. Instead, everybody benefited from low interest rates. Thus was born the great paradox of economic and monetary union. In order for countries to survive within it, they needed to make deeper structural reforms to improve their competitiveness; and yet the pressure to push through those reforms was reduced by the benign mood of financial markets.

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By about 2005 it was apparent that national economies, far from converging as they had been expected to do, were pulling apart. The differences were no greater than the dispersion in growth rates in American states, but they were worryingly persistent. Some were growing fast with high inflation, among them Ireland, Greece and Spain. All were enjoying a boom fuelled by low interest rates. At the other end of the spectrum, mighty Germany was growing anaemically, but with very low inflation. To some extent the ECB’s one-size-fits-all interest rate exacerbated this polarisation: interest rates were too low for overheating countries, but too high for Germany (the situation is reversed today).

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Third, currency chaos might easily have led to a protectionist free-for-all, undermining the single market. In one form or another, major turmoil was probably unavoidable in Europe. What might once have been a currency crisis became, with the euro, a debt crisis. The euro allowed countries accustomed to high inflation to avoid reform in the good years as they benefited from low interest rates. Brutally, no doubt, the hardest-hit economies have been forced into overdue reforms, for instance in Ireland and Spain. Nowadays it is Italy and France, less traumatised but also less reformed than other countries, which present some of the biggest dangers to the future of the euro. They are too big to fail, too big to save and too big to bully from Brussels.

5 Day Weekend: Freedom to Make Your Life and Work Rich With Purpose
by Nik Halik and Garrett B. Gunderson
Published 5 Mar 2018

According to a congression­ally mandated study by the U.S. Federal Trade Commission, one out of every five consumers has an error on at least one of their three credit reports.3 An error on your credit report can make the difference between being approved or denied for a loan or getting a high or low interest rate. The credit reporting agencies are required by law to give you a free look at your credit report once a year at AnnualCreditReport.com. One strategy I recommend is to request one free report from one bureau every four months. That way you can regularly monitor your credit and check for errors for free.

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Instead it’s always available to borrow from, in order to accelerate your business growth or to purchase investments. For example, suppose you find a great real estate deal that can make you a lot of money in a short period but requires $20,000 down. If you don’t have that in cash, you can borrow it from your Cash Flow Insurance policy with no credit check, extremely low interest rates, and no timetable for repayment. Then, you can use the cash flow from rent to pay back the loan.4 Deposits you make into your personal Cash Flow Insurance policy never lose value, providing you with capital preservation without risking principal. Your cash value is not affected by market volatility if the economy “crashes” again.

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Other Cash Resources Whole life insurance is not the only vehicle you can use to save money and borrow from using your cash as collateral, but no savings vehicle has the same benefits as Cash Flow Insurance. ­Retirement plans could work, because you can borrow from them — but there is no guarantee of principal without moving to a money market at a very low interest rate. There’s also no death benefit. There are strict limits on how much you borrow and on the schedule for paying the loan back, plus there’s no option to pay back more than the loan amount and thereby capture interest. Savings accounts at a bank could work, but they are currently paying less than 1 percent interest.

Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives
by Satyajit Das
Published 15 Nov 2006

Volcker had embarked on an unpopular strategy of high interest rates that had ultimately proved successful in beating inflation, although there had been collateral damage. The entire US Savings and Loan Industry had ended up as road-kill. But the high interest rates opened up la belle époque – an era of low inflation, low interest rates and rising stock prices. Chairman Greenspan found himself in command of the ship just as it sailed into calmer waters. Woody Allen observed that 80% of success in life is just showing up at the right time. The Maestro, Greenspan’s nickname, had immaculate timing. The tennis-playing, jazz saxophone-loving Greenspan has presided over an unparalleled period of prosperity, the bond market collapse of 1994 and several asset price bubbles and collapses.

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So IBM launched a worldwide borrowing programme, raising large amounts in the Deutschmark (DM) and Swiss franc (CHF) capital markets (‘Marks’ and ‘Swissies’ to the traders). The proceeds of the loans were converted into dollars and remitted back to IBM HQ Armonk, Stateside, to be used for general corporate funding purposes (what else?). Coincidentally, the World Bank had a declared policy of raising funds in currencies with low interest rates such as the DM, CHF and Japanese yen. Its demand for fixed rate funds in these currencies was greater than the capacity of the respective capital markets. The dollar had also substantially appreciated against the DM and CHF from the time IBM borrowed these currencies. This created significant unrealized foreign exchange gains for IBM.

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The products, the traders, the models (though we obviously needed to do some more work) and infrastructure were all in situ. Even the language – ‘flow business’, ‘structured products’, ‘trading revenues’ – was present. The irrational belief and exuberance in models and derivatives generally – the hubris – was also firmly entrenched. Serial killings The 1990s ushered in a new age, all due to Chairman Greenspan. Low interest rates (the result of inflation having been clubbed to death) and benign markets set off the ‘yield hogs’: investors desperate for returns. But it was a little more complicated. In the 1990s, several factors conspired to place an unprecedented amount of money in the hands of investors – mainly investment managers – who literally didn’t quite know what to do with it.

Financial Independence
by John J. Vento
Published 31 Mar 2013

Also, if you are saving for anything other than the proverbial rainy day, such as for a house, wedding, new car, or special trip, count these funds as extra. (It might even be helpful to open a separate savings account for these larger separate items you are saving for.) Given the relatively low interest rates offered at this time on cash instruments (which include savings accounts, money market funds, and certificates of deposit, or CDs), and the fact that the current rate of inflation is higher than the interest rate, you may actually be losing money on the ultimate purchasing power of your savings.

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This unfortunately is very common for couples who are always trying to keep up with the Joneses. With regard to their high-interest debts, they need to consolidate their debt and lower their overall interest rates and monthly payments. (The one exception is the 0 percent car loan, which, based on the existing low interest rate, they should continue to make payments.) James’ office building has a mortgage of $740,000, which is almost equal to the building’s current fair market value. Unfortunately, they will not be able to refinance this loan because of the extremely high debt-to-equity ratio (close to 100 percent).

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In addition, they should take out an additional $100,000 from the equity in their home. This $100,000 should be used to wipe out all of their credit-card debt as well as James’ $28,500 auto loan, which totals $84,500. Unfortunately, there is not sufficient equity in their home to cover his outstanding student loan, so they must continue to make payments on this low-interest rate personal loan. The balance of $15,500 (from the $100,000) should be added to their cash reserves. The new mortgage at 4.5 percent interest, even with the additional $100,000, will cost them approximately $34,049 per year, compared to the $37,920 they are currently paying on their old home mortgage.

Shortchanged: Life and Debt in the Fringe Economy
by Howard Karger
Published 9 Sep 2005

In comparison, only 5.7% of whites received a subprime home refinancing loan in 2002.19 These figures help substantiate the charge that the subprime and predatory loan sector targets people of color.115 Home Mortgage Loans For most consumers, home ownership begins with a mortgage application. Borrowers’ interest rates are based on their FICO score (see chapter 4), the numeric representation of their financial responsibility. The higher the FICO score, the cheaper the mortgage. Securing a low interest rate, however, is only one part of the loan package. For example, lenders may offer a low interest rate but compensate by imposing high discount points and loan origination fees, increasing the loan term, or introducing prepayment penalties. FIXED-RATE, ADJUSTABLE-RATE, BALLOON, AND SAM MORTGAGES Charlene Duvall is a retired 75-year-old school bus driver who lives in Miami, Florida.

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A low introductory rate to transfer credit card balances can also include a balance-transfer fee of 3%–5%—for example, $30-$50 to transfer a $1,000 balance to a new credit card. Sometimes teaser-rate cards use bait-and-switch tactics. For example, you get a solicitation advertising a credit card at an incredibly low interest rate. But the fine print states that the company can issue you a more costly card if you fail to qualify for the premium card. Many, if not most, of us will get the card with the higher interest rate. What’s in the fine print also results in thousands of us paying millions each month in fees we didn’t expect or don’t consider reasonable.

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Schmitt with Heather Timmons and John Cady, “A Debt Trap for the Unwary,” BusinessWeek, October 29, 2001 10 The Getting-Out-of-Debt Industry We are besieged by advertising on two fronts: how to get more and cheaper credit, and how to get out of debt. On the one hand, we are lured into taking on more debt through cheap credit; on the other hand, we’re warned of being in too much debt.174 Federal Reserve chairman Alan Greenspan pointed out in 2004 that because of low interest rates, we could more easily handle high levels of personal debt.1 In 2003 economics journalist Robert Samuelson argued that Americans were already too heavily in debt and the last thing we needed was more “cheap credit.”2 Despite Greenspan’s insouciance, “cheap credit” still mounts up and must be paid off.

The Next 100 Years: A Forecast for the 21st Century
by George Friedman
Published 30 Jul 2008

It was devastating American businesses—MBAs were being taught to learn from the Japanese and emulate their business practices. Certainly Japan was growing extremely rapidly, but its rapid growth had less to do with management than with Japan's banking system. Japanese banks, under government regulation, paid extremely low interest rates on money deposited by ordinary Japanese. Under the various laws, the only option for most Japanese was to put money into Japan's post office, which doubled as a bank. The post office paid minimal interest rates. The government turned around and lent this money to Japan's largest banks, again at interest rates well below international levels.

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It is also no surprise that the Japanese had extremely high savings rates. Japan had virtually no public retirement plan at the time, and corporate pensions were minimal. Japanese planned for retirement through savings. They weren't more frugal, just more desperate. And this pool of desperate depositors had no alternative but to make deposits at very low interest rates. While high interest rates imposed discipline on Western economies, culling out the weaker companies, Japanese banks were lending money at artificially low rates to friendly corporations. No real market existed. Money was flowing and relationships were the key. As a result, a lot of bad loans were made.

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Small-town banks took the farmers’ deposits and invested the money on Wall Street, which in turn invested the money in railroads and industry. But there was a problem. The cheap-money policies that had been followed for fifty years might have helped the pioneers, but those same policies were hurting their children, who had turned the farms of the West into businesses. By the 1870s the crisis of cheap money had become unbearable. Low interest rates were making it impossible to invest the profits from the farms—and especially from the businesses that were serving the farmers. A strong, stable currency was essential if America was to grow. In 1876, Rutherford B. Hayes was elected president after the failed presidency of Ulysses S. Grant.

Buying Time: The Delayed Crisis of Democratic Capitalism
by Wolfgang Streeck
Published 1 Jan 2013

After 1945, capitalism had found itself on the defensive worldwide; in all the countries of the emergent Western bloc, it had to make efforts to extend and renew its social franchise, in the face of a working class strengthened by war and the rivalry between two systems.45 This could be achieved only through sizeable concessions that Keynesian theory had already envisaged and paved the way for: in the medium term, government intervention in the business cycle, and state planning to provide for growth, full employment, social redistribution and ever greater protection from the unpredictability of markets; in the long term, a gradual departure from capitalism in a world of permanently low interest rates and profit margins. Only under these conditions, in the service of politically defined social purposes, could a profit-oriented economic regime, after the end of the war economy, be rebuilt within a stable liberal democracy immune from fascist regression and Stalinist temptations; only then was it politically feasible to restore full property rights and managerial authority.

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Rogoff, Growth in a Time of Debt, NBER Working Paper No. 15639, Cambridge, MA: National Bureau of Economic Research, 2009). If this is true – like all econometric ‘laws’, it should be treated with utmost caution – many developed economies are already incapable of growth. 73 See a few thoughts on the subject in chapter 4 below. 74 In combination with low interest rates, capital controls and high inflation, this may add up to a public debt reduction strategy. The technical name for it is ‘financial repression’ (C. Reinhart and M. Sbrancia, The Liquidation of Government Debt, NBER Working Paper No. 16893, Cambridge, MA: National Bureau of Economic Research, 2011). 75 Systems to regulate state bankruptcies have often been proposed.

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Surprisingly, public discussion of the financial and fiscal crisis hardly touches on the question of why nobody in the vast supervisory machineries of the large nation-states and the EU, ECB, OECD or IMF noticed what was going on before their eyes. When Greece had to mask its debt burden in order to gain admission to the European Monetary Union, and then set about running up huge debts at the new low interest rates, it is now public knowledge that the infamous American investment bank Goldman Sachs helped it – for its usual exorbitant fees – to brighten up its accounts.57 It seems scarcely credible that none of this was suspected in the highly ‘networked’ international ‘financial community’. The president of the Greek central bank at the time was the economist Lukas Papademos; his job done, he rose to become vice-president of the European Central Bank (and in 2011 was made Greek prime minister by EU governments, as an apolitical ‘expert’ from the outside, assigned to carry out ‘reforms’ that would ensure his country could repay its creditors).

Breakout Nations: In Pursuit of the Next Economic Miracles
by Ruchir Sharma
Published 8 Apr 2012

GDP: in the 1970s it took $1.00 of debt to generate $1.00 of U.S. GDP growth, in the 1980s and 1990s it took $3.00, and by the last decade it took $5.00. American borrowing was getting less and less productive, focused more on financial engineering and conspicuous consumption. U.S. debt became the increasingly shaky pillar of the global boom. Low interest rates were driving growth in the United States, pressuring central banks around the world to lower their rates as well, while fueling an explosion in U.S. consumer spending that drove up emerging-market exports. It was no coincidence that the emerging markets began to levitate in mid-2003, after aggressive U.S. interest-rate cuts—aimed at sustaining a recovery after the tech bubble burst two years earlier—started the worldwide flood of easy money, much of which poured into emerging markets.

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By late 2007, the lion’s share (90 percent) of new mortgages in Hungary were being granted in Swiss francs and euros, setting the country up for collapse when the crisis hit and foreign banks started pulling out. The Czechs and Poles were offered the same deal but did not really bite. The Poles did take out some foreign-currency loans, but in much smaller amounts than the Hungarians did. The Czechs, who had comparably low interest rates at home, did not partake at all. One reason is that their governments were not turbocharging easy money with bad policy by heavily subsidizing home mortgages. The other reason may go back to cultural differences, the devil-may-care southern side of the Hungarian lifestyle. Whatever the case, foreigners won’t touch Hungary now; their favored target after the fall of the Soviet system has seen investment fall for eleven quarters in a row since the crisis of 2008.

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This has largely happened, but it has proved to be a double-edged sword. Once a country adopts the euro, it enters a danger zone where the cost of capital becomes too cheap, and supposedly smart investors start making all kinds of mistakes. In the case of Portugal and Spain, it now looks as if the euro (and the low interest rates that came with it) set them up for the real estate bubbles that burst in the 2008 crisis. Among Slovaks, who embraced the euro in 2009 just before the Greek crisis, a public backlash has broken out against the fact that Slovakia must now stand alongside far richer Eurozone members like Germany and bail out somewhat richer Eurozone members like Greece.

The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer
by Dean Baker
Published 15 Jul 2006

While lower interest rates encourage growth, by themselves they are not always sufficient to get an economy back on track when it falls into a recession, as Japan discovered in the nineties.3 In an economy where workers fear losing their jobs, few people will buy new cars or take on unnecessary debt regardless of how low interest rates go. Also, even at low rates firms will not invest if they don’t see demand for their products. 2 Interest rates generally don’t all change by exactly the same amount, but they do tend to move in the same direction. For example, if the federal funds rate rises by 2 percentage points, then the interest rate on a car loan will probably increase, but most likely by somewhat less than 2 percentage points. 3 After the collapse of its stock and real estate bubbles at the beginning of the nineties, Japan’s economy entered a period of prolonged stagnation.

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For example, if the federal funds rate rises by 2 percentage points, then the interest rate on a car loan will probably increase, but most likely by somewhat less than 2 percentage points. 3 After the collapse of its stock and real estate bubbles at the beginning of the nineties, Japan’s economy entered a period of prolonged stagnation. The Japanese central bank eventually lowered its interest rate almost to zero, but the economy remained extremely weak. It has only been in the years since 2004 that Japan’s economy has again been showing respectable growth rates. This rebound was certainly aided by low interest rates, but it required many other policy changes as well. 30 This means that the Fed cannot always generate the rate of growth and level of employment that it considers best. But the Fed can prevent the economy from growing faster than it wants, and it can keep the economy from creating more jobs than it thinks are desirable.

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If debt repayments prevent a non-custodial father from 3 There have been several papers examining the weak link between credit card interest rates and other interest rates in the economy. The research suggests that banks tend not to pass on lower costs of funds in the form of lower interest rates to borrowers because they do not want to compete directly on the basis of low interest rates. The reason is that the people who select credit cards primarily based on the interest rates they charge are the ones who are most likely to default, and therefore are not customers that the credit card issuers really want (see Calem and Mester, 1995). Insofar as this explanation is correct, consumers are likely to see little benefit in the form of lower interest rates, even if the new bankruptcy law succeeds in substantially reducing default rates. 61 ever accumulating money in a bank account, and the father loses his job, then the child support payments will stop as soon as the paychecks stop.

The Price of Tomorrow: Why Deflation Is the Key to an Abundant Future
by Jeff Booth
Published 14 Jan 2020

In China, incentivizing production requires keeping lower wages (relative to the world), tax incentives for production and distribution, and investments in automation to achieve production that allows their exports to win on a world market. Conversely, to support consumer spending at 70 percent of the economy, the United States requires relatively higher wages, high credit creation with low interest rates (debt to finance that increased spending), and lower taxes. Donald Trump’s tax incentives enacted November 2, 2017, had an effect of 1) increasing consumer spending and growth in the economy—in other words, I will give you more money, so you spend it, driving short-term growth in GDP and jobs; this 2) increased the trade deficit with China as consumers bought more imported products, and it also 3) increased the US budget deficit in 2018 to almost $800 billion.

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Real estate would not be priced anywhere near where it is today. Stocks would likely still be near historic lows. Our politicians would look different—in fact, some of them wouldn’t be our politicians, because they would have been wiped out with their debt and the asset price collapse. Monetary easing and artificially low interest rates have been a grand experiment played out on the world stage without full consideration of the downstream effects. For the wealthy and those with assets that have been artificially boosted, that experiment has played out well. If we’re being honest with ourselves, much of the wealth and privilege that we enjoy is not from our ingenuity or hard work, but because the governments of the world decided to print money.

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I call this the kick-the-can-down-the-road strategy—or rearranging the deck chairs on the Titanic. Another way of looking at this strategy is “growth at any cost to society.” A day will come, probably sooner than later, when we realize that the only thing driving our economies is the explosion of debt. If governments need to run huge deficits with extremely low interest rates for fear of growth failing, even in economies that are running at near full employment, imagine how the debt and deficits explode in a recession or depression when the economy falters. Once bond holders determine that governments have little ability to repay or service the debt, the risk premium (or interest rates) on the debt will rise.

Money and Government: The Past and Future of Economics
by Robert Skidelsky
Published 13 Nov 2018

Der Spiegel, 3 March. Devine, J. (1994) The causes of the 1929–33 Great Collapse: a Marxian interpretation. Research in Political Economy, 14, pp. 119–94. Dobbs, R., Lund, S., Koller, T. and Shwayder, A. (2013), QE and ultra-low interest rates: distributional effects and risks. McKinsey Global Institute. Available at: http://www.mckinsey.com/global-themes/employment-andgrowth/qe-and-ultra-low-interest-rates-distributional-effects-and-risks [Accessed 12 July 2017]. Dowd, K., Cotter, J., Humphrey, C. and Woods, M. (2008), How Unlucky is 25Sigma. Available at: https://arxiv.org/ftp/arxiv/papers/1103/1103.5672.pdf [Accessed 31 July 2017].

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Sovereign states joined the gold standard independently; they made their colonies and dependencies part of their monetary systems. The gold standard offered investors a cheap and efficient credit-rating agency. Provided they practised monetary discipline, balanced their budgets and were free of arbitrary regime change, developing countries could go on borrowing to finance their ‘catch-up’ at low interest rates. 5. The gold standard worked in tandem with empire. The golden age of the gold standard was also the golden age of imperialism. Imperialism cemented globalization. Between 1880 and 1900 the whole of Africa and parts of Asia were incorporated into the European empires. Thus the spread of the gold standard coincided with the political division of the world into sovereign and dependent states.

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But the fragile economy was hit by both supply and demand shocks. A once-and-forall increase in unit labour costs between 1919 and 1922 was never reversed; and aggregate demand was reduced by the policy of deflation to regain and then maintain the gold standard. Structural adjustment would have been easier had Keynes’s recipe of low interest rates and a ‘managed’ exchange rate been followed, but for most of the interwar years ‘abnormal’ unemployment was treated as a cyclical problem that would soon disappear. Policies most frequently recommended were to remove the obstacles to adjustment such as war debts and reparations, tariffs, and the over-generous unemployment benefits which hindered labour mobility and wage flexibility.

No Ordinary Disruption: The Four Global Forces Breaking All the Trends
by Richard Dobbs and James Manyika
Published 12 May 2015

Since the start of the crisis, the central banks of the United States, the United Kingdom, the Eurozone, and Japan have injected more than $5 trillion of liquidity into their economies.35 These actions no doubt prevented a catastrophic scenario from unfolding, but they also pushed interest rates to depths that have remained largely unexplored. And because rates have been held at such low levels for so long, they have helped created new habits that may be hard to shake. Governments across the globe became reliant on low interest rates to finance deficit spending and stimulus. For example, the combined deficits of countries around the world peaked at nearly $4 trillion in 2009.36 But low interest rates held interest costs in check. Between fiscal year 2008 and fiscal year 2012, for example, the US government’s net interest bill fell from $253 billion to $220 billion, a decline of 13 percent, even as the total gross federal debt outstanding grew 67 percent.37 Historically, expansive monetary policy has been a temporary measure deployed to boost consumer expenditure and corporate investments at times of slow growth.

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The interest rates it paid, as low as 5 percent for portions of the debt, were significantly below the rates Reliance would have had to pay to Indian banks.66 In 2011, private equity giant TPG reached a deal to sell 5 percent of itself to Kuwait and Singapore SWFs.67 In 2010, a group of SWFs joined the Ontario Teachers’ Pension Plan, one of Canada’s largest pension funds, to invest $1.8 billion in BTG Pactual, one of Brazil’s largest investment banks.68 Firms with large balance sheets—and cash on hand—could become new investors of capital in these sorts of partnerships. The benefits to borrowers of persistently low interest rates are obvious: companies and governments will be able to lock in cheap long-term borrowing. Those that act quickly can benefit by refinancing when interest rates fall. But a rise in the cost of capital can create other types of opportunities. Higher interest rates will offer higher returns on investments for many companies.

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In the United States, where Medicare and Medicaid already cover a huge swath of the population, public expenditures on health care are expected to more than double, to nearly 15 percent of GDP, by 2050.8 Youth unemployment is high and rising, putting an entire generation at risk 1 Includes the EU-27 and other wealthy economies, such as Australia, Canada, Japan, and the United States. SOURCE: ILO Global Employment Trends for Youth, 2013; McKinsey Global Institute analysis The timing of the impending public sector expenditure “bomb” doesn’t help. As the era of historically low interest rates ends, the cost of capital could start to rise. That spells trouble for governments that are presiding over massive pools of floating-rate debt that constantly needs to be rolled over and refinanced. The combined balance of global fiscal deficits was at an unprecedented $4 trillion in 2011, and total government debt stood at 120 percent of GDP, putting pressure on the ability of governments to provide services.9 The European Commission projects that the graying population will impose an additional “off-balance-sheet commitment” of 3 percent of GDP by 2030.

The Lost Decade: 2010–2020, and What Lies Ahead for Britain
by Polly Toynbee and David Walker
Published 3 Mar 2020

Astonishing ‘We should never stop reminding ourselves just what an astonishing decade we have lived through,’ said the Institute for Fiscal Studies (IFS), ever honest and reliable. ‘The UK economy has broken record after record, and not generally in a good way: record low earnings growth, record low interest rates, record low productivity growth, record public borrowing followed by record cuts in public spending.’ There was also record employment and remarkable growth in jobs, at least until 2019, with ‘help wanted’ becoming a familiar sign. But the new jobs paid indifferently at best, and often badly.

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His wealth-management firm looks after the investments of 100,000 clients, mostly British expats, advising them on the tax-efficient zones in which to park their money. His firm has 1,500 employees in fifty countries, from Switzerland to Botswana, China and Luxembourg to South Africa. His base is in Dubai, which is where he was when we spoke to him, but he lived, he said, mainly on planes. ‘It’s been very good for the markets: low interest rates, low inflation and, yes, quantitative easing as well.’ QE had dramatic redistributive effects, as we saw, and inflated the value of assets. ‘Clients’ accounts have done very well.’ Green had few worries about protectionism or nationalisation or clamping down on tax havens: ‘You can’t fight globalism.

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The result was migrants and ethnic minorities clustered together, the councils disempowered and not even informed when large numbers moved into the area, too weak to prevent over-concentration and ghettos. The old Tory dream died as home ownership fell as a proportion of all tenures, down to 64 per cent in England. For homeowners in situ, low interest rates were good news. For households with a mortgage, the proportion spending at least a quarter of their disposable income on housing costs halved. But rising property values pushed up rents for those who couldn’t get on the fabled stairway. In London, private rents increased 32 per cent in the ten years to 2016, when average earnings rose by only 16 per cent.

Buy Now, Pay Later: The Extraordinary Story of Afterpay
by Jonathan Shapiro and James Eyers
Published 2 Aug 2021

Parts of the Australian market, he told the audience, were in a bubble, and it was caused by low interest rates. ‘There’s very little time cost of money,’ he said. ‘If you miss earnings this year, investors are happy to be patient and hold their stocks for maybe another year or so. You take the extreme example of zero interest rates and you can almost justify any sort of multiple you want. This is one of the reasons that it has been hard shorting in Australia over the last few years and few months.’ King’s comments were prescient. Interest rates had been low for a long time. In the United States, low interest rates had aided the long, slow recovery from the depths of the 2008 financial crisis.

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The economy would run hot, and perhaps too hot. Bond markets now had to contemplate that a strong economy would lead to a shortage of workers, forcing up wages and prices. Bond yields cranked up, and as they did, the pendulum swung away from new-world tech stocks, which thrived in an environment of low-interest rates, and towards old-world banks and industrial corporations that had once seemed to have been left behind. For Afterpay, the macro didn’t matter too much. The dawning of a new age of political strongmen and the level of the ten-year bond rate had no bearing on how a university student would pay for the clothes she bought online.

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That’s because $6.50 invested in a safe investment at 5 per cent a year will be worth $10 in a decade. But if interest rates are zero, future profits become more valuable. And since high-growth companies are expected to make all their profits well into the future, then—all else being equal—their present worth is boosted by low interest rates. The more valuable these businesses, the more money they can raise from investors, and the more they can then spend, enabling them to grow bigger and at a faster pace. And the bigger they get, the more valuable they are deemed to be by the market. For old-hat fund managers who made their names by putting their investors’ money in reliable companies where profits were protected, this new environment tested their fortitude.

Debtor Nation: The History of America in Red Ink (Politics and Society in Modern America)
by Louis Hyman
Published 3 Jan 2011

With such large penalties for non-compliance and such large incentives for compliance, the stick and carrot of the FHA remade American mortgage lending. For President Roosevelt, the FHA mandated low interest rates to counter “exorbitant and usurious rates charged in many cities,” which justified the whole program.78 He considered 8 or 12 percent rates far too high. Both to encourage borrowing and because the loans were less risky, the government mandated a relatively low interest rate. Banks were to charge borrowers 5 percent interest per year. Four percent of that interest would go to the bank, or the investors who later bought the mortgage, and 1 percent would go to a special insurance fund.79 Mortgages would be classed according to risk and maturity date.

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The enforcement of its loans never meant losing a valued possession—or a limb. Personal loan departments helped people get disruptions in their income without risking the loss of their possessions or bodily harm. Personal loans, for those able to get them, protected the wealth of borrowers as well by the relatively low interest rates for the loans and the borrower’s ability to pay off other forms of debt. Personal loans could protect the equity of installment purchases.56 Personal loans, used for debt consolidation, enabled middle-class borrowers to save their equity in installment purchases—something lost to working-class borrowers on repossession.

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By the late 1930s, the National City Bank reported losses of only one-tenth of 1 percent.60 Painter, the assistant manager in the bank’s personal loan department, in remembering the period many years later recounted with some pride that, “some have said, and I would be the last to deny it, that the bank’s dividend record was maintained during the low interest rate and [the] small commercial loan volume days of the depression years by the profitable use of some of the bank’s funds by the Personal Loan Dept.”61 For the Manufacturers Trust Company, also a savings bank, losses on loans made in the previous twelve months were only one-fifth of 1 percent. Less than 1 percent of their accounts were more than thirty days overdue.

Manias, Panics and Crashes: A History of Financial Crises, Sixth Edition
by Kindleberger, Charles P. and Robert Z., Aliber
Published 9 Aug 2011

Sony, Matsushita, and Sharp and a seemingly endless list of firms dominated the global electronics industry. Nikon and Canon ‘owned’ the world’s photo-optics industry. The mandarins in the Ministry of Finance maintained low interest-rate ceilings on both bank deposits and bank lending rates; the interest rates on deposits were below the inflation rate so households had to save a high proportion of their incomes or else their wealth would have declined. The demand for loans from business firms at these low interest rates was much greater than the supply; government officials provided ‘window guidance’ to the banks identifying the firms that were to be given preference.

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US real estate prices began to increase at an above-average rate in 2002. Real estate prices increase in the long run, in part because of the increase in the general price level and in part because of the increase in nominal GDP. (Much of the increase in real estate prices reflects increases in the price of land.) The Federal Reserve maintained low interest rates in part because of the sluggishness in the economy, and house prices increased three times as rapidly as the general price level. The sharp increase in prices induced a construction boom, and housing starts reached two million units a year – about 500,000 more units than the number required to satisfy the growth in population and the losses to fires, storms, and similar factors.

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The Bank of Amsterdam was also a Wisselbank where bills of exchange (Wissel in Dutch, Wechsel in German) were paid. Merchants kept deposits at the Bank of Amsterdam to meet bills presented for collection. Deposits of precious metals enabled the Bank of Amsterdam to earn seignorage – a type of profits – when it produced coins and it paid a low interest rate on deposits. In 1614 the Municipality of Amsterdam established a Bank of Lending (Huys van Leening), that enabled merchants to establish their own credit efficiently but it was not an active lender.7 This credit created by the merchants led to an excessive expansion of the Wisselruiti; when the chain of bills of exchange broke in 1763 because one of the merchants did not have the money to pay on a maturing bill, the DeNeufville bank failed.

Makers and Takers: The Rise of Finance and the Fall of American Business
by Rana Foroohar
Published 16 May 2016

For one, the fact that we are in the longest and weakest economic recovery of the post–World War II period, despite the trillions of dollars of monetary and fiscal stimulus that our government has shelled out since 2008, shows that our model is broken. Our ability to offer up the appearance of growth—via low interest rates, more and more consumer credit, tax-deferred debt financing for businesses, and asset bubbles that make us all feel richer than we really are, until they burst—is at an end. What we need isn’t virtual growth fueled by finance, but real, sustainable growth for Main Street. To get there, we need to understand the key question, which is really quite simple: How did finance, a sector that makes up 7 percent of the economy and creates only 4 percent of all jobs, come to generate almost a third of all corporate profits in America at the height of the housing boom, up from some 10 percent of the slice it was taking twenty-five years ago?

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Shadow banking, the portion of the financial industry that remains largely unregulated (and includes hedge funds, money market funds, and financial arms of big companies like GE), has grown like kudzu: swelling by more than $1.3 trillion per year since 2011 and reaching $36 trillion today.7 Through it all, low interest rates set by the Federal Reserve, which were supposed to help individuals, ended up making the rich richer by inflating the stock market rather than improving the ability of real people to refinance their homes. (Most of the housing recovery has been led by investors, as will be covered in chapter 7.)

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Both trends have redirected capital to less socially useful areas of the economy and created a vicious cycle that’s increasingly difficult to break via the usual methods like monetary policy. Witness the fact that despite the $4.5 trillion the Fed injected into the economy and six years of historically low interest rates, corporations are reinvesting just 1–2 percent of their assets into Main Street.13 Much of the rest is going straight into the pockets of the richest 10 percent of the population—mostly in the form of rising asset prices—and those people are unlikely to spend as much of it as the middle and working classes would.

Pivotal Decade: How the United States Traded Factories for Finance in the Seventies
by Judith Stein
Published 30 Apr 2010

Controls prevented capital from moving around, seeking out the highest interest rate, and allowed countries to keep their rates low to achieve full employment. But McCracken’s solution was not to reinstate capital controls—Keynes’s preference—but to promote exchange flexibility. As a result, a preference for low interest rates would translate into a lower exchange rate. McCracken and the foreign policy people wanted to negotiate a solution at the next IMF meetings, but Connally dismissed the possibility because there was no international consensus. In June Nixon made clear that Connally would lead and “move on the problem,” not “just wait for it to hit us against—e.g. in the fall of ’72.”80Waiting could endanger Nixon’s reelection.

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But the dollar declined as a result of the lack of confidence in financial markets that the U.S. balance of payments would improve because the United States had not concluded trade agreements with Japan, Canada, and the EEC. At the time, U.S. interest rates were low because the Fed was increasing the money supply to boost the domestic economy.106 This produced a money exodus from the United States to Europe. Pompidou was not shy about complaining and told Nixon that the U.S. budgetary deficit and low interest rates were at fault. Nixon defended his course of action, which he claimed would produce a prosperous United States and then strengthen the dollar. He expressed his own disappointment that the EEC had taken the decision to raise agricultural levies, in essence denying the normal competitive benefits of a devaluation that would have accrued to U.S. agricultural exports.107 Indeed, the trade negotiations were going nowhere.

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Between 1973 and 1990, GDP grew 1.06, compared with 2.45 from 1950 to 1973.56 The rapid gains after the 1982 recession did not continue and savings, investment, and productivity stagnated. Deregulation spawned the savings and loan crisis, not entrepreneurship. Balanced budgets now replaced tax cuts as the latest elixir, promising low interest rates and high investment. From 1980 to 1989, the budget deficit averaged 3.9 percent of GDP. During the 1970s the deficit was 2.1 percent, and in the 1960s it was 0.8 percent. In 1985 Congress passed the Gramm-Rudman-Hollings Balanced Budget Act, which required incremental steps toward a balanced budget for 1993.

Inside the House of Money: Top Hedge Fund Traders on Profiting in a Global Market
by Steven Drobny
Published 31 Mar 2006

When the high yielders were at the bottom of the range and rates went up, it seemed a no-brainer to go and buy them. It was a great trade, because the low yielding countries had low inflation and low interest rates and the high yielding countries had high inflation and high interest rates. The policy regime was designed to squeeze inflation out of the high yielders. So there was significant carry and the governments had the policy. But German inflation accelerated after the Berlin Wall fell, and German interest rates started going up a lot. Suddenly, the low interest rate countries like Germany started becoming high yield countries. At the same time, global deflation was building, the U.S. economy was weak, the Japanese bubble was bursting, and the property boom that had occurred in the United Kingdom and in several other countries was giving under the weight of high interest rates.There was pressure for lower rates in the high yielders and higher rates in the low yielders and the carry was being whittled away.

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The ERM was introduced in 1979 with the goals of reducing exchange rate variability and achieving monetary stability within Europe in preparation for the Economic and Monetary Union (EMU) and ultimately the introduction of a single currency, the euro, which culminated in 1999. The process was seen as politically driven, attempting to tie Germany’s fate to the rest of Europe and economically anchor the rest of Europe to the Bundesbank’s successful low interest rate, low inflation policies. The United Kingdom tardily joined the ERM in 1990 at a central parity rate of 2.95 deutsche marks to the pound, which many believed to be too strong. To comply with ERM rules, the UK government was required to keep the pound in a trading band within 6 percent of the parity rate.

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Risk/reward had gone the wrong way at a time when investors were very, very leveraged in those high yielders, so I started looking for the ERM to fall apart. The poor risk/reward in the carry trade was also partly responsible for my eventual departure from Bankers. I was on the cover of the International Herald Tribune in November 1991 just before they signed the Maastricht Treaty, saying the global economy needs low interest rates and a revaluation of the deutsche mark would do the job. Bankers’s management were not very comfortable with me talking against the carry trade. They were sitting there in the carry trade, very involved, while their main research guy out of London was saying the whole thing was going to fall apart!

How Markets Fail: The Logic of Economic Calamities
by John Cassidy
Published 10 Nov 2009

Taken together, incentive-based compensation and herding were “a volatile combination. If herd behavior moves asset prices away from fundamentals, the likelihood of large realignments—precisely the kind that trigger tail losses—increases.” Finally, Rajan added, there is one more ingredient that can “make the cocktail particularly volatile, and that is low interest rates after a period of high rates, either because of financial liberalization or because of extremely accommodative monetary policy.” Cheap money encourages banks, investment banks, and hedge funds to borrow more and place bigger bets, Rajan reminded the audience. When credit is flowing freely, euphoria often develops, only to be followed by a “sudden stop” that can do great damage to the economy.

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Since the summer of 1987, the room had been the preserve of Alan Greenspan, who was now in his sixteenth year at the helm of the Fed and dominated it utterly. The meeting began with a presentation by the Fed’s economic staff about the possibility of a Japanese-style deflation, in which prices would fall and the economy would stagnate for a prolonged period despite extremely low interest rates. In the previous few months, the annual rate of consumer price inflation had dipped toward 2 percent, payrolls had fallen, and GDP growth had been weak, partly because of fears of a war in Iraq, which had duly arrived in March. The stuttering economy had left the Fed in a bind. With the funds rate already at its lowest level since the 1960s, there were doubts about how much further the central bank could go to stimulate spending.

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Every bubble is different, but almost all of them share three common features: policymakers beholden to the illusion of stability; financial innovations that make speculating easier; and New Era thinking typified by overconfidence and disaster myopia. In real estate bubbles, particularly, monetary policy is key. Low interest rates provide the helium that inflates the bubble. Once house prices start rising, the mortgage rate effectively sets their upper limit, and the relationship is pretty much one to one. If the interest rate on thirty-year fixed mortgages is 10 percent, somebody with enough income to make a monthly payment of $2,500 can take out a loan of $285,000.

Making Globalization Work
by Joseph E. Stiglitz
Published 16 Sep 2006

The almost $200 billion they channel each year in foreign direct investment to developing countries has narrowed the resource gap.1 Corporations have brought jobs and economic growth to the developing nations, and inexpensive goods of increasingly high quality to the developed ones, lowering the cost of living and so contributing to an era of low inflation and low interest rates. With corporations at the center of globalization, they can be blamed for much of its ills as well as given credit for many of its achievements. Just as the issue is not whether globalization itself is good or bad but how we can reshape it to make it work better, the question about corporations should be: what can be done to minimize their damage and maximize their net contribution to society?

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And finally, there are middle-income countries, like Argentina, that have been lent too much (or, depending on one’s perspective, have borrowed too much), mostly by private lenders, but also by the IMF, World Bank, and regional development banks, and cannot repay what is owed without wrenching adjustments. Debt Relief for the Poorest The very poor countries are so desperately poor that they take money in any form that they can get. Typically, private lenders will not lend to them; but in the past the World Bank, the IMF, and advanced industrial countries have often provided loans at low interest rates. The hope was that the loans would finance projects and programs which would lead to growth—enough growth that the country would find it easy to repay the loans. But this is often not how matters turned out. Even when there has been growth, it has been so feeble that it has not offset the increase in population; twenty years after the loan was granted, the country is even poorer, and in no position to repay.

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Others go to buy bonds from the United States and other “strong” currency countries; these bonds will be added to the developing country reserves. They have an enormous advantage: they are highly liquid, so they can be sold quickly whenever the country needs cash; but they have an enormous cost: they earn a very low interest rate. Most of the bonds are short-term U.S. Treasury bills (usually referred to as “T-bills”), which in recent years have yielded as low as 1 percent interest. There is something peculiar about poor countries desperately in need of capital lending hundreds of billions of dollars to the world’s richest country.

The Bank That Lived a Little: Barclays in the Age of the Very Free Market
by Philip Augar
Published 4 Jul 2018

Gordon Brown’s ‘golden rule’ that over the course of the economic cycle the government would borrow only to invest and not to fund current expenditure had earned him the nickname ‘Iron Chancellor’ and was the basis of the ‘Goldilocks economy’ – neither too hot nor too cold, with high employment, rising house prices, low interest rates, steady growth and low inflation – which prevailed for all of Barrett’s time at Barclays. These conditions were particularly good for banks, with interest rates at a 5 per cent sweet spot. Retail banks make their money simply by lending at a higher rate than they offer to depositors and the difference is the net interest margin. In contrast to later years when low interest rates made customers sensitive to any slight change, rates of about 5 per cent gave banks room to make a generous net interest margin by trimming deposit rates and adding a bit to borrowing rates.

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This was the kind of modern management that Galley, Newmarch and other shareholders had wanted to see from Buxton ten years before, and investors loved it. Less discussed and equally important was an increase in Barclays’ leverage, the use of borrowed money to ramp up the bank’s returns. In times of low interest rates and rising asset prices it made sense to borrow cheaply and lend that money on at a higher rate or use it to play the markets. It was an easy way to make money and every bank did it, in the process often lowering the credit standards they required of borrowers, particularly in the housing market.

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This punctilious lawyer had learned banking as a corporate financier, trading and risk management at BZW and modern financial techniques at Odey Asset Management. He knew all about shorting (selling shares you didn’t own in the hope that the price would fall and you could buy them back more cheaply before any money changed hands); leverage (borrowing money at low interest rates to invest in the markets); derivatives; and hedging risk. As Barclays’ finance director, his interactions with investors showed him that shareholders of all kinds were demanding in their expectations. He knew that quick results were expected and he had no time to waste. As he prepared for his first board meeting as chief executive designate in November 2003, he developed his strategy.

The Tyranny of Nostalgia: Half a Century of British Economic Decline
by Russell Jones
Published 15 Jan 2023

What tends to happen is that policy reacts to events at least as much as it triggers them. It is the impact of the economy on policy, rather than the reverse, that dominates data. Interest rates tend to rise when an economy is strong, and inflation is rising, and fall when an economy is weak, and inflation is in retreat. But it should not be concluded that low interest rates are a catalyst for weak growth and that high interest rates are the source of price instability. Rather, the effects run the other way: when an economy is weak, it requires the support of looser monetary policy; when inflation is high, the necessity is for tighter monetary policy. Economic analysis is therefore, by its nature, less pure and more opaque, and its conclusions more tentative and open to dispute, than is the case with the natural sciences.

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He was against self-defeating attempts to balance the budget during a recession through austerity that would prolong the downturn rather than achieve the professed objective, but he was equally distrustful of elaborate economic forecasts and he was no supporter of either persistent budget deficits or unbridled ‘tax and spend’.23 It is likely that he would have had strong reservations about the fine-tuning of demand, or the employment of a formal incomes policy, while ‘growthmanship’ would have been anathema to him. What he argued for most strongly was the stabilization of volatile investment, the main source of domestic instability. He believed this should be encouraged by persistently low interest rates, although in extremis this strategy could lose potency, and the speeding up or slowing down of a separate government capital budget (while the ordinary current budget remained in balance) would be warranted. He was also open to the idea of varying national insurance contributions to sustain the spending of the income or liquidity constrained, but – in a precursor of Friedmanite theory, and the latter’s notion of the relative stability of the consumption function – Keynes was critical of too-regular small variations in taxation to manage demand, ‘as people have established standards of life’.24 Neither was Keynes an inflationist.

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There was therefore a desire to identify a series of separate regulations and controls that could be tightened up as asset market and other financial extravagances become manifest, thereby supplementing ‘standard’ monetary and fiscal policy to avoid the development of destabilizing Minsky-like financial sequences. There was a need to develop a countercyclical policy for the financial cycle. This was particularly the case in an environment of historically low interest rates, where investors might be encouraged to take excessive risks in order to generate higher returns. It was recognized that in such a strategy of ‘leaning against the financial wind’, particular attention should be paid to credit growth, which has a habit of accelerating procyclically as bank balance sheets become the beneficiaries of strengthening output and still-low rates, in the process fuelling asset prices, and particularly real estate prices.

Seven Crashes: The Economic Crises That Shaped Globalization
by Harold James
Published 15 Jan 2023

The government ran large budget deficits as it tried to keep up employment in the state-owned railroad and postal systems, and also to generate more purchasing power. It kept on looking for new and ingenious ways to administer repeated fiscal stimuli, which were then monetized by the central bank. Equally significant, large industrial producers demanded continued access to cheap central bank credit, at low interest rates that became rapidly, in real terms, grotesquely negative: the central bank discount rate remained at just 5 percent until the summer of 1922. The president of the central bank, an elderly Prussian bureaucrat called Rudolf Havenstein, boasted about his success in getting new printing plants (132 factories, as well as the bank’s own facilities), printing plate manufacturers (29), and paper factories (30) to meet the enormous demand for new money.

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The bid for home ownership was just one area where consumers, eager to acquire assets and a lifestyle they had once thought they could not afford, discovered they could use leverage.14 Continually rising property prices would make this a secure bet, as the value of the property would constantly increase and make the debt more affordable. Low interest rates encouraged countries as well as individuals and corporations to borrow. But—unlike in the 1970s—governments in poorer or emerging market economies did not press to borrow, in part because of the legacy of the 1997–1998 East Asia crisis, which highlighted the dangers of indebtedness. Some of the most serious imbalances occurred within the industrial world, as central banks embraced solutions that made debt ever more affordable.

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After the collapse, Bernanke argued that “a policy of aggressive depreciation of the yen would by itself probably suffice to get the Japanese economy moving again.”107 The suggestion was probably the main reason why Japanese officials thought of his urging as so dangerous: it seemed to be undoing the conventional framework for international currency cooperation. Bernanke added: “I am not aware of any previous historical episode, including the periods of very low interest rates of the 1930s, in which a central bank has been unable to devalue its currency.”108 There were indeed famous and very obvious examples of how devaluation could boost economic expansion: the UK in 1931, the United States in 1933, or Nixon’s unilateral closing of the gold window in 1971. Bernanke could draw on a rich literature, to which he had contributed an important paper, on how in the interwar years abandoning the gold standard freed monetary policy and thus laid a path to recovery.109 He also thought about nonstandard open-market operations, which might contain some fiscal component.

The Upside of Inequality
by Edward Conard
Published 1 Sep 2016

An economy with an abundant capacity and willingness to take risk will expand until it is constrained by savings. In an economy constrained by savings, interest rates will rise until they equilibrate the supply and demand for savings by pruning unworthy investment projects and encouraging savers to save more. But that’s not the economy we see today. Quite the opposite—we see low interest rates stemming from an economy flooded with risk-averse savings stemming largely from a growing trade deficit. Debt and equity come from different sources. Deferred consumption—namely, savings—chiefly funds debt. Savers tend to be risk-averse. Many would often gladly stuff their mattress with money and earn little if any return rather than take the risk of losing their money.

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Instead, we have seen an explosion of subprime mortgages in the United States, the construction of empty cities in China, and the funding of never-to-be-paid-back “government-guaranteed” Greek consumption by German-financed debt. This hardly indicates an adequacy of safe collateral. Quite the opposite: together with low interest rates, they suggest an abundance of risk-averse savings overreaching for traditional collateral. Regardless of the reasons, until risk-averse savings fund innovation, they have sat on the sidelines while equity has funded and underwritten the risks of producing innovation. At the same time, we see successful faster-growing, high-tech, knowledge-intensive companies, like Google and Apple, generating more cash then they consume and holding cash rather than distributing it to their shareholders or investing it in R&D.

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At the same time, greater polarization of the Democrat and Republican parties, growing tension in the Middle East, and a more aggressive Russia and China increase risk by widening the dispersion of potential outcomes and makes them more unpredictable. Compounding matters, the Obama administration lowered the payoff for successful risk-taking by raising marginal tax rates. Seen from this proper perspective, low interest rates and high corporate profits are not symptomatic of growing rents or a lack of investment opportunities, as some advocates of income redistribution claim. Both are symptomatic of the same thing—the economy bumping up against its capacity and willingness to bear more risk—no different than what we see when the economy falls into recession.

Keeping at It: The Quest for Sound Money and Good Government
by Paul Volcker and Christine Harper
Published 30 Oct 2018

The Arthur Smithies–Alvin Hansen doctrine that a little inflation was a good thing had no constituency in the New York Fed. Federal Reserve policy had been maintaining historically low interest rates (⅜ to ⅝ percent for three-month Treasury bills to 2½ percent for long-term bonds) from the Depression right through the World War II and early Korean War inflations. My senior thesis had excoriated that spineless approach of letting political pressure for low interest rates override the central bank’s obligation to keep prices stable. If that was the way the Fed viewed its responsibilities, it might as well be part of the Treasury Department!

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But the review of central banking theory and practice as it developed in the years after the Federal Reserve was established helped provide perspective. More notably, the concluding sections on the importance of price stability and the key role of monetary policy could have been written today. Federal Reserve policy in those days was devoted to sustaining the pattern of low interest rates established in the late 1930s and maintained throughout World War II. The residue of Depression-era “easy money,” with interest rates remarkably similar to those prevailing after the 2008 financial crisis, seemed important to the Treasury Department, and indeed to President Harry Truman. Borrowing costs were kept low and financial markets stable.

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It is true that interest rates can’t fall significantly below zero in nominal terms. So, the argument runs, let’s keep “a little inflation”—even in a recession—as a kind of safeguard, a backdoor way of keeping “real” interest rates negative. Consumers will then have an incentive to buy today what might cost more tomorrow; borrowers will be enticed to borrow at zero or low interest rates, to invest before prices rise further. All these arguments seem to me to have little empirical support. Yet fear of deflation seems to have become common among officials and commentators alike. (Even back in July 1984, as my Fed colleagues and I were still monitoring the 4 percent inflation rate, the New York Times had a front-page story warning about potential deflation.)

The City
by Tony Norfield

While the financial system grows alongside and is intertwined with the accumulation of capital, weak economic growth and lower profitability prompts the accelerated growth of different types of financial business, especially if there is also a decline in returns on financial investments in an environment of low interest rates. It was these lower returns that prompted the extra leverage and the explosive growth of derivatives markets in the 2000s. Financial institutions could not maintain the returns they needed from their loans or from bond and equity investments. For example, many pension funds needed annual yields on their investments of around 7 per cent if they were to meet their promises to pensioners of an attractive income in retirement.

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As a result, one of the classic mechanisms for resolving a crisis, the destruction of capital values, has not, at the time of writing (mid-2015), yet come into play. The major central banks have done their best to prevent this outcome with successive ‘quantitative easing’ policies and historically low interest rates; weaker countries have more directly borne the brunt of the economic damage. Another key way of trying to restore profitability is to increase the exploitation of the workforce, by cutting real wages and imposing onerous new conditions. So far in the rich countries, this has only been attempted in a piecemeal fashion.

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The UK’s figures will have declined with the dissolution of the Sterling Area in the early 1970s, and since sterling has a very much smaller role in foreign payments than the US dollar, the seigniorage amounts are probably negligible in relation to UK GDP.13 This is not contradicted by the UK’s major financial role in the world, since that is not really based upon sterling. Possibly the foreign circulation of Swiss francs and Japanese yen are more important in relation to their respective GDPs than in the UK’s case. The longer-term trend of appreciation in the value of the latter currencies, and their low interest rates, makes holding cash in the form of notes relatively attractive.14 Nevertheless, seigniorage is only a very narrow measure of the potential economic gains to be had from a currency with an international role. The stocks of currency circulating abroad may be large absolute sums, but they remain only small shares of GDP.

The Pyramid of Lies: Lex Greensill and the Billion-Dollar Scandal
by Duncan Mavin
Published 20 Jul 2022

It’s a blemish on a company’s record and puts the executives on notice that the regulator has its eye on them. GAM’s cost base was bloated and performance was not as good as in the past. But there were broader, external forces hurting GAM too. The whole industry was under pressure to reduce costs and justify their fees. The global investing environment was relatively benign, with low interest rates and weak economic growth everywhere. That made it harder for investment managers to truly stand out. Active managers like GAM – which charge higher fees because they aim to actively outdo benchmark indexes – were losing out to passive managers that just copy the market and charge clients less.

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In the years after the financial crisis, the biggest banks in the world were undergoing a major strategic upheaval. New regulations had made some old business lines obsolete, inefficient or unprofitable. Uneven rules around the world also tipped the balance so that US investment banks were winning out against banks in Europe, even on their own patch. Ultra-low interest rates set by central banks – a blunt instrument meant to boost economic activity – also tilted business lines in or out of favour, as did emerging technologies. The shifting global balance of economic power, from West to East, played a role too. Most of the pre-crisis finance giants were going through some kind of overhaul.

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Credit Suisse has an extensive network of private bankers in the region. Some of those clients were persuaded to take out loans to generate bigger returns for their stake in the funds. Sometimes they were told to borrow as much as 60 per cent more than they had invested in cash. Wealthy clients of the bank can borrow money at a low interest rate and invest it into a fund that pays a slightly higher rate. That way they’re effectively getting paid for nothing, though if the investments go bad, they’re on the hook for their own investment plus the total of the loan. It’s a way to juice the potential reward, though at some considerable risk.

Stigum's Money Market, 4E
by Marcia Stigum and Anthony Crescenzi
Published 9 Feb 2007

Indeed, data from the Federal Reserve’s quarterly surveys of senior loan officers show that lending standards loosened during nearly every quarter of the early 2000s, with a greater percentage of officers reporting a loosening of lending standards than at any time since the 1980s. This impact that low interest rates had on the housing market in the early 2000s illustrates the important role that interest-rate levels play in the growth of the agency 20 Andreas Lehnert, Wayne Passmore, and Shane Sherlund, “GSEs, Mortgage Rates, and Secondary Market Activities,” Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System, July 2005. securities market. Low interest rates tend to boost originations, while higher interest rates tend to reduce originations, hence affecting the amount of securities the agencies decide to issue.

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Nevertheless, bankers have at times had an image problem, seen as the culprits behind the high interest rates that borrowers must pay and as acting in ways that could put the financial system and the economy at risk, perhaps through the extensive use of derivatives or by lending to risky borrowers. Both charges reflect the preference for low interest rates and a few serious misconceptions entertained by much of the public and more than a few politicians over the years. First, it is the Fed, not bankers, that sets the general level of short-term interest rates. Second, banking is risk free or, alternatively, risk-free banking is what the country needs.

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You have enough volatility in the Treasury market to make huge money, provided that you pick the right time to acquire an asset and that you get rid of it ahead of a market downturn. That’s how you can really make money, but you need flexibility to do this, and you don’t have such flexibility with a portfolio of long corporates.” Still, in recent years, the low interest-rate and tight credit spread environment that has prevailed in recent years has led to a “yield grab” across the fixed-income market, including the banking industry. As a result, the data show that there has been a seismic shift in the types of securities that banks are willing to own, particularly in the early 2000s.

The End of Growth: Adapting to Our New Economic Reality
by Richard Heinberg
Published 1 Jun 2011

• The Clinton White House’s (and Treasury Secretary Lawrence Summers’s) crucial error in shielding over-the-counter derivatives from regulation in the Commodity Futures Modernization Act; this constituted “a key turning point in the march toward the financial crisis.” • Then NY Fed President, now Treasury Secretary Timothy F. Geithner’s failure to “clamp down on excesses by Citigroup in the lead-up to the crisis.” • The Fed’s maintenance of low interest rates long after the 2001 recession, which “created increased risks.” • The financial sector’s spending of $2.7 billion on lobbying from 1999 to 2008, with members of Congress affiliated with the industry raking in more than $1 billion in campaign contributions. • The credit-rating agencies’ stamping of “their seal of approval” on securities that proved to be far more risky than advertised (because they were backed by mortgages provided to borrowers who were unable to make payments on their loans)

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The system as a whole does have some of the characteristics of a bubble or a Ponzi scheme, but it also has a certain internal logic and even the potential for (temporary) dynamic stability. FIGURE 18. Total US Debt, 1945–2010. US debt by sector in nominal values (not inflation adjusted). We see the rapid expansion of both household and financial sector debt beginning in 2000, spurred by low interest rates and rising home values. Starting in 2008, household and financial debt contract, while government debt expands. Source: The Federal Reserve, Z.1 Flow of Funds Accounts of the United States. However, there are practical limits to debt within such a system, and those limits are likely to show up in somewhat different ways for each of the four categories of debt indicated in the graph.

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During the 2000s, Zimbabwe inflated its currency so dramatically that eventually banknotes were being circulated with a face value of 100 trillion Zimbabwe dollars. In each case the result has been the same: a complete gutting of savings and an eventual re-valuation of the currency — in effect, re-setting the value of money from scratch. How does a nation inflate its currency? There are two primary routes: maintaining very low interest rates encourages borrowing (which, with fractional reserve banking, results in the creation of more money); or direct injection by government or central banks of new money into the economy. This in turn can happen via the central bank creating money with which to buy government debt, or by government creating money and distributing it either to financial institutions (so they can make more loans) or directly to businesses and citizens.

In FED We Trust: Ben Bernanke's War on the Great Panic
by David Wessel
Published 3 Aug 2009

An investment partnership run by Grantham, Mayo, Van Otterloo & CO., a Boston money manager with a taste for timber, bought more than 5 percent of the land in the state of Maine. To be sure, Fed policy during this first part of the decade kept the economy chugging along, but there is a potential downside to sustained very low interest rates — a downside that goes far beyond overpaying for assets. As economic historian Charles Calomiris of Columbia University observed, “The most severe financial crises typically arise when rapid growth in untested financial innovations” — such as complicated securities invented to invest in mortgages — “coincided with … an abundance of the supply of credit.”

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But the words weren’t chosen to enter the popular culture the way his December 1996 warning about “irrational exuberance” in the stock market did, nor did he draw any link between these “low-risk premiums” and the abundance of credit. Rather, with some justification, he described the investor optimism as “the apparent consequence of a long period of economic stability.” (Translation: The Fed was doing such a good job that people thought the good times would last forever.) The Greenspan Fed’s policy of sustained low interest rates reflected an almost exclusive focus on keeping the economy growing and avoiding falling prices for goods and services, not on restraining the prices of houses or stocks. That was what Greenspan believed central banks should do. Throughout 2003, Bernanke was a strong ally of Greenspan’s in making the case that the Fed should keep interest rates low and should say so publicly.

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“I will stipulate that, unless we get a significant vote in favor of putting it in, I would recommend that we drop it and bring it up for discussion … next time,” he said, according to transcripts released in May 2009. Seven of the eighteen members of the FOMC present objected, an extraordinary protest by FOMC standards. “Right on the margin,” Greenspan said, ruling that the unusual vow would be included in the statement. But many of those at the Fed who embraced the low interest rates of the early 2000s — or favored even lower rates, such as Bob Parry, former president of the San Francisco Fed — would later contend that the Fed should not have kept rates so low for so long. And, in retrospect, they were correct. Among outsiders, that view became conventional wisdom: the Wall Street Journal asked fifty-five economists in March 2008 if they agreed with this statement: “With the benefit of hindsight, the Fed was too slow to raise the federal funds rate after taking the target to 1 percent in 2003?”

The Deficit Myth: Modern Monetary Theory and the Birth of the People's Economy
by Stephanie Kelton
Published 8 Jun 2020

“Dear Reader: You Owe $42,998.12,” Time magazine cover, April 14, 2016, time.com/4293549/the-united-states-of-insolvency/. 18. James K. Galbraith, “Is the Federal Debt Unsustainable?,” Policy Note, Levy Economic Institute of Bard College, February 2011, www.levyinstitute.org/pubs/pn_11_02.pdf. 19. Olivier Blanchard, “Public Debt and Low Interest Rates,” Working Paper 19-4, PIIE, February 2019, www.piie.com/publications/working-papers/public-debt-and-low-interest-rates. 20. Greg Robb, “Leading Economist Says High Public Debt ‘Might Not Be So Bad,’” MarketWatch, January 7, 2019, www.marketwatch.com/story/leading-economist-says-high-public-debt-might-not-be-so-bad-2019-01-07. 21. David Harrison and Kate Davidson, “Worry About Debt?

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But—and this is really important—the government can always strip markets of any influence over the interest rate on government bonds. Indeed, that’s exactly what the Federal Reserve did during and immediately after World War II, and it’s what the Bank of Japan is doing today.29 To keep a lid on interest rates during World War II, the Federal Reserve “formally committed to maintaining a low-interest-rate peg of 3/8 percent on short-term Treasury bills” and “also implicitly capped the rate on long-term Treasury bonds at 2.5 percent.”30 Even as deficits exploded and the national debt climbed from $79 billion in 1942 to $260 billion by the time the war ended in 1945, the federal government paid just 2.5 percent interest on long-term bonds.

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Using your thumbs, give a thumbs-up for strong demand from investors. Strong bids mean bond prices go thumbs-up. There’s an inverse relationship between bond prices and bond yields, so a thumbs-up for higher bond prices implies a thumbs-down for interest rates. It’s cheaper to borrow when primary dealers indicate a willingness to buy at low interest rates. When dealers submit weaker bids, it means they’re asking for higher returns. If the weakness is widespread, the Treasury Department may end up paying somewhat more than it anticipated when the auction was announced. In practice, Treasury auctions are always oversubscribed, meaning that there are always more bids than there are securities to go around.

More Money Than God: Hedge Funds and the Making of a New Elite
by Sebastian Mallaby
Published 9 Jun 2010

President Reagan had reshuffled his administration at the start of his second term, and the new team appeared determined to bring the dollar down in order to reduce the U.S. trade deficit. The fundamentals, insofar as they were relevant, pointed the same way. Interest rates were falling, making it unrewarding for speculators to hold dollars. If the combination of political action and low interest rates could persuade even a few speculators to abandon the greenback, the upward trend in the currency could suddenly reverse. In the mature phase of a cycle, all the speculators who want to ride the dollar have already climbed aboard. There are hardly any buyers left, so it takes only a few sellers to make the market perform a U-turn.

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In January he authorized one of his lieutenants to buy a staggering position in Canadian bonds, adding to the bets he already had in the United States, Japan, and Europe. Then, together with his wife and friends, he headed off to China on another vacation. ON JANUARY 21, 1994, FEDERAL RESERVE CHAIRMAN Alan Greenspan made his way over to the White House. Fueled by low interest rates, the economy had first recovered and then grown smoothly for thirty-four consecutive months, but now Greenspan was visiting President Clinton and his entourage to deliver an unwelcome message. Even though inflation was quiescent, it was time to preempt its resurgence with a small rate hike.

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The big man listened to Fraga’s story and quickly approved a trade, and over the space of a few days in late January, the Soros team sold short about $2 billion worth of the Thai currency.14 The selling was both a prediction of a crisis and a trigger that could bring it on: To defend the baht against the pressure from Druckenmiller and Fraga, the government sold a chunk of its dwindling foreign-currency reserves and raised interest rates by 3 percentage points—a punishing hike given that Thai banks were tottering.15 But the rate hike came too late to scare the predators away. The Soros team had taken out baht loans of six months’ duration and had locked in the low interest rates that had existed before the government hiked them. Secure in their positions, Druckenmiller and Fraga could afford to wait until the end of July for the inevitable to happen.16 In the months and years to come, a spirited argument would break out as to whether hedge funds precipitated Asia’s financial crisis.

The Future of Money: How the Digital Revolution Is Transforming Currencies and Finance
by Eswar S. Prasad
Published 27 Sep 2021

Not all innovations discussed in this chapter can be considered foundational, but collectively, they herald deep changes. The timing of this wave of Fintech might be the result of a fortuitous confluence of factors—a wave of technological advancements, including in mobile and internet-related technologies; laxer financial regulation; and low interest rates that sparked the search for new sources of profit and lower costs in financial markets. While many of these financial innovations had their origins in the 2000s, it is only over the last decade that they have taken firmer root and proliferated. Wide Sweep of Fintech New financial technologies and new companies built around these technologies are improving the execution of the many basic functions of a financial system that were discussed in Chapter 2—credit, savings, and insurance.

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Challenger banks do have at least a minimal physical presence and hold their own banking licenses (unlike their close cousins, neo banks, which are purely digital operations, lack a license, and usually have a partner bank through which they offer a smaller range of services to customers). Still, their limited physical operations give challenger banks a cost advantage compared to traditional banks. Basic no-frills accounts at challenger banks pay depositors low interest rates and lack features such as overdraft facilities. These banks make money through transaction fees paid by merchants, through fees on specialized services, and, in some cases, through offers of premium accounts with more features and modest fees. One of the selling points these banks tout is that they eschew many of the fees that traditional banks charge—such as fees for monthly account maintenance, overdrafts, transfers, nonsufficient funds, and ATM transactions—all of which disproportionately affect accounts with low balances.

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If a central bank reduces short-term nominal interest rates (which it controls directly) when economic growth is slowing, banks ought to be eager to provide cheap loans since their funding costs are falling. But banks might be hesitant to make loans when the economy is weak, and the risk of defaults is higher. Moreover, consumers and businesses might be cautious about borrowing money even at low interest rates. When a firm faces uncertain demand prospects for the goods it produces, it may be reluctant to undertake investment that might not pay off, even if it can finance that investment cheaply. Such reticence on the part of consumers to spend and businesses to invest can lead to falling inflation or even deflation, a situation in which prices are actually falling.

European Spring: Why Our Economies and Politics Are in a Mess - and How to Put Them Right
by Philippe Legrain
Published 22 Apr 2014

In May 2012 Brussels insisted that the Dutch government tighten fiscal policy in a recession, even though its bond yields were at record lows, its public debt was scarcely above the EU limit and comfortably below Germany’s, and it was a net lender to foreigners, with a huge current-account surplus of 7 per cent of GDP.242 Nor was there market pressure on Germany and other northern European countries – including Britain – to embrace austerity. On the contrary, they benefited from ultra-low interest rates as capital fled southern Europe. Since early 2012 Germany has been able to borrow for ten years at negative interest rates, after allowing for inflation, and it faced very low interest rates before that. It was an ideal opportunity to invest in upgrading the country’s rundown infrastructure, in the clean energy needed to realise Merkel’s desired “energy transition” (Energiewende) and more generally in future growth.

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For instance, Royal Bank of Scotland made a further £8.2 billion in losses in 2013, while credit to businesses in the eurozone contracted at a record rate.39 To cap it all, both Britain and the eurozone are failing to face up to their huge (and often similar) longer-term challenges. The crisis in Britain, the eurozone and indeed across the Western financial system – from the mighty United States to tiny Iceland – is the result of massive bad lending in the years up to 2007 by a dysfunctional and dangerously fragile banking system, fuelled by excessively low interest rates and abetted by the complacency (and sometimes the complicity) of regulators and politicians. Investors underestimated risk and misallocated capital on a massive scale, inflating a property and financial bubble of unprecedented scale and scope, financed by reckless lending by both international banks and local ones.

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Britain has pinned its hopes on easy money and a cheap currency while doing little to remedy the economy’s longstanding structural weaknesses: its underinvestment in skills, infrastructure, housing and business capital more generally and its unhealthy reliance on a dysfunctional financial sector. In effect, the British government has assumed that low interest rates and QE would together boost investment and that a weaker currency and flexible labour markets would automatically shift the economy towards broad-based export-led growth. But in practice, banks have refused to lend, companies have been loath to invest and exports have stagnated, as Chapter 7 explains.

Crashed: How a Decade of Financial Crises Changed the World
by Adam Tooze
Published 31 Jul 2018

The result was that Greece and Portugal could borrow on terms that were better than ever before in their history, and one might have expected this to produce a huge surge in new public borrowing. Reading some commentary on the eurozone crisis, one might imagine that this was indeed what happened.30 But, despite the unprecedentedly low interest rates, there was, in fact, no public debt boom after 2001. Certain countries borrowed more than others. But overall, the Maastricht rules limiting deficits exercised an effective restraint, especially when one considers the inducement to borrow provided by the convergence of yields. Despite the profound ambiguity of the institutional structure, the sense of calm was preserved by the fact that no major public borrower was grossly abusing the situation.

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The bulk of its debts were piled up in the 1980s and 1990s as its two main parties, PASOK (social democrat) and New Democracy (Christian democratic), lured voters with the promise of West European modernity and affluence.4 In 2006 Greece’s debt level relative to GDP was lower than it had been when it joined the eurozone in 2001. But it was not reduced by much and would have been worse but for fiddling. Athens’s failure was not to have used the exceptional period of rapid growth and low interest rates to substantially reduce its debt burden. Any sudden surge in the deficit, any upward hike in interest rates, was likely to topple it from just about managing to insolvency. That is precisely what happened in 2008. In response to the crisis, the conservative New Democracy government abandoned all fiscal restraint, and at the same time, interest rates for Greece as a weaker sovereign borrower surged.

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Once their Excel spreadsheet was properly edited, there was no sharp discontinuity at the 90 percent mark and the case for emergency action was far weaker than they made out.3 But in early 2010 their arguments ruled the roost. In the Financial Times they opined: “[T]he sooner politicians reconcile themselves to accepting adjustment, the lower the risks of truly paralysing debt problems. . . . Although most governments still enjoy strong access to financial markets at very low interest rates, market discipline can come without warning.” Once bond markets realized the full measure of the “fiscal tsunami” unleashed by the banking crisis, their judgment would be merciless. “Countries that have not laid the groundwork for adjustment will regret it.”4 No one was safe. As Rogoff told Germany’s right-wing Welt am Sonntag, a newspaper that hardly needed encouragement: “Germany’s public finances are not on a sustainable path. . . .

The Next Decade: Where We've Been . . . And Where We're Going
by George Friedman
Published 25 Jan 2011

Whether it stops borrowing, increases borrowing, or decreases it, the American economy constantly shapes global markets. It is the power to shape that is important. Of course, it should also be remembered that every dollar the United States borrows, others lend. If the market is to be trusted, it is saying that lending to the United States, even at currently low interest rates, is a good move. Many countries have impacts on other countries. What makes the United States an empire is the number of countries it affects, the intensity of the impact, and the number of people in those countries affected by these economic processes and decisions. In recent years, for instance, Americans had a rising appetite for shrimp.

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Bush’s reasons were derived both from geopolitics and from partisan domestic politics. He was at war with the jihadists, and he did not want to raise taxes to pay for his military interventions. Instead, he wanted the total revenue from taxes to rise by way of a stimulated economy. The theory was that the combination of military spending, tax cuts, and low interest rates would allow the economy to surge, increasing tax revenues enough to pay for the war. If this supply-side gambit didn’t work, Bush reasoned, he would still have the benefit of not undermining political support through tax hikes before the 2004 elections. He also assumed that he could deal with the economic imbalances after the election, as the war wound down.

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This cooperation was designed so that there would be no losers, and therein lay its fatal flaw. The capital problem was exacerbated by Japan’s not having a retirement plan worth mentioning, which meant that citizens were forced to save heavily, putting their money in government post office banks, which paid very low interest rates. The money was then loaned by the government to the large “city banks” linked to the keiretsu. This system gave Japan a huge advantage in the 1970s and 1980s, when U.S. interest rates were in the double digits and Japanese corporations could borrow at less than 5 percent. But the money was not being loaned to businesses that were inherently profitable.

Global Governance and Financial Crises
by Meghnad Desai and Yahia Said
Published 12 Nov 2003

The case of Brazil is very important from the point of view of a critique of mainstream ‘moral-hazard-type’ crisis-analysis. For example, according to the McKinnon and Pill approach to financial crisis the main cause of borrowingagents losing their capacity to assess and price their risk properly is that internal and external moral hazards lead to ‘artificially’ low interest rates; these, in turn, gave a false incentive to agents to accumulate excessive amounts of risk.17 However, in Brazil high interest rates did not seem to have been able to avoid a financial crisis either. Figure 7.6 shows a first crucial difference between ‘route 1’ and ‘route 2’; even though in both cases the credit to the private sector grew rapidly, the use made of this credit was rather different.

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This quantitative short-sharp-shock seems to have had rather more long-lasting effects than the continuing (and strengthening) Chilean price-based controls. Maybe when drastic action is needed, as was clearly the case in Malaysia in 1994, quantitative controls are to be preferred.47 However, not all elements of the inflow-control package were dismantled at the end of 1994; low interest rates were maintained as part of residual policy package to disincentive a possible rapid return of private capital inflows after the end of quantitative restrictions – real deposit rate increased in 1995 to just 0.9 per cent and in 1996 to 1.8 per cent, while the real lending rate did so to 2.5 and 3.6 per cent, respectively.

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Third, as opposed to Chile, the return of inflows in 1995 pushed this index back up with a vengeance; of course, the difference was in the levels of interest rates. As mentioned earlier, Malaysia may have lifted most of the quantitative controls on inflows towards the end of 1994, but kept the low interest rate part of the residual inflow-control package. The return of inflows, extremely low deposit rates and little life in the stock exchange (by pre-crisis standards), together with low mortgage rates, set in motion a new ‘route 1’-style real estate bubble: in just four quarters the index jumped 2.6-fold again.

I Hate the Internet: A Novel
by Jarett Kobek
Published 3 Nov 2016

People with salaries in the six figures could afford to pay $3500 for a 1BR apartment in a traditionally working class Latino neighborhood. The other employees, the dopes who came West with promises of deferred compensation, would bunch together. They lived eight people to a 2BR apartment. They paid $5,000 a month in rent. They had two sets of bunkbeds in each room. The citizens of San Francisco were being victimized by low interest rates. That was capitalism and it was simply grand, darling. chapter fourteen The video of Adeline in Kevin Killian’s class became public domain. Adeline was making money for the Internet. The Internet was a wonderful resource for sermons about inequality amongst the 1,000 Americans who cared about contemporary poetry, moral outrage about governmental policy, and arguing that religious figures from previous millennia understood the social conditions of the present.

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“I must sell these buildings or do something. I can’t keep letting myself be robbed by animals!” “You don’t think I’m an animal, do you?” asked Christine. “You’re a doll,” said the landlord. “You’re the only star in my life.” If Christine’s landlord did evict her, there was no feasible way that she could stay in the city. Low interest rates, venture capitalists and the tech industry had removed her ability to remain in San Francisco. Christine’s biggest concern was that she was trans, which meant that she was a woman born with male physiology. San Francisco was just about the friendliest place in America for a transperson. And even San Francisco was pretty bad.

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She was Brown. She was an activist and a former city employee. She sent email to a wide group of people. She detailed her experiences with Local’s Corner. Latino people were feeling squeezed by the forces of gentrification. Their neighborhood was being pulled apart by the whims of mega-capitalists, low interest rates, investors from out of town, and corporations located in Silicon Valley. And there was Local’s Corner, the most obvious and tone deaf symbol of the changes wrought on the neighborhood. It had denied a Latino family service. On Cesar Chavez Day. Its owner had a bad reputation around the neighborhood.

Fed Up!: Success, Excess and Crisis Through the Eyes of a Hedge Fund Macro Trader
by Colin Lancaster
Published 3 May 2021

But the ones on the nice floors always have great views: from Goldman, a great view of the Hudson River over to Jersey City; from JP Morgan, a great view of Midtown all the way to Central Park. The meetings don’t make me feel much better. Each of the conversations seems to drift to the fact that we’re living on borrowed time. If we go back to the last couple of bubbles, we know that the seeds of the problem are artificially low interest rates. Low interest rates are like the first two drinks, when the buzz settles in. This magnifies the greed factor. The last two bubbles are good examples. You had the tech bubble and then the housing and credit bubble. But the current one is an entirely different animal. It’s way bigger. This is the everything bubble.

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The bubble all started in the late 1980s but really ramped in the 2000s, when the world moved away from rational thinking, away from Markowitz and modern portfolio theory to Pets.com. Alan Greenspan, the top guy at the Fed in those days, was there to drive the bubble even bigger. That’s when the central banks changed. At the time, it looked innocent enough. Greenspan gave us low interest rates. They dubbed it “lower for longer.” But this was really just lighter fluid on a fire. It told people to get greedy. I’m not talking about everyday risk taking and speculation, normal human greed. I’m not even talking about Gordon Gekko in the ‘80s. This is much more than “greed is good.” I’m talking about steal as much as you can, and if you’re wrong, we’ll bail you out.

The Finance Book: Understand the Numbers Even if You're Not a Finance Professional
by Stuart Warner and Si Hussain
Published 20 Apr 2017

The relationship between gearing and interest cover For most businesses there is an inverse relationship between gearing and interest cover. Management will try and strike an appropriate balance between the two. Low interest rates will make it easier for businesses to achieve a comfortable level of interest cover and hence lead to higher levels of gearing. One of the causes of the 2007/8 financial crisis was an unprecedented prior period of low interest rates across the global economy. This encouraged companies, and banks in particular, to accept higher levels of gearing than normal, which left them severely exposed when parts of the financial system began to collapse.

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From a financial risk perspective, companies that want to minimise financial risk will seek greater equity finance. From a commercial viewpoint, the debt–equity mix will depend on the company’s ability to raise debt finance. Lenders will look at credit ratings, cash flow forecasts, business plans, etc. when deciding whether to lend. Relatively low interest rates during the 21st century have made debt finance a more attractive form of finance for business. Paradoxically although interest rates have remained low (and negative in some countries) this has not translated into a growth in debt financing because smaller companies in particular have found it difficult to borrow.

Planet Ponzi
by Mitch Feierstein
Published 2 Feb 2012

Now obviously, in a benign economic climate you would expect loan losses to come down. There’s nothing in principle strange about seeing loss provisions rise and fall. But we are not in a benign economic climate. To pick just a few issues: (a) borrowers are currently experiencing bizarrely and unsustainably low interest rates; (b) the real economy is weak, joblessness high, and the outlook deteriorating; (c) the eurozone crisis is impairing countless European financial institutions, many of which do business with Bank of America; and (d) under any deficit reduction plan at all, the fiscal stimulus is about to be ripped away from the American economy and replaced with fiscal tightening of unprecedented severity, while (e) the scope for further economic support from the Fed is minimal.

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Cotton prices are also exceptionally volatile.29 The same has been true of cocoa futures.30 By good fortune, none of these flash crashes have yet caused much damage, but poorly maintained levees didn’t do much harm to New Orleans until 2005. The mortgage market looked to be working fine, until it came close to destroying the international financial system. In 2010 we were fortunate that the flash crash happened when the markets were still being buoyed up by ultra-low interest rates, by quantitative easing, by massive fiscal stimulus, and by a broad sense of returning security in the financial markets. Those props (disastrous as they’re proving in the longer run) were enough to stop the meltdown. But just suppose the next crash happens when another major financial institution is on the brink.

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The investment management world has plenty of sophisticated managers, but also far too many mediocre ones. Those mediocre ones are always struggling to catch up with their benchmarks‌—‌and consequently also tempted to ‘chase yield’ wherever it can be found. There are a million ways to chase yield, many of which can be extraordinarily destructive. For example: you borrow some money (at a low interest rate) in yen, and invest the cash (at a high interest rate) in Aussie dollars. Or you switch out of (low-yielding) US Treasuries and buy into (higher yielding) AAA-rated mortgage market securities founded in part on subprime debt. Or you get out of (low-yielding) German bonds in order to enjoy the higher rates available on Greek, Italian, or Portuguese ones.

How I Invest My Money: Finance Experts Reveal How They Save, Spend, and Invest
by Brian Portnoy and Joshua Brown
Published 17 Nov 2020

My mortgage is less than I would pay in rent and I have participated in the booming Denver real estate market for the last 13 years. I view my home as an investment in sacred family time and my sanctuary away from the rest of the world. Taking advantage of financial opportunities when they present themselves, in this case with low interest rates for both my home and education, has been at the core of building my financial independence. I have a Roth IRA where I invest in individual equities. I typically buy companies I understand and use in my own life. I am part of a powerful demographic: the working mother. You can bet that working moms have found the longest lasting, most efficient products out there.

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We give not only because we care about the cause we are giving to, but because it is good for our souls. We have been very lucky and believe we are called to be good stewards of what we have been blessed with. We are not fans of debt and pay cash for just about everything, cars included. The only debt we maintain is our mortgage due to the low interest rate. I follow the same advice I have given to many clients in similar situations and haven’t paid a penny more than is owed since we purchased our home ten years ago. To me, having the funds available to pay it off if we needed to is the same as the mortgage being paid off. It works for us. We have three primary financial goals: Prepare for retirement, Pay for college for our two sons, and Be prepared for life’s what ifs.

The End of Growth
by Jeff Rubin
Published 2 Sep 2013

If low rates become the norm, though, their capacity to induce people to borrow and spend diminishes. Free credit also carries other economic costs. Beyond the clear risk that a prolonged period of low interest rates might reinflate asset bubbles, like the subprime mortgage–backed US housing market, keeping rates at zero comes with a long list of market-distorting consequences. Japan found that out during its run of low interest rates in the 1990s. At that time, Japanese banks allowed struggling companies to roll over loans that wouldn’t have been considered given normal interest rates. These companies were able to afford the artificially low interest payments, but they didn’t have the wherewithal to repay the principal.

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It took a big jump in oil prices (the OPEC oil shocks) to get North Americans to switch from burning oil in their furnaces to burning natural gas, and it will take an even bigger jump to get them to switch their gas tanks over. this page: Those old enough to remember the 1970s know that waking the specter of inflation is a scary prospect for any economy. Against a backdrop of historically low interest rates and expansionary monetary policy, it bears noting that the mandate of many of the world’s central banks is to keep inflation in check. The Bank of Canada, for instance, has an inflation control target of 2 percent, the midpoint of a control range of 1 to 3 percent. Recently, the BoC’s target inflation range was extended for another five years, until the end of 2016.

Mastering the Market Cycle: Getting the Odds on Your Side
by Howard Marks
Published 30 Sep 2018

First there’s denial, and then there’s capitulation. The world is full of positive and negative events, and on most days we see some of each. And some of the events that occur are ambiguous, having elements of both good and bad, making them subject to either positive or negative interpretation. Take the example of the second cartoon. Low interest rates are good, because they stimulate business activity and increase the discounted present value of future cash flows. But they’re also bad, since the stronger business activity they abet can give rise to inflation and thus signal the central banks that rates should be raised, withdrawing stimulus from the economy.

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It is inescapable that these developments—and the risk tolerance or risk obliviousness that was behind them—ultimately would lead to unsafe financial behavior, particularly via the issuance of financial instruments that were unsound and likely to fail. The ability to borrow large amounts of capital at low interest rates caused asset buyers to consider the period a “golden age.” But it wasn’t marked by the availability of sound, bargain-priced investments. Rather, the ready availability of leverage made it easy to invest heavily in assets whose prices had risen a great deal, and in innovative, untested, synthetic, levered investment products, many of which would go on to fail.

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In order to expand the volume of mortgages they issued, lenders hit on novel ways to increase their appeal to borrowers: interest-only mortgages that minimized monthly payments by eliminating the traditional requirement that the principal balance be paid down; adjustable-rate mortgages that allowed borrowers to benefit from the ultra-low interest rates at the short end of the yield curve; and, most importantly, “sub-prime” mortgages (sometimes called “liar loans”) that didn’t require applicants to document income and employment. With sub-prime mortgages being packaged into securities and sold onward, as opposed to being retained as in the past, lenders’ emphasis shifted from borrowers’ creditworthiness to loan volume.

The Capitalist Manifesto
by Johan Norberg
Published 14 Jun 2023

When I met two local furniture companies who did not receive any corresponding deductions, they asked why they should be forced to pay higher taxes so that their rival could compete more fiercely. Then of course we have the financial markets, full of banks and financial companies that count on taxpayers saving them when they fail, and traders who think that the central bank must avoid any risk of a bear market with promises of low interest rates and increased liquidity. This has perverted the stock market. It is supposed to value companies, and when, say, trade wars, pandemics and recessions hurt those companies, stocks should fall in value, yet instead they have often increased because central banks respond to every crisis by lowering interest rates and pumping more money into the economy.

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There is reason to believe that this is an underestimate, as many problem companies are unlisted and the pandemic has also increased their number.34 One reason why zombie companies have become much more common, especially since the global financial crisis, is the prolonged era of extremely low interest rates. This made it less interesting for banks (which also face low borrowing costs) to force them into bankruptcy, which would also force the banks to record a loss and risk entering into a long-running dispute over assets. Zombie companies find it much easier to sell bonds in a market that the central banks has inflated.

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According to The Economist’s calculations, the share of GAFAM’s revenues that overlap with their competitors has increased from 22 to 38 per cent since 2015.35 In a more existential way, Apple has started to make life miserable for its ad-dependent competitors by offering iPhone users the opportunity to avoid being tracked online by a particular company. Furthermore, Big Tech’s impressive growth took place during a period of low interest rates and booming markets. These companies will face more difficult times ahead. Just as I wrapped this chapter up, I received the latest results from these supposedly invincible companies: in November 2022, amid slowing sales and collapsing share prices, Amazon announced that it would have to let around 10,000 workers go and there were reports that Google was preparing to do the same.

Vassal State
by Angus Hanton
Published 25 Mar 2024

By August 2021, Reuters was reporting ‘UK for sale’.30 While these takeovers were going on during the Covid crisis, some of the private equity-owned companies did find themselves without customers, such as restaurant chains Prezzo and Bella Italia, but the British government jumped in to pay their staff, and their business rates. The financiers still wanted more, and lobbied hard for further government support: some pundits argued that large emergency loans at low interest rates, 80 per cent guaranteed by the government, should not be offered to the private equity firms. Despite this, the industry’s lobbying prevailed and they were fully included in the bailouts. The strength of their structure became apparent: each subsidiary was in its own silo, so it could, where necessary, plead poverty.

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Their borrowing costs are treated like any other costs, so that their interest payments reduce taxable profits, which incentivises heavy borrowings: when eventually they do crystallise their gains, they navigate the legal chicanes to take these to low-tax jurisdictions. This incentive to borrow, along with low interest rates, has fuelled the private equity boom over the years since the financial crash of 2008/9. The direct result has been the takeover of countless UK companies, and the sending of UK tax and profits across the Atlantic, often via tax havens. Even though most of the horses had already bolted, the UK tried to limit this tax advantage through the 2017 ‘restriction on corporate interest tax relief’.

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The Europeans have restrained American influence, and have kept growth in US businesses below 4 per cent each year (as against 9 per cent a year in the UK). Technology moves too fast for Westminster The years since 2010 have been almost unbelievably good for US corporations, which enjoyed a combination of low interest rates and a migration of trade and social life into an online world of digital platforms. Many traditional businesses reaped some digital benefit, but the true winners were US software corporations. Meta/Facebook, Apple, Microsoft, Amazon and Alphabet/Google (MAMAA) represent a sort of perfection of the US corporation, taking payments instantly, selling products with zero marginal cost and building vast customer bases in weeks, not years.

Not Working: Where Have All the Good Jobs Gone?
by David G. Blanchflower
Published 12 Apr 2021

Sir Charles Bean, also a member of the MPC, agreed that a higher house-price to earnings ratio compared to the past was likely sustainable as everything had changed. Sadly, it hadn’t. An average house today costs about six times average annual earnings, whereas the historical multiple is somewhat below four. Now there are good reasons why house prices should have risen relative to earnings. The transition to a low inflation, low interest rate environment has shifted the real burden of repayments for a typical mortgage into the future, so making it easier initially for cash-strapped households to service a loan of a given size. Demographic and social developments mean the number of households has been rising, while until recently the rate of house building has been low.

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Subsequently, the UK lost its AAA credit rating, and despite claims at the outset that the UK government would deliver a “march of the makers,” that didn’t happen, and manufacturing employment declined further. Public-sector pay freezes were imposed and public-sector employment fell sharply. Other governments around the world pursued tight fiscal policy, which meant that central banks were the only show in town. Low interest rates and many billions of asset purchases followed. House and equity prices rose but real wages fell. The number of workforce jobs in UK manufacturing was 2.57 million in June 2010 compared to 2.72 million in September 2018. As a share of all workforce jobs in the UK, it fell from 8.2 percent in June 2010 to 7.7 percent in the latest data.

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In this case, rising home prices were an unmistakable story. But most economists who looked at these prices focused on broad aggregates—say, national average home prices in the United States. And these aggregates, while up substantially, were still in a range that could seemingly be rationalized by appealing to factors like low interest rates. The trouble, it turned out, was that these aggregates masked the reality, because they averaged home prices in locations with elastic housing supply (say, Houston or Atlanta) with those in which supply was inelastic (Florida—or Spain); looking at the latter clearly showed increases that could not be easily rationalized.” (2018, 158) Duh!

The Third Pillar: How Markets and the State Leave the Community Behind
by Raghuram Rajan
Published 26 Feb 2019

Shylock, who hated Antonio, Shakespeare’s merchant of Venice, was, in a sense, the ideal lender, since he was perfectly willing to take his pound of Antonio’s flesh if Antonio did not repay the debt. Because Antonio then had every incentive to repay, Shylock was willing to lend. These attributes of debt—that it is explicit, often secured by collateral, and impersonal—seem to favor the lender. They also make it much easier, though, for a potential borrower to get a loan at a low interest rate in competitive environments—somewhat paradoxically, the harsher the debt contract and the more it seems weighted in favor of the lender, the greater and broader the borrower’s access to finance. If, in contrast, sympathetic courts were to suspend the lender’s power to recover whenever the borrower was in difficulty, lenders would not be eager to lend to anyone who was even moderately risky, and lending would dry up.

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Corporations disliked having to manage the resulting exchange rate volatility—it was costly to hedge exchange risk, and unhedged contracts could become unprofitable overnight. Therefore, after the breakdown of the Bretton Woods system of fixed exchange rates, a number of countries in Europe tried to tie their currencies to the deutsche mark under the European Exchange Rate Mechanism (ERM), hoping to inherit Germany’s low inflation and low interest rates, even while reducing currency volatility with respect to their most important trading partners. Unless they implemented Germany’s conservative fiscal and wage policies, though, countries were likely to have to adjust their exchange rates periodically, even under the ERM—as France did in the early 1980s.

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The mix of rising credit and rising house prices was immensely risky, but the accompanying job growth took pressure off the politicians. Bankers, motivated by large bonuses to maximize short-run profits and lulled by easy financial conditions, took too much risk. Central banks across the world were too complacent, both about the consequences of the very low interest rates they maintained, as well as about the extent of risk-taking. The boom turned to bust, and seventy years after the Great Depression, the world looked like it was entering a new depression. Governments and central banks intervened very actively, including bailing out big banks and financial companies.

Valuation: Measuring and Managing the Value of Companies
by Tim Koller , McKinsey , Company Inc. , Marc Goedhart , David Wessels , Barbara Schwimmer and Franziska Manoury
Published 16 Aug 2015

To build a synthetic rate, add the expected inflation rate of 2.5 percent to the long-run average real interest rate of 2 percent, which leads to a synthetic risk-free rate of 4.5 percent.10 Although it is different from the actual yield, the synthetic yield is based on our judgment that the low interest rates are an aberration caused by the unusual monetary policy and a flight to safety. As the economy returns to historical levels, we believe the government bond rates will rise to historical levels. The result is a cost of equity for the market of about 9.5 percent even during these times of historically low interest rates. If market prices eventually rise to reflect low interest rates (or interest rates rise to reflect market prices), make sure to reevaluate your perspective. Estimating the risk-free rate in typical times Once Treasury yields better reflect market prices, use the current yield on long-term government bonds to estimate the risk-free rate, and consequently the cost of equity.

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For example, EBITA interest coverage measures how many times a company could pay its interest commitments out of its pretax operational cash flow if it invested only an amount equal to its annual depreciation charges to keep the business running (or, for EBITDA coverage, if it invested nothing at all). In today’s low-interest-rate environment, however, debt coverage is a better measure of a company’s long-term ability to service its debt. Interest coverage ratios might appear strong today for some companies, simply because they attracted debt at low interest rates over the past few years. When these companies need to re-fund the debt at higher rates in the future, their interest coverage will plummet. Exhibit 29.5 shows how interest coverage alone explains rating differences for a sample containing large U.S. and European companies rated by Standard & Poor’s (excluding financial institutions).

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For FedEx, however, this common ratio understates its financial burden because it ignores the company’s obligation to pay rent. With rental expense included, the FedEx coverage ratio drops to just 3.7 times, less than half that of UPS. Over the past decade, interest rates have dropped to unprecedented lows, making interest coverage ratios uncharacteristically high. To evaluate leverage in this low-interest-rate environment, many analysts are now measuring and evaluating debt multiples such as debt to EBITDA or debt to EBITA. Given its much larger denominator, debt to EBITDA tends to be more stable, making assessments over time much clearer.8 The ratio also does a better job of teasing 8 In Exhibit 10.11, FedEx reports an EBITA-to-interest coverage ratio that falls from 84.8 in 2011 to 27.8 in 2013.

Efficiently Inefficient: How Smart Money Invests and Market Prices Are Determined
by Lasse Heje Pedersen
Published 12 Apr 2015

For instance, macro traders often like to express their views in a way that earns a positive carry, meaning that they earn income even if nothing changes. Hence, whether they do so intentionally or not, they often have exposure to so-called carry trades, in particular the currency carry trade. The currency carry trade involves investing in currencies with high interest rates while shorting currencies with low interest rates. This strategy earns an interest rate differential, essentially borrowing one currency at low interest and investing in another currency with a higher interest rate, but it is exposed to the risk that the relative values of the currencies can change. Managed futures investors (also called commodity trading advisors, CTAs) trade many of the same securities as global macro traders: bond futures, equity index futures, currency forwards, and commodity futures.

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When Short Capital returns the IBM share, Fidelity returns that cash plus interest (at a rate called the rebate rate). If the interest rate is lower than the money market interest rate, then Fidelity earns a premium because it can invest the cash at a higher rate than it pays for it. Such a low interest rate translates into an implicit cost for Short Capital, which is called a “loan fee” (and sometimes it literally is a fee). Hence, short-selling is not exactly the opposite of buying because shorting is associated with a loan fee. However, for about 90% of the stocks in the United States, the loan fee is small, typically around 0.10–0.20% annualized.

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While some discretionary macro hedge funds find such local knowledge so important that they set up local offices around the world, others find this loose talk to be mostly noise and rely instead on hard data, historical precedence, thorough research, and other information; the most extreme example of the latter is the systematic macro hedge funds and systematic global tactical asset allocation funds, which trade based on quantitative models. 11.1. CARRY TRADES A classic macro trade is the currency carry trade: Invest in currencies with high interest rates while selling currencies with low interest rates. For instance, in January 2012, Australia had an interest rate of about 4% and Japan had an interest rate of close to 0%. Hence, you could borrow 100 yen in Japan at 0% interest, exchange the yen into about 1 Australian dollar, and then earn an interest rate of 4% per year. If you hold this position for a year, then you will have A$1.04 at the end of the year and still owe ¥100.

Vulture Capitalism: Corporate Crimes, Backdoor Bailouts, and the Death of Freedom
by Grace Blakeley
Published 11 Mar 2024

In a complex and highly interdependent world, even something as safe as mortgage lending can ultimately lead to a “black swan” disaster that strikes everyone by surprise.55 In fact, the US state had helped to inflate the bubble that burst so violently in 2008. Without the implicit insurance provided by the central bank, the investment banks never would have taken the kinds of risks they took. Without decades of low interest rates and the removal of restrictions on lending, they wouldn’t have been able to expand their mortgage lending so dramatically. Without the state-owned enterprises Fannie Mae and Freddie Mac, which drove the securitization boom, the big investment banks may never have entered the mortgage securitization game in the first place.56 The US government also created a system of oversight in which two government-sanctioned ratings agencies controlled 80 percent of the bond ratings market.57 Cozy relationships between ratings agencies and bond issuers created significant conflicts of interests.

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The paperwork WeWork filed ahead of the IPO showed that Neumann was, according to Forbes, “burning through cash” and had “some of the worst corporate governance practices” the journalist had ever seen.15 The company was taking massive losses, and Neumann was getting personally rich on the back of the chaos. First, he had bought several of the buildings WeWork was leasing, meaning the company was paying him a significant personal rental income.16 Second, Neumann had taken several personal loans from the company at very low interest rates.17 Third, and most ridiculously, Neumann had personally trademarked the word we and sold it to the company in exchange for $5.9 billion in stock options.18 At the time of the IPO, Neumann had personal lines of credit open with several banks that were underwriting the floatation, and the Wall Street Journal reported he planned to sell $700 million of his company stock before going public.19 Investors took one look under the hood of WeWork and balked.

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In a world where the production of even a single commodity takes place within multiple firms across different countries, there are always lots of invoices to collect and pay. Traditionally, banks would provide financing for firms when they paid invoices, or while they waited for invoices to be paid. But in the postcrisis world of low interest rates and tight regulation, supply chain financing was no longer profitable for traditional banks. That’s where Greensill Capital came in. Greensill would step in to pay a company’s outstanding invoices before collecting payment, plus interest, from the company in the future. But Greensill wasn’t a bank, so where did all its money come from?

Security Analysis
by Benjamin Graham and David Dodd
Published 1 Jan 1962

We have revised our text with a number of objectives in view. There are weaknesses to be corrected and some new judgments to be substituted. Recent developments in the financial sphere are to be taken into account, particularly the effects of regulation by the Securities and Exchange Commission. The persistence of low interest rates justifies a fresh approach to that subject; on the other hand the reaffirmance of Wall Street’s primary reliance on trend impels us to a wider, though not essentially different, critique of this modern philosophy of investment. Although too great insistence on up-to-date examples may prove something of a boomerang, as the years pass swiftly, we have used such new illustrations as would occur to authors writing in 1939–1940.

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If these low rates should prove temporary and are followed by a rise to previous levels, long-term bond prices could lose some 25%, or more, of their market value. Such a price decline would be equivalent to the loss of perhaps ten years’ interest. In 1934 we felt that this possibility must be taken seriously into account, because the low interest rates then current might well have been a phenomenon of subnormal business, subject to a radical advance with returning trade activity. But the persistence of these low rates for many years, and in the face of the considerable business expansion of 1936–1937, would argue strongly for the acceptance of this condition as a well-established result of a plethora of capital or of governmental fiscal policy or of both.

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The disconcerting question presents itself, however, whether or not the fall in interest rates is not closely bound up with the cessation of the secular expansion of business and with a decline in the average profitability of invested capital. If this is so, the debit factors in stock values generally may outweigh the credit influence of low interest rates, and a typical dollar of earning power in 1936–1938 may not really have been worth more than it should have been worth a decade and a half previously. The Factor of Timing. Increasing importance has been ascribed in recent years to the desirability of buying and selling at the right time, as distinguished from the right price.

The Investopedia Guide to Wall Speak: The Terms You Need to Know to Talk Like Cramer, Think Like Soros, and Buy Like Buffett
by Jack (edited By) Guinan
Published 27 Jul 2009

Municipal bonds are exempt from federal taxes and most state and local taxes, especially if the investor lives in the state in which a bond is issued. Also known as a muni-bond. 192 The Investopedia Guide to Wall Speak Investopedia explains Municipal Bond Municipal bonds may be used to fund expenditures such as the construction of highways, bridges, and schools. Muni-bonds, or “Munies,” tend to offer low interest rates, but they do get favorable tax treatment (tax-free interest) and are thus popular with people in high income tax brackets. Related Terms: • Government Security • Yield • Tax Deferred • Interest • Yield to Maturity—YTM Mutual Fund What Does Mutual Fund Mean? An investment instrument that is made up of a pool of funds collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments, and similar assets.

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This led to the collapse of many mortgage lenders, banks, and hedge funds. The meltdown spilled over into the global credit market as risk premiums increased rapidly and capital liquidity was reduced. The sharp increase in foreclosures and the problems in the subprime mortgage market were blamed largely on loose lending practices, low interest rates, a housing bubble, and excessive risk taking by lenders and investors. It is also known as the subprime collapse or the subprime crisis. Investopedia explains Subprime Meltdown After the tech bubble and the events of September 11, 2001, the Federal Reserve stimulated a struggling economy by cutting interest rates to historically low levels.

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The Investopedia Guide to Wall Speak 305 Investopedia explains Treasury Inflation Protected Securities (TIPS) If U.S. Treasuries are the world’s safest investments, one might say that TIPS are the safest of the safe. This is the case because the real rate of return, which represents the growth of the investor’s purchasing power, is guaranteed. The downside is that because of that safety, TIPS offer very low interest rates. Other countries have similar securities. For example, TIPS in Canada are called real return bonds (RRB). Related Terms: • Consumer Price Index—CPI • Inflation • Real Rate of Return • Government Security • Interest Rate Treasury Note What Does Treasury Note Mean? A marketable U.S. government bond with a fixed interest rate and a maturity generally between 1 and 10 years.

Underwater: How Our American Dream of Homeownership Became a Nightmare
by Ryan Dezember
Published 13 Jul 2020

By 1999, more than half of mortgages had down payments of less than 10 percent. That had been the threshold for loans that Fannie and Freddie would buy on the secondary market. But the loan guarantors went lower with the market, accepting 5 percent down, then 3 percent, and finally, in many cases, zero. The same low interest rates that were making home buying more attractive were also driving investors to seek out riskier investments to boost their returns. To meet the needs of aspiring homeowners and yield-starved investors alike, lenders lowered their standards. Mortgages to borrowers with iffy credit were known as Alt-A loans.

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The FDIC said starter homes were worth watching closely. If interest rates rose, a lot of new homeowners who’d signed adjustable-rate mortgages might find themselves unable to make monthly payments. Rising home prices were also a risk to buyers at the margin because of the accompanying increases in property taxes. Yet low interest rates and lenient lenders made owning a home more attractive—sometimes even cheaper—than renting in many markets. The national vacancy rate for rental properties exceeded 10 percent for the first time on record. Empty apartments were especially numerous in the Midwest and the South. A friend noticed the report’s citation of my article and sent it to me.

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They estimated that even in the worst-case scenario—one in which home values never recovered and not a penny could be borrowed to amplify returns—the yield from renting homes bought cheaply enough on the courthouse steps or from desperate banks would be much higher than almost any other investment given how low interest rates were being held. The opportunity as they saw it was nearly boundless, measured in trillions of dollars. They deemed it Housing 2.0. There were doubters. Mostly apartment owners. They were in the business of managing large numbers of residences, and it was hard enough when they were all under one roof.

The Pay Off: How Changing the Way We Pay Changes Everything
by Gottfried Leibbrandt and Natasha de Teran
Published 14 Jul 2021

With these accounts, you generally get cheques, automated transfers and debit cards. You may already be charged annual fees for some services or incur regular charges on certain transactions, such as withdrawing money from ATMs owned by other banks, but because the deposit side of the balance sheet is generating less revenue in the current low-interest-rate environment, you can expect banks to soon be introducing or raising service and transaction fees. Then there are the overdrafts themselves. Depending on where we live, banks charge us for going overdrawn in several ways; charging in advance for using overdrafts, for going into unarranged overdrafts and, of course, by raising interest on any overdrawn balances.

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And, in spite of new players such as Alipay and Tenpay, Chinese customers, especially businesses, still keep ample funds in their current accounts.2 And then there’s Europe. Where payment revenues total 2 per cent of GDP in the USA and even 3 per cent in Asia, they are a paltry 1 per cent in Europe. Few payments in Europe have explicit fees – banks rely instead on account servicing fees and interest margins, the latter making them vulnerable to low interest rate environments. With negative interest rates for the euro, Swiss franc and Danish and Swedish krone, the interest margin on current accounts is very low or even negative in Europe. As we’ve seen, credit cards aren’t widely used in continental Europe so the banks don’t earn much there, and regulations limit what they can earn from interchange fees.

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Banks also increasingly outsource their payment services to third-party providers; most have already hived off their card acquiring and processing activities, and many are now doing the same for issuing cards. It’s the same story for customer service, including call centres. The banks have to pay for all this and invest in their own IT and in shared infrastructures, reducing the amount they actually pocket from payments. Sluggish growth and low interest rates do not generally make for happy banks. Combine that with the aforementioned fees and investments, heavy regulation, excess capacity, unionised workforces and tough employment laws, and a bank can find itself in a bind. Eurozone banks, which suffer all such tribulations, have average cost-to-income ratios of 66 per cent, compared with 55–57 per cent at Nordic and US banks.

Big Data and the Welfare State: How the Information Revolution Threatens Social Solidarity
by Torben Iversen and Philipp Rehm
Published 18 May 2022

On a US$300,000 home with 20 percent down payment, the total interest paid for a thirty-year mortgage is about US$112,000 (r = 2.75) and US$166,000 (r = 3.875). If the interest rate ratio were 1.2 (as in 1999) instead of 1.4, the p90 interest rate in 2020 would be 3.23, with total interest paid being approximately US$135,000. The difference in total interest paid between high and low interest rates in these two scenarios is 166,000 − 112,000 = 54,000 (1.4 ratio) and US$135,000 − 112,000 = 23,000 (1.2 ratio). The higher interest rate spread therefore costs the high interest rate mortgage holder 54,000 − 23,000 = 31,000. https://doi.org/10.1017/9781009151405.005 Published online by Cambridge University Press Appendices 141 appendices Appendix 5A: The Model We assume that individual i’s time horizon is equal to the term of any loan so that the interest rate on the loan is proportional to the total interest that has to be paid back (in addition to the principal).

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On a US$300,000 home with 20 percent down payment, the total interest paid for a thirty-year mortgage is about US$112,000 (r = 2.75) and US$166,000 (r = 3.875). If the interest rate ratio were 1.2 (as in 1999) instead of 1.4, the p90 interest rate in 2020 would be 3.23, with total interest paid being approximately US$135,000. The difference in total interest paid between high and low interest rates in these two scenarios is 166,000 − 112,000 = 54,000 (1.4 ratio) and US$135,000 − 112,000 = 23,000 (1.2 ratio). The higher interest rate spread therefore costs the high interest rate mortgage holder 54,000 − 23,000 = 31,000. Published online by Cambridge University Press Appendices 141 appendices Appendix 5A: The Model We assume that individual i’s time horizon is equal to the term of any loan so that the interest rate on the loan is proportional to the total interest that has to be paid back (in addition to the principal).

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On a US$300,000 home with 20 percent down payment, the total interest paid for a thirty-year mortgage is about US$112,000 (r = 2.75) and US$166,000 (r = 3.875). If the interest rate ratio were 1.2 (as in 1999) instead of 1.4, the p90 interest rate in 2020 would be 3.23, with total interest paid being approximately US$135,000. The difference in total interest paid between high and low interest rates in these two scenarios is 166,000 − 112,000 = 54,000 (1.4 ratio) and US$135,000 − 112,000 = 23,000 (1.2 ratio). The higher interest rate spread therefore costs the high interest rate mortgage holder 54,000 − 23,000 = 31,000. Published online by Cambridge University Press Appendices 141 appendices Appendix 5A: The Model We assume that individual i’s time horizon is equal to the term of any loan so that the interest rate on the loan is proportional to the total interest that has to be paid back (in addition to the principal).

The greatest trade ever: the behind-the-scenes story of how John Paulson defied Wall Street and made financial history
by Gregory Zuckerman
Published 3 Nov 2009

Trades that lock in instant payments in the hopes of a payday someday in the future make even the likes of George Soros queasy. “"I don’'t know if I would have done it myself, if I was in [Paulson’'s] shoes,”" Soros says. “"I probably wouldn’'t have bet the house.”" Instead, most traders prefer “"positive”" carry trades, or those where profits are immediate and clear. Banks, for example, borrow money at low interest rates and lend it out at higher rates. A borrower may go belly-up, of course, but on paper the move looks like a winner. There didn’'t seem to be a more surefire positive-carry trade than selling insurance on even risky mortgage debt. Insurance companies like American International Group, huge global banks, and countless investors locked in instant gains from the premiums that Paulson and other bears paid for their CDS insurance.

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In mid-2005, the Monteses found a home they loved, a gray stucco bungalow with a hot tub in the backyard in a middle-class neighborhood of Orange County. It cost $567,000. The only catch was they didn’'t have money for a down payment and couldn’'t afford the home unless they agreed to a mortgage with a low interest rate for the first two years, but one that would then rise, increasing their monthly payments by more than 50 percent. Their mortgage broker assured the Monteses, who earned combined salaries of $90,000, that they’'d easily be able to refinance their mortgage before the rate climbed. Sitting around the kitchen table with their two teenage daughters, they decided to cut back on vacations and restaurant outings, and to take the plunge to become home owners.

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Veteran investor Jeremy Grantham has identified twenty-eight bubbles in various global markets since 1920; the past decade alone has witnessed historic bubbles in Asian currencies, Internet stocks, real estate, and commodity prices, as if markets are becoming less efficient, not more so. Ever more furious competition among investors, and the growing ease with which they quickly can shift cash to almost any kind of market around the globe, may be partly responsible for the change. Extremely low interest rates, a key ingredient in past bubbles, have the potential to inflate the next one. The appetite to lend likely has been sated for a while, but it won’'t be long before bankers convince themselves of the next easy way to score sure profits. Perhaps massive increases in public-sector borrowing, which likely will prove harder to reduce than it was to expand, will sow the seeds of the next financial bubble.

Economists and the Powerful
by Norbert Haring , Norbert H. Ring and Niall Douglas
Published 30 Sep 2012

Indeed, just being denied a loan in itself can damage a person’s centralized credit rating according to any of the “Big Three” international centralized credit bureaus (Experian, Equifax and TransUnion/Callcredit), as can applying for more than one new credit source in “too short” a time period. The main reason that the credit market does not clear is the potential for adverse selection. Ideally, banks charge a low interest rate for loans to finance low-risk projects and a high interest rate to finance high-risk projects. If they could reliably tell them apart, they would finance every project at an interest rate commensurate with the risk. However, the bankers can only make an educated guess about the riskiness of a project and the trustworthiness of a borrower.

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This is how the Bank of North America already provided them with paper currency. As creditors, they could live very well with falling prices and the increasing real value of debt. Given how the government had financed the revolution by effectively printing money, they feared the government would issue even more money at low interest rates. This would raise prices and devalue what their debtors owed them. If private banks, owned and controlled by these merchants, issued the money instead, they could control the amount. They would also reap the profits from creating money out of nothing, rather than the government (Nettels 1962).

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It seems clear that banks did not simply happen to become more leveraged and have fewer liquid assets. They collectively chose to do this because they knew central banks and therefore the public would have to bail them out if they ran into trouble. Those with most debt would benefit the most from the boom in the run-up to the crisis and from the low interest rates after the crisis erupted. That is why no bank wanted to stay behind in this game. This kind of competition also took place on an international level. A global era of progressive deregulation and increasing financial laissez-faire ensued as each country wanted to help their own financial institutions to gain a lead or at least not to fall too far behind (Schularick and Taylor 2009).

The Globalization Paradox: Democracy and the Future of the World Economy
by Dani Rodrik
Published 23 Dec 2010

Financial globalization does force governments to pay more attention to what bankers want, but finance and banking is one industry among many, with its own special interests. Why should its demands line up always, or even most of the time, with what a country needs? Consider a typical conflict in a developing economy: foreign bankers prefer high interest rates and an appreciated currency while domestic exporters prefer low interest rates and a cheaper currency. Which of these two outcomes should monetary and fiscal institutions be designed to deliver? More often than not, exporters’ preferences will do the most good for the economy as a whole, and hence the economies where finance does not have the upper hand politically will prosper.

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Calls for increased regulation of finance were rebuffed by pointing out that banks would simply get up and move to less regulated jurisdictions.23 The immediate causes of the financial crisis of 2008 are easy to identify in hindsight: mortgage lenders (and borrowers) who assumed housing prices would keep rising, a housing bubble stoked by a global saving glut and the reluctance of Alan Greenspan’s Federal Reserve to deflate it, financial institutions addicted to excessive leverage, credit rating agencies that fell asleep on the job, and of course policy makers who failed to get their act together in time as the first signs of the crisis began to appear. Without these regulatory failings, the glut in global finance would not have proved dangerous; after all, low interest rates are a good thing insofar as they enable higher investment. And without the global commingling of banks’ balance sheets, the consequences of inadequate regulation would not have been as damaging; bank failures would have remained local and their effects contained. A deeper problem will need to be addressed in the long term: deregulation and the pursuit of hyperglobalization have allowed a huge chasm to develop between the reach of financial markets and the scope of their governance.

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Johnson had been the chief economist of the IMF in the run-up to the crisis, which gave his words added credibility. Johnson laid the blame for the crisis squarely on Russian-and Asian-style cronyism in the United States. Wall Street had become so powerful that it got whatever it wanted out of Washington. Lax regulation, the promotion of imprudent levels of home ownership, low interest rates, the fragile U.S.-China financial relationship—everything that had precipitated the crisis had been promoted by the financial industry. Banks may not have guns and armies at their disposal, Johnson argued, but they had other means that were equally effective: campaign contributions, the revolving door between Wall Street and Washington, and an ability to foster a belief system supportive of their interests.

Fool's Gold: How the Bold Dream of a Small Tribe at J.P. Morgan Was Corrupted by Wall Street Greed and Unleashed a Catastrophe
by Gillian Tett
Published 11 May 2009

So, just as bankers in the early 1990s had responded to falling interest rates by producing more complex and leveraged derivatives products, they now began searching for a new round of more complex credit ideas. Investor attention was also drawn to another sector. The real estate world—unlike the corporate sector—was relatively unscathed by the internet bust. On the contrary, the low interest rates Greenspan had instituted had given the housing market quite a boost, as mortgages became less and less expensive. Unbeknownst to the J.P. Morgan bankers, and against their better judgment, these two booming businesses of mortgages and derivatives were about to become fatefully intertwined. PART 2 PERVERSION [ SIX ] INNOVATION UNLEASHED The onset of the new decade unleashed a new era of credit.

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Ever since the 1970s, bankers had used mortgages to create bonds or bundles of debt, later known as CDOs. By the dawn of the new decade, though, this activity became dramatically more intense and mingled with other fields of finance, including credit derivatives. The American housing market had benefited hugely from the low interest rates Alan Greenspan was holding to, and the rapidly mounting piles of mortgage loans were fertile fodder for the CDO machine. This was especially true because so many of the new mortgages were relatively high risk, which allowed the banks to offer extremely attractive returns. During the 1990s, CDOs had been constructed only out of “conforming” mortgages, meaning those that conformed to the high credit standards imposed by federal-government-backed housing giants Fannie Mae and Freddie Mac.

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Bush continued, “This market has seen tremendous innovation in recent years, as new lending products make credit available to more people. For the most part, this has been a positive development…[but] there’s also been some excesses in the lending industry. One of the most troubling developments has been the increase in adjustable-rate mortgages that start out with a very low interest rate and then reset to a higher rate after a few years. This has led some home owners to take out loans larger than they could afford based on overly optimistic assumptions about the future performance of the housing market. Others may have been confused by the terms of their loan or misled by irresponsible lenders.”

Beyond Diversification: What Every Investor Needs to Know About Asset Allocation
by Sebastien Page
Published 4 Nov 2020

A: With currency hedging, investors must manage the trade-off between carry, which is driven by the interest rate differential, and the risk that currencies contribute to the portfolio. Importantly, the investor’s base currency matters. When investors in a country with low interest rates hedge their currency exposures, they typically benefit from risk reduction, but it comes at the cost of negative carry. Japan, for example, has very low interest rates, which means currency hedging is a “negative carry trade.” So it is very hard to convince Japanese investors to hedge, even though from a risk perspective, it may be the right decision. In Australia, by contrast, currency hedging offers positive carry because local interest rates are relatively high.

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Small cap stocks tend to have higher equity betas than large cap stocks, and this difference in market beta exposure is often expressed during stock market drawdowns. Similarly, the currency carry trade has an indirect equity beta exposure that remains dormant until risk assets sell off. The strategy is to buy high-interest-rate currencies (the Australian dollar, emerging markets currencies, etc.) and to fund these positions by shorting low-interest- rate currencies (for example, the Japanese yen). In normal markets, the investor earns a risk premium because forward rates typically do not appreciate or depreciate enough to offset profits (the carry) from the interest rate differential embedded in currency forward contracts. But when risk assets sell off, the carry trade unwinds as investors sell the higher-risk currencies and buy the safe havens.

The Fifth Risk
by Michael Lewis
Published 1 Oct 2018

How can an organization survive that stresses and responds only to the worst stuff that happens inside it? How does it encourage more of the best stuff, if it doesn’t reward it? The $70 billion loan program that John MacWilliams had been hired to evaluate was a case in point. It had been authorized by Congress in 2005 to lend money, at very low interest rates, to businesses, so that they might develop game-changing energy technologies. The idea that the private sector underinvests in energy innovation is part of the origin story of the DOE. “The basic problem is that there is no constituency for an energy program,” James Schlesinger, the first secretary of energy, said as he left the job.

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But the entire time I was in the White House, we grappled with the question: Where do we find the political capital for rural development? Because it can’t just come from the people rural development helps.” By the time she left the little box marked “Rural Development,” Lillian Salerno had spent the better part of five years inside it. The box’s function was simple: to channel low-interest-rate loans, along with a few grants, mainly to towns with fewer than fifty thousand people in them. Her department ran the $220 billion bank that serviced the poorest of the poor in rural America: in the Deep South, and in the tribal lands, and in the communities, called colonias, along the U.S.-Mexico border.

Inflated: How Money and Debt Built the American Dream
by R. Christopher Whalen
Published 7 Dec 2010

Public opinion, led by major media organs like the New York Times, condemned Bretton Woods and the idea of trade liberalization—unless the United Kingdom and other nations of Europe followed suit and dropped their tariffs as well. Eventually, after lengthy negotiations and sometimes difficult exchanges between Keynes and Vinson, the two sides agreed on forgiveness of the lend-lease obligation and low-interest rate loans to finance Britain’s balance of payments deficit. The United States agreed to this formulation in large part to get the United Kingdom to follow up with a multilateral trade agreement removing the prewar tariffs. But the bitter reality for the British was that agreement with the United States was a necessary condition for the country to be in a position to ratify the Bretton Woods agreement by the end of December 1945.

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Eccles in particular bore the full brunt of Truman’s populist anger, but refused to resign as a Fed governor. Though not reappointed as chairman, Eccles remained on the board and fought for the Fed’s independence during the remainder of his term as governor until he resigned in 1951. McCabe was pressured repeatedly by President Truman and Snyder to continue supporting artificially low interest rates, publicly and privately. Yet he, Eccles, Sproul, and the other members of the FOMC stood their ground and defended their responsibility for controlling inflation, which was a plausible threat from 1946 to 1950. With the famous Accord of 1951 between the central bank and the Executive Branch, the Fed and Treasury agreed on a set of rules with respect to their respective operations.

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Since the collapse of Bear, Stearns & Co. and Lehman Brothers in 2008, the Fed has kept interest rates at zero, ostensibly to help the banking sector recover from record credit losses. Since then, Fed interest rate policies have transferred trillions of dollars from savers to the shareholders of banks through low interest rates. Little of this largess has reached American households, however, because neither the banks nor the millions of residential mortgages now underwater have been restructured or refinanced by the banking industry, thwarting the Fed’s reflation efforts. The more interesting question raised by Fed policies since 2001 is whether the U.S. economy can generate positive real growth as and when interest rates in the United States return to something like normal levels.

The Bond King: How One Man Made a Market, Built an Empire, and Lost It All
by Mary Childs
Published 15 Mar 2022

Once all the analysts returned to Newport Beach with their on-the-ground research, they compiled their findings in a paper. Never shy about publicizing its thoughts, Pimco published “The Housing Project” in May 2006, walking through what everyone now knows about the early 2000s housing boom: low interest rates reduced monthly payments, which allowed home buyers to buy bigger, fancier, more expensive homes, at the same monthly installment. Prices rose and rose. To feed the market, lenders created interest-only and other delayed- or hidden-payment loans, which only bought borrowers time as they stacked up more and more debt.

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Savings rates were headed up. More regulation would dampen risk taking. Unless the Chinas and Brazils of the world started consuming like America had, the whole world would grow more slowly. Investors had to adapt to what Gross called this “new normal,” an expression he said El-Erian had coined, to describe a world of low interest rates, low risk taking, and muted economic activity. Investment returns would be predicated on injections from central banks, so investors should “shake hands with the government.” They should expect considerably lower rates of return than the thirty-year rally they’d enjoyed. Gross’s worst news: lower returns probably meant they’d have to charge lower fees, a long-term double-whammy.

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By the end of May, markets had descended into chaos, and it seemed like the thirty-year bond rally was finally, maybe, over. This time, the catalyst was singular: it was the Fed. It started when chair Ben Bernanke began to forecast the future path of the Federal Reserve’s asset-purchase program, a holdover from the crisis-dig-out efforts. Years of ultra-low interest rates had stimulated the economy by encouraging risk taking; the Fed’s extraordinary measures had reassured markets, as hoped. In what he presented as good news about the economy’s stability, Bernanke said the asset-purchase program would become less necessary as a recovery took hold. Which, paradoxically, spooked the market.

Dead Aid: Why Aid Is Not Working and How There Is a Better Way for Africa
by Dambisa Moyo
Published 17 Mar 2009

Very often, a country will hire a bank to accompany its representatives on a roadshow to help make the case to an array of investors (institutions like pension funds and asset managers as well as private individuals) as to why they should lend their money to the country. It is also an opportunity to show that it can manage its borrowings in a credible way – after all, many of these countries were not able to keep the relatively low-interest-rate debt of the 1970s from piling up in an unsustainable way. There are good reasons to believe that the greater desire of many African leaders to see their countries excel should give investors the comfort that governments will fare better with private debt flows today than in the past. Finally, assuming the country’s representatives make a compelling case for its credibility and intention to repay, and once the loan terms are agreed upon (the maturity or length of the bond, the cost of the bond, the currency it will be issued in), the country gets its cash.

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In practice, like many other poor countries, the Zambian micro-finance market can be split into three tiers. The first two target salaried workers, who pay different rates of interest depending on their employer. In the first tier are civil servants (doctors, teachers and military personnel), who by virtue of working for the government are charged relatively low interest rates. Second come salaried professionals, not employed by government (lawyers and bankers) and who, because they work in the private sector and do not have the security of the government behind them, are charged a higher rate of interest. In each of these two cases, the micro-loan lender uses the salary as collateral – using the individuals’ wage to directly secure the loan.

Liberalism at Large: The World According to the Economist
by Alex Zevin
Published 12 Nov 2019

Sensing an opening in March 1931, as passage of the Smoot-Hawley Tariff demonstrated US failure to assume a constructive global role, Keynes briefly argued for a revenue tariff and for the gold exchange to be ‘relentlessly defended, that we may resume the vacant financial leadership of the world, which no one else has the experience or public spirit to occupy’.82 Five months later, the same hope led him to the opposite conclusion, when he toasted devaluation with Hutton.83 The Economist and the ‘mandarins’ who read it found this inconsistency disturbing, but it must be borne in mind so as not to misunderstand the postlude to these debates in 1936: the General Theory of Employment, Interest and Money and its call to ‘euthanize the rentier’. Despite the presence of many of his students on its staff at this point, the Economist remained extremely cautious about the interventions Keynes proposed – agreeing on little more than the need for low interest rates, which kept up stock and housing prices in the pit of a now worldwide depression. When the young Tory MP Harold Macmillan’s Reconstruction: A Plea for National Unity appeared three years prior, for example, the paper harshly criticized its reliance on Keynes: overproduction was impossible, while stripped of ‘verbal embellishments’, the schemes to force reorganization in the cotton and coal industries ‘amount in fact to Protection plus Monopoly!’

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The decline in profitability suffered by US manufacturers soon engulfed their foreign rivals too, while attempts to restore profit rates unleashed trade union militancy across the advanced economies. The problem was not just economic, but political and imperial. Mired in Vietnam, Washington had little to show for its efforts there besides monetary chaos. In the context of low interest rates, dollars spent on ‘butter and guns’ sloshed through the global economy, joining huge pools already ‘offshored’ in the City of London, where investors used them (among other things) to bet against the US currency. Nixon’s devaluation in 1973 was a defensive strike, meant to wind up a long, losing battle to maintain confidence in the gold convertibility of the dollar, and restore competitive capacity against German and Japanese exporters.

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In 2006, as US real estate prices began to fall, setting off a reaction in the repo markets in housing debt – on which big banks and other financial institutions had come to rely for short term-funding – the horizon was cloudless, at least for the financial system. The Economist recognized that as housing prices ‘flatten off’, the US economy – driven by consumer spending and residential construction, abetted by low interest rates – would slow down. But that needn’t result in a crash. On 24 March 2007, ‘Cracks in the Façade’ considered what the rise in delinquencies and defaults on subprime mortgages, and the cost of insuring against these, might mean for markets and the wider economy; the ‘biggest risk’ was that ‘politicians rewrite the rules ham-fistedly’.96 By 2008, when this securitized, supposedly safe debt turned toxic, banks holding it as loan collateral rushed to cover their losses, and panic selling swept markets (even those unrelated to mortgages), exposing highly leveraged banks as illiquid, when not insolvent.97 Lehman Brothers collapsed in September, brought down by the credit squeeze, with state authorities everywhere stepping in to avert more failures.

Poisoned Wells: The Dirty Politics of African Oil
by Nicholas Shaxson
Published 20 Mar 2007

“Even with corruption,” a French diplomat said, “so much money will come that things will happen here.” Maybe, some people thought, a combination of easy wealth and international attention and exposure would soften the dictator. Others had faith in free markets. Most investors shun the worst-ruled countries; they prefer low interest rates, good infrastructure, trustworthy contracts, and a benign economic and political environment. These incentives for rulers to shape up often work well, and many argue that they are a key to prosperity around the world. On my first visit to Equatorial Guinea this vision was widely shared in the West; it was an era of great faith in the 38 Pedro Motú transforming power of private enterprise.

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The concept of oil expresses perfectly the eternal human dream of wealth achieved through lucky accident, through a kiss of fortune and not by sweat, anguish, hard work. In this sense oil is a fairy tale and, like every fairy tale, it is a bit of a lie. It does not replace thinking or wisdom. Although I don’t agree with some of what is in Kapuscinski’s beautifully written books,32 he is dead right about oil. Low interest rates and inflation, or other normal parameters of responsible economic management that attract the oil companies or determine the level of reward, don’t matter much, so long as the oil is there. To get tax revenues, rulers no longer need to worry about improving the local business environment—and, by extension, the lives of their citizens—a point that Fela 39 P o i s o n e d We l l s Kuti had instinctively understood in the 1970s.

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This was not normally taken in cash; instead, the central bank would pay it to a foreign supplier, who would deliver $20,000 worth of goods. The happy official would collect these from the port and sell the goods in the market, with another mark-up, and repeat the cycle. 52 Abel Abraão Many other routes existed to tap into the cash flowing from the offshore wells. A top official might borrow kwanzas from a state bank at low interest rates, convert them into dollars, then wait until inflation had eroded their kwanza value to peanuts before paying the loan back. So the banks built up debts, which the oil-fed government covered. The elites also obtained state assets in murky Russian-style privatizations, capturing the construction trade and banking services, which depended heavily on government contracts—paid, of course, with oil money.

Toward Rational Exuberance: The Evolution of the Modern Stock Market
by B. Mark Smith
Published 1 Jan 2001

The rapid price increases were quite unsettling, in that inflation in the United States had been virtually unknown since the Civil War. Finally, on November 3, 1919, the Federal Reserve was forced to abandon its easy money policy, increasing its discount rate (the interest rate at which member banks could borrow from the system) from 4% to 4¾%. The days of easy credit and low interest rates were over. The discount rate would eventually rise to 7%, forcing up other interest rates as well. In 1920, for the first time in history, the yield on long-term government bonds exceeded 5%. The impact on the stock market was devastating. As measured by the Dow Jones Industrials, the market fell 44% from its 1919 peak to its eventual bottom in 1921.

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Christ was, according to Barton, a man who “picked up twelve men from the bottom ranks of business and forged them into an organization that conquered the world.” The Man Nobody Knows became the best-selling book of 1924.9 According to conventional wisdom, the bull market of the mid-1920s was fueled in part by the low interest rate policy of the Federal Reserve. European central bankers had expressed concern that large quantities of gold were flowing from Europe to the United States, a trend that, if continued, would ultimately imperil their ability to keep their nations on the gold standard. Reluctantly, the Federal Reserve Bank of New York sought to lower interest rates so as to make American-based deposits less attractive to foreigners.

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“In making a cheap money policy for the Treasury,” Eccles argued, “we cannot avoid making it for everybody. All monetary and credit restrictions are gone under such conditions; the Federal Reserve became simply an engine of inflation.”13 In effect, the central bank pegged Treasury bonds at high prices (low interest rates) by aggressively buying government securities in the open market. Combined with the elimination of price controls after the war, which released pent-up pricing pressures in the economy, this aggressive expansion of the money supply inevitably produced a virulent inflation. By year-end 1948, the wholesale price index had risen 70% since the war.

Palace Coup: The Billionaire Brawl Over the Bankrupt Caesars Gaming Empire
by Sujeet Indap and Max Frumes
Published 16 Mar 2021

Leveraged buyout artists had become the richest men on Wall Street by the 2000s, but their province remained public companies that had fallen out of favor or misbegotten divisions of larger conglomerates. Yet the combination of massive amounts of capital that private equity firms were beginning to raise—KKR and Blackstone collectively raised $40 billion for LBO funds in 2006—along with low interest rates meant that plenty of large, stable, corporate stalwarts were suddenly vulnerable to a private equity bid. Most of these companies were not in need of an overhaul like Continental Airlines in 1993. Rather, their stability allowed them to hold a massive amount of debt that public markets would not tolerate.

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In 2009, Harrah’s began acquiring the junior mortgage debt of the Planet Hollywood hotel and casino from the likes of Goldman Sachs for fifty cents on the dollar or less. Ultimately, Harrah’s spent $70 million to acquire $300 million of debt, which it then converted into a controlling equity position by early 2010. There was a remaining $550 million senior mortgage that would be left in place at a low interest rate, making it a low-risk bet. A young executive at Apollo, David Sambur, had been looking at various distressed casinos like Las Vegas’s Fontainebleau and Atlantic City’s Revel to plug into Harrah’s. Those were poor fits, and nixed by Harrah’s management. Planet Hollywood, however, would be the property that both Apollo and Caesars could agree on.

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Its strategy was simply to go to court and force a default of an otherwise healthy company to collect on its CDS. It profited spectacularly, even if its bonds were rendered near worthless. Elliott had done deep legal analysis, as it had in Caesars, and was confident in its position; but the loss in the case stung the firm. The steady economy and low interest rates had limited distressed opportunities to fading retailers and volatile energy companies, and the flood of billions into the distressed debt funds left the industry as cutthroat as ever. David Tepper, whose firm, Appaloosa, made a profit approaching $1 billion, on its Caesars position had little to prove on Wall Street.

Making It Happen: Fred Goodwin, RBS and the Men Who Blew Up the British Economy
by Iain Martin
Published 11 Sep 2013

In the 1980s and 1990s the expanding finance industry had successfully eroded Glass–Steagall to the point that shortly before leaving office Bill Clinton signed its death warrant. Banks were extending into all manner of innovative activities, money was plentiful and credit was cheap. A long period of historically low interest rates spanned the presidencies of both Clinton and his successor George W. Bush. Cheap home loans were billed as an extension of the American dream. They also created an opportunity for profit – a lot of it – for those who ran hungry banks. The RBS operation at Greenwich did not originate sub-prime mortgages.

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On Monday 13 October, Brown and Darling hosted another Downing Street press conference at which the precise terms were laid out. The state was putting £20bn into RBS, and would own 63 per cent of it, and £17bn into Lloyds and HBOS, meaning the taxpayer held 41 per cent of the newly merged entity. Brown, in the sonorous tones which had on so many occasions hailed the British economic miracle of low interest rates, a surging City and constant growth, emphasised that this mattered to every family and business in the country. ‘The action we are taking is extraordinary . . . We must, in an uncertain and unstable world, be the rock of stability on which the British people can depend.’ Boom and bust had not been ended after all.

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Chapter 8 1 ‘Fred’s new Fawlty Towers’, Sunday Herald, 15 October 2000. 2 Edinburgharchitecture.co.uk 3 ‘Nicklaus to appear on new fiver’, Daily Telegraph, 12 July 2005. 4 Martin Sorrell interviewed in ‘Building the Brand’, 2007. (http://www.youtube.com/watch?v=jHsEBtHnc7g). 5 ‘Royal Bank buys Churchill Insurance for £1.1bn’, Daily Telegraph, 12 June 2003. 6 As in the UK the pace of consolidation and growth of the banking sector was aggressive in the Republic of Ireland. Low tax rates and low interest rates combined to create a banking boom. 7 ‘RBS “absolutely horrible” say Churchill staff’, Daily Telegraph, 5 March 2004. 8 Goodwin owns a 1972 Triumph Stag. 9 ‘RBS dismisses fears it overpaid for Charter One’, Scotsman, 10 May 2004. Despite the standard public denials, it rapidly became apparent to members of Goodwin’s management team that the price had been too high. 10 ‘Revealed: RBS’s secret jet’, Sunday Telegraph, 4 April 2004.

One Billion Americans: The Case for Thinking Bigger
by Matthew Yglesias
Published 14 Sep 2020

Last but by no means least, it really is worth emphasizing that at least under present economic conditions there’s no particular immediate need to worry about financing details or the budget deficit. Both interest rates and inflation have been low for years, and while that might change in the future, it’s not an immediate problem. Indeed, the low interest rates themselves are arguably a problem that more population growth could solve. Beating secular stagnation In the late 1930s, economist Alvin Hansen postulated that the American economy had entered a period of what he called secular stagnation, in which only large sustained budget deficits could prevent a recurrence of the kind of mass unemployment experienced during the Great Depression.* World War II delivered the deficits Hansen called for, and during the postwar demobilization period there was some concern that he might be right—though the next several decades clearly proved him wrong.

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For starters, our normal time-tested way of fighting recessions is to ask the Federal Reserve to cut interest rates. This worked very well for years, but it ran into trouble in 2008–2009 when they cut rates all the way down to zero and that still wasn’t enough. Then, over a decade later, with the unemployment rate low, interest rates were still at what would have traditionally been considered emergency levels. That meant that when the coronavirus pushed the global economy back into recession, there was only so much room to respond with rate cuts—raising the risk that high unemployment will persist even once the public health emergency passes.

Your Money: The Missing Manual
by J.D. Roth
Published 18 Mar 2010

But many experts say that it's okay to take on reasonable debt to pay for a handful of things that are likely to increase in value. This good debt includes an affordable mortgage on your home, student loans to pay for education, and loans to start a new business. Car loans are borderline: They generally carry low interest rates, but as you well know, cars lose value the moment you drive them off the lot. Even when you take on these kinds of "good" debts, be smart. Don't borrow more than you can afford. Shop around for the best interest rate (see Chapter 7 for more on this). And remember: The best debt is debt that's paid off.

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Choosing a Card There are hundreds of different credit cards out there, and they all claim they're offering a good deal. So how can you tell which one is best for you? The biggest factor to consider is whether you carry a balance on your cards. If you typically carry a balance—or think you might in the future—focus on cards with low interest rates. On the other hand, if you pay your balance in full every month, look for a card with no annual fee, a solid rewards program, and at least a 21-day grace period. Note The grace period is the time between when you buy something and when you have to pay interest on it. Your grace period runs from the end of the billing cycle (usually the day the bill is mailed) until the day the bill is due.

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Cash is versatile and, unlike frequent-flyer miles, never expires. Watch out for extra fees. Some fancy cards will give you all sorts of perks—for a price. You're usually better off with a no-fee card than paying $20 or $50 (or more!) every year for features you hardly use. Look for more than just a low interest rate. Though it sounds like gibberish, a credit card's "method of computing the balance for purchases" is important. Look for cards that calculate your interest using either "average daily balance" or "adjusted balance." Tip Tired of getting credit-card offers in the mail? You can stop them by calling 1-888-5-OPTOUT or visiting OptOutPrescreen.com.

Portfolio Design: A Modern Approach to Asset Allocation
by R. Marston
Published 29 Mar 2011

The same inflation expectations led to rising wage demands and to downward pressure on the U.S. dollar. To lower interest yields from their highs in the late 1970s, it was necessary for the Federal Reserve to pursue a tight monetary policy. This shift in policy began with the appointment of Paul Volcker as Fed chair in 1979. The low interest rates that we experience today were made at the Fed. But in the long run, low interest rates result from low inflation, not from the Fed lowering the Fed Funds rate. To provide further evidence of the link between inflation and interest rates, consider the bond returns earned on long-term Treasury bonds in each decade since 1950 as shown in Figure 7.2.

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No doubt that transformation may occur in some of the larger c10 P2: c/d QC: e/f JWBT412-Marston T1: g December 6, 2010 18:47 Printer: Courier Westford 206 PORTFOLIO DESIGN 250 200 Billions of Dollars P1: a/b 150 Other Europe 100 U.S. 50 0 2004 Q1 2005 Q1 2006 Q1 2007 Q1 2008 Q1 2009 Q1 FIGURE 10.8 LBO Loan Market Size in Billions of Dollars Data Source: Bank for International Settlements. hedge fund companies, but it will likely be the exception rather than the rule. The boom in buyout funds in this decade was fueled by a very favorable financing environment. Not only was this a low interest rate period, but spreads of high-yield bonds over Treasury debt fell as low as 2.5 percent. That’s a far cry from the 10 percent spreads available in late 2002. Figure 10.8 shows the growth in the LBO loan market from 2004 through the first quarter of 2009. The loan market reached a peak of almost $200 billion in the second quarter of 2007 before falling as the financial crisis crippled the high-yield market.

Republic, Lost: How Money Corrupts Congress--And a Plan to Stop It
by Lawrence Lessig
Published 4 Oct 2011

.="1ems, criticizing a government report on the crisis: The emphasis the report places on the folly of private-sector actors ignores the possibility that most of them were behaving rationally given the environment of dangerously low interest rates, complacency about asset-price inflation (the bubbles that the regulators and, with the occasional honorable exception, the economics profession ignored), and light and lax regulation.5 This is the idea that I want to pursue here: that the gambling that Wall Street engaged in made sense to them given (1) “the environment of dangerously low interest rates,” (2) “complacency about asset-price inflation,” and (3) “light and lax regulation.” My focus will be on (3) “light and lax regulation” and (2) “complacency about asset-price inflation.”

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Center for Responsive Politics, OpenSecrets.org, Teachers’ Unions: Long-Term Contribution Trends, available at link #71; Center for Responsive Politics, OpenSecrets.org, Democrats for Education Reform Expenditures, 2010 Cycle, available at link #72; Center for Responsive Politics, OpenSecrets.org, Democrats for Education Reform Expenditures, 2008 Cycle, available at link #73; Center for Responsive Politics, OpenSecrets.org, Democrats for Education Reform Expenditures, 2006 Cycle, available at link #74. Chapter 7. Why Isn’t Our Financial System Safe? 1. My claim is not that the failures I describe in this chapter were the most important cause of the economic collapse, or even that properly handled, they would have avoided the economic collapse. Certainly the biggest drivers beyond the low interest rates were the trade imbalance and currency distortions with foreign trading partners. Jeffrey A. Frieden and Menzie D. Chinn, Lost Decades: The Making of America’s Debt Crisis and the Long Recovery (forthcoming: Sept. 2011). But the argument here is about the rationality of this part of our financial policy, however significant this part is. 2.

How the Other Half Banks: Exclusion, Exploitation, and the Threat to Democracy
by Mehrsa Baradaran
Published 5 Oct 2015

From the beginning, the goal of postal banking abroad was financial inclusion. Postal banks were such a success in England that one contemporary called them “the greatest boon ever conferred on the working classes of this country.”22 In England, postal banks were geared toward “the humbler classes” and offered a low interest rate of 2 percent on deposits, below those of existing banks.23 Once the British system started, word spread internationally through the fastest means available at the time: the post office. The idea quickly spread across the British Empire to New Zealand in 1876, to Canada in 1868, and to New South Wales in 1871.24 After two decades, almost every Western country—plus Japan—had adopted nationwide postal banking.25 Germany was the only country that chose not to implement postal banking because it already had an extensive network of savings banks and credit unions.

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For one, he made clear that the people who would use postal savings banks were not currently bank customers: “The people to be reached are in the main those who, because of locality, have not had the opportunity to place their money in safe-keeping, or through prejudice or fear have kept it in hiding.”83 The congressional debate repeated this message: “The postal depository is the poor man’s bank, and it will carry its blessings into every community in the country.”84 The proposal reinforced the rhetoric with structural limits on postal savings that would make them unattractive to anyone but the poor. These included account caps and low interest rates. Meyer explicitly indicated that these limits be taken as “evidence of good faith on the part of the Government that it has no desire to enter into competition with existing financial institutions, particularly as the banks in the nearest localities are to be used as depositories and not the United States Treasury.”85 But the crucial shift that enabled postal banking was the decision that profits would not go to the Treasury but would stay under local control.

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sort=nomPeakValue&group=none&view=peak&position=0&comparelist=&search=. “The Federal Reserve made $9 trillion in overnight loans to major banks and Wall Street firms during the financial crisis, according to newly revealed data released Wednesday.… All the loans were backed by collateral and all were paid back with a very low interest rate to the Fed—an annual rate of from 0.5% to 3.5%.” See Chris Isidore, “Fed Made $9 Trillion in Emergency Overnight Loans,” CNN Money, December 1, 2010, accessed March 13, 2015, money.cnn.com/2010/12/01/news/economy/fed_reserve_data_release/. 17. According to 12 U.S.C. 1824, the FDIC is authorized to borrow from the Treasury and the secretary of the Treasury is authorized and directed to make loans to the FDIC on such terms as may be fixed by the corporation and the secretary.

Samuelson Friedman: The Battle Over the Free Market
by Nicholas Wapshott
Published 2 Aug 2021

The book was not merely a piece of revisionist economic history that became universally accepted as correct; it argued that mismanagement of the control of the supply of money, above all, changed the direction of the economy. At the heart of their argument was the long-abandoned quantity theory of money, which suggested that the more money in circulation, through low interest rates and cheaper borrowing, the more the value of money would decrease. Similarly, the less money in circulation, because of high interest rates, the more money would maintain its value over time. In their Monetary History, Friedman and Schwartz revived the long-ignored quantity theory in an incarnation that would fast become known as “monetarism.”

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Keynes and others offered a simple explanation, suggesting that the slump was the inevitable result of too much money chasing too few goods, prompting a bubble in stock and general prices that collapsed spectacularly between October 24 and October 29, 1929. Friedman and Schwartz came to a radically different conclusion. The Great Depression was not the result of overexuberance in the market, they argued, but was instead precipitated by the failure of the Federal Reserve to pump enough dollars into the system through lending at low interest rates to prevent the chronic lack of liquidity that ended up driving so many banks to fail and businesses to go bust. The pair noted that the Fed had raised the discount rate in 1920, then again in 1931, two years after the Wall Street crash, then raised the reserve requirement in 1937, which, along with other federal government measures, caused the “Roosevelt Recession” of 1937.

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As Samuelson had written in the first edition of Economics in 1948, By increasing the volume of their government securities and loans and by lowering Member Bank legal reserve requirements, the Reserve Banks can encourage an increase in the supply of money and bank deposits. They can encourage but, without taking drastic action, they cannot compel. For in the middle of a deep depression, just when we want Reserve policy to be most effective, the Member Banks are likely to be timid about buying new investments or making loans.22 Alongside persistent, record-low interest rates, George W. Bush presided over a mounting federal deficit, a subject that would become the main topic of debate in Congress in the early years of the new century. Bush had inherited a burgeoning budget surplus from Clinton—$237 billion in 2000, $127 billion in 2001—but government spending soon outstripped tax revenues as Bush fulfilled his campaign promises to introduce deep tax cuts, to increase defense spending, and to introduce an expensive Medicare drugs bill.

Stress Test: Reflections on Financial Crises
by Timothy F. Geithner
Published 11 May 2014

The safeguards for traditional banks weren’t tough enough, either, but what made our storm into a perfect storm was nonbanks behaving like banks without bank supervision or bank protections, leaving by some measures more than half the nation’s financial activity vulnerable to a run. When the panic hit, and the run gained momentum, we did not have the ability to protect the economy until conditions were scary enough to provoke action by Congress. Those were the main causes of the crisis. You could say that on the front end, the long period of low interest rates in the United States and worldwide helped fuel the crisis, because it helped fuel the mania that inflated the bubble, encouraging more borrowing, more home-building, more risk-taking. This was a necessary condition, though not a sufficient condition. And on the back end, the inadequacy of our firefighting tools—our inability to manage the failure of large complex institutions in an orderly fashion, our limited authority to stop a panic outside the banking system—helped prevent us from containing the crisis.

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The deterioration of the U.S. fiscal position before the crisis, the product of the Bush administration’s deficit-financed tax cuts and spending increases, helped limit the political appetite for a more aggressive and sustained fiscal response to the crisis. We could have afforded to do more than we did for a longer period of time, and the world would have financed it at low interest rates, but with the deficit already projected to be over $1 trillion before President Obama took office, there was significant opposition in Congress and among the public to additional doses of stimulus. Profligacy in good times can painfully constrain a government’s ability to respond to crises, substantively and politically.

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They need to signal that they’ll eventually hit the brakes, and that they’ll remain vigilant about inflation going forward, but the threat of future inflation is much less worrisome than the threat of imminent deflation and depression. Loose monetary policy can have limited power in a crisis, because low interest rates don’t help that much when borrowers don’t want to borrow and lenders don’t want to lend, but as the central bankers of the 1930s demonstrated, tight monetary policy can be disastrous. On the fiscal side, the government should do as much as it can to reduce taxes and increase spending in order to offset the loss of wealth, the tightening of credit, and the collapse in private demand.

Personal Investing: The Missing Manual
by Bonnie Biafore , Amy E. Buttell and Carol Fabbri
Published 24 May 2010

.) • The cost of 4 years at a private college averaged about $120,000 in 2010. With a college degree almost mandatory for many careers, borrowing to get your degree is relatively easy to justify. Still, you have to compare how much you plan to spend on your degree to the financial benefits it will bring to your career. Fortunately, student loans typically come with low interest rates and let you pay off your loans over long periods. • Borrowing to start a business can be risky, but can also be a tremendous opportunity to change your life. 40 Chapter 3 Get Rid of High-Interest Debt You know you’re being ripped off if you borrow from “payday” lenders who cash your paycheck and charge the equivalent of 485% interest per year (nice work if you can get it) or from anyone who loans you money in a back alley at 25%.

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A HELOC is a line of credit against the equity you’ve built up in your house from your down payment, paying off the balance on your mortgage, or because the value of your home has increased. The interest rate on a HELOC is about the same as a mortgage rate, so it’s a great way to consolidate high-interest debt to one low-interest-rate source. A HELOC is a line of credit, which means you can borrow the amount you need up to the credit limit the lender sets when you apply for the loan. Similar to a credit card, you must pay a minimum amount each month, but you can pay off the balance as quickly as you like. (If you use the money you’re no longer paying on high-interest-rate cards to pay off the HELOC balance, your debt balance will go down more quickly, as you see in the next step.)

Big Three in Economics: Adam Smith, Karl Marx, and John Maynard Keynes
by Mark Skousen
Published 22 Dec 2006

In Fisher's world, the primary effect of monetary inflation was a general rise in prices, not structural imbalances, asset bubbles, and the business cycle. He focused almost exclusively on the price level, rather than the monetary aggregates or interest rates. But an "easy money" policy developed in the mid-1920s when the Fed artificially lowered interest rates to help strengthen the British pound, and this low-interest-rate policy created a manufacturing, real estate, and stock market boom that could not last. Austrian Economists Warn of Impending Disaster During the 1920s, there was a school of economics that did predict a monetary crisis: Specifically, the up and coming generation of Austrian economists, Ludwig von Mises (1881-1973) and Friedrich Hayek (1899-1992).

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Suppose in a recession that the government hires construction workers and suppliers to construct a new federal building costing $100 million. These previously unemployed workers are now getting paid. In the first round of spending, $100 million is added to the economy. Now suppose that the public's marginal propensity to consume is 90 Figure 5.2 The General Theory Was Written When Interest Rates Were at Their Ail-Time Lows Interest rate 16.00 14.00 12.00 10.00 S.OO 6.00 4.00 2.00 0.00 percent, that is, these workers spend 90 cents of every new dollar earned. (Another way of saying it: their marginal propensity to save is 10 percent.) In the sgdhnd round of spending, $90 million is added to the economy. Then there is a third round.

Smart Money: How High-Stakes Financial Innovation Is Reshaping Our WorldÑFor the Better
by Andrew Palmer
Published 13 Apr 2015

Without the costs of legacy information technology (IT) systems and branch networks that weigh down the banks, Lending Club can ensure a lower interest rate for borrowers than they would normally get: the average rate that borrowers were paying on loans in 2013 was 14 percent, well inside credit-card charges. Allowing for a default rate of 4 percent, and Lending Club’s servicing fees, the returns to investors were 9–10 percent, not too shabby given how low interest rates have been. Growth has been explosive. By December 2012, Lending Club had surpassed $1 billion in loans taken out since its launch in 2007. It had doubled that by the start of July 2013, hit the $3 billion mark by December of that year, and surpassed $6 billion by the end of September 2014.

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In the United States the 2009 Credit Card Accountability, Responsibility, and Disclosure (Credit CARD) Act reduced interest-­rate increases and late fees on credit cards. The Consumer Financial Protection Bureau is looking at overdraft fees and the prepaid-cards market. The Durbin Amendment—passed as part of the Dodd-Frank Act in July 2010—capped interchange fees, the commission that merchants pay, on debit cards. Add in persistently low interest rates, which have eaten into banks’ net interest margins, and Oliver Wyman, a consultancy, has estimated that US banks lose money on 37 percent of consumer accounts. The rich will still pay their way in this sort of environment, thanks to larger account balances and the prospect of higher-margin activities such as investment advice.

10% Less Democracy: Why You Should Trust Elites a Little More and the Masses a Little Less
by Garett Jones
Published 4 Feb 2020

If it doesn’t repay the loan it received from the central bank on time, it’ll typically get into big trouble, so it’s genuinely not free money from Deutsche Bank’s point of view—but it was free for the central bank to create the money in the first place. Central banks do a lot more than that, of course, but that’s their classic job: lend money on generous terms (say, low interest rates) when the central bank wants to give the economy a boost, or lend money on tougher terms (at higher interest rates) when the central bank wants to slow things down a bit. One can spend a lifetime on the details—my dissertation was about just one tiny detail, how the Federal Reserve controls interest rates on a day-to-day basis—but that’s the core channel.

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Before the Glorious Revolution, the idea that a monarch must repay lenders was considered absurd. How could a queen or king be at the beck and call of mere lenders of coin? But this power to repudiate loans meant that lenders were afraid to lend to monarchs, which in turn meant higher interest rates when monarchs really needed to borrow. The power to borrow at low interest rates relied on the commitment to repay, and the commitment to repay relied on a monarch strong enough to repay but weak enough to be forbidden from abjuring repayment. The Glorious Revolution achieved this happy-enough medium, according to Nobelist Douglass North and Stanford political scientist Barry Weingast in an important essay.¹⁰ By sacrificing power now—the power to repudiate sovereign debt—the government gained a reserve of potential power—the power to borrow on good terms when necessary.

The Money Machine: How the City Works
by Philip Coggan
Published 1 Jul 2009

Since then, shares have offered lower yields than bonds or savings accounts because the prospects of capital growth are much greater. That changed in the case of the credit crunch as share prices plummeted. It is too early to tell whether it is the start of a new era. Probably the best way of showing the importance of yields is to cite the bond market. Suppose that in a year of low interest rates the Jupiter Corporation issues a bond with a face value of £100 and an interest rate (normally called the coupon) of 5 per cent. In the following year interest rates rise and bond investors demand a return of 10 per cent from newly issued bonds. Those investors who bought Jupiter bonds are now stuck with bonds which give them only half the market rate.

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Companies will be able to borrow only by offering investors penally high rates of interest, discouraging them from investing in new plant and machinery. Without new investment, the economy will not grow. The government will effectively have ‘crowded out’ private-sector borrowing. A low PSBR, the government argued, would result in low interest rates. Businesses would be encouraged to invest and the economy would grow. The drive to cut government deficits spread more widely in the 1980s and 1990s. The heavy defence expenditure incurred by the US during the cold war had caused its deficit to rise sharply. Tax rises and some spending cuts imposed by Presidents Bush and Clinton helped bring down the shortfall in the 1990s.

The Sport and Prey of Capitalists
by Linda McQuaig
Published 30 Aug 2019

A pipeline that facilitates the exploitation of the tar sands is something Canadians don’t need. But something we do need is a strong national infrastructure: public transit, affordable housing, roads, and bridges, as well as hospitals and schools. During the 2015 election campaign, Justin Trudeau promised he would take advantage of historically low interest rates in order to rebuild our national infrastructure. Canadians liked what they heard and voted him into power. What they didn’t know was that they would end up paying inflated prices for this new infrastructure and that they wouldn’t end up owning it. One Justin Trudeau Meets the Smartest Guy on Wall Street If the world’s seven billion people were ranked on a ladder according to how much power they wield, Larry Fink would be on a rung way, way, way up near the top — just thirty-three rungs below the world’s most powerful person, according to a ranking by Forbes magazine.1 So, although balding and rather mousy-looking, Fink turned heads at the annual gathering of the global elite in Davos in January 2016.

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Throughout his campaign, Trudeau had highlighted the fact that interest rates were extremely low and had insisted that this created a rare, not-to-be-missed opportunity for financing new infrastructure at very low cost. Trudeau had talked about creating an infrastructure bank that would enable Ottawa to use its strong credit rating to help municipalities reduce their borrowing costs. This, however, was not at all what Fink had in mind. He had trillions of dollars to lend, and lending them at low interest rates didn’t turn his crank. There seemed a fundamental mismatch. Trudeau had made no mention during his campaign of the possibility of Canada teaming up with big Wall Street players like Fink to finance new infrastructure. Indeed, if he had raised such a possibility, Canadians would likely have been much more wary of the whole infrastructure idea.

Home: Why Public Housing Is the Answer
by Eoin Ó Broin
Published 5 May 2019

The short statement acknowledged that the ‘over stimulation of the housing market is accepted as a key causal factor in the scale of the economic downturn.’66 With the painful benefit of hindsight the document’s authors were siding with the critical voices informing the 2004 NESC report by concluding that In a climate of low interest rates and rising incomes, a series of disastrous pro-cyclical policies led to a model that provided unprecedented growth, but it was a growth based not on foreign demand for our goods and services – as should be the case in a small open economy – or the productive use of investment capital to create sustainable employment.

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As stated above it is the non-market nature of public housing that enables it to be provided at an affordable rate to those unable to access market housing. While public housing is not completely insulated from all market effects – use of private builders or accessing market finance albeit at low interest rates via the HFA and EIB are cases in point – caution must be taken to ensure that market dynamics do not undermine the ability of public housing to meet its core objective. Public Private Partnerships, Joint Ventures, public land sales, stock transfers, private rental subsidies and long-term leasing arrangements all introduce ever greater levels of profit maximisation, increasing costs and undermining the long-term benefits of public housing to both tenants and the taxpayer.

The Smartphone Society
by Nicole Aschoff

We can’t understand the present political moment without connecting our hand machines to the unsteady terrain of our for-profit system. In the years following the dot.com crash in 2000, Wall Street players—bankers, brokers, traders, hedge fund managers—were flush with ready access to cash in the low-interest-rate environment and looking around for a new game at the casino. They found one in the US housing market, perfecting a speculative model based on bundling and slicing home mortgage loans, and transforming them into profitable financial products that could be bought, sold, traded, hedged, insured—you get the picture.

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As this book went to press, California legislators approved a landmark bill that forces app-based service companies (such as Uber and Lyft) to reclassify their workers as employees rather than independent contractors. Tech companies are sitting atop mountains of cash thanks to mass quantities of unpaid and underpaid work, a technological infrastructure that was developed with taxpayer money, and access to cheap credit for development and expansion, courtesy of low-interest rates engineered by the Federal Reserve. The resources to provide a decent livelihood for all tech workers, whether they’re app drivers or content moderators, are available. Opportunities for organizing workers in tech and related industries are also there. When the assembly line was popularized in the early twentieth century observers thought the deskilled work and high-pace environment of factories would never support empowered workers.24 They couldn’t have been more wrong.

The Switch: How Solar, Storage and New Tech Means Cheap Power for All
by Chris Goodall
Published 6 Jul 2016

One recent article in the magazine Investment and Pensions Europe summarised the reason for the trend: Powering the surge is a perfect storm of supportive policies and favourable financial and technological developments. Government policy aimed at stimulating investment in non-carbon power sources is paying off, while citizen groups are raising political pressure on lawmakers to move faster. Major investors are responding, raising allocations to an asset class that offers attractive yields in a low-interest-rate world, inflation protection from revenue often linked to inflation, and project finance structures that have more protections and control than rival asset classes, such as unsecured corporate debt. The journalist Christopher O’Dea went on quote the comments of an industry leader: We’re seeing the renewables sub-sector growing very, very significantly as a share of the overall infrastructure allocation at many clients,’ says Andrew Robertson, senior managing director and co-head of Macquarie Infrastructure Debt Investment Solutions (MIDIS).

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In the US a recent estimate by a respected government agency put the average figure for the cost of electricity from new wind developments at around $66 a megawatt hour, compared to projections of well over $70 for gas, even with very cheap fuel prices. Wind costs have fallen 15 per cent since the same survey of projects completed three years earlier. The $66 figure assumes a cost of capital of almost 9 per cent. Take that figure down to 6 per cent, a more reasonable figure in a world of very low interest rates, and the cost declines to less than $55. In the best locations, such as parts of Texas, the number would be below $50. In places like this, wind can still be cheaper than solar. So why should we assume PV is a better long-term solution, even in most of the world’s windy locations? The reason is that photovoltaics are on a much steeper experience curve, and even if they are not cheaper now in some locations, they will almost certainly become so within a few years.

Beyond the Random Walk: A Guide to Stock Market Anomalies and Low Risk Investing
by Vijay Singal
Published 15 Jun 2004

Equivalence of returns implies that the forward rate foresees the currency with a higher interest rate falling in value. However, the evidence reveals that currencies with higher interest rates do not actually fall as much as implied by the forward rate, creating the forward rate bias. A trading strategy that short-sells currencies with low interest rates and buys currencies with high interest rates can generate abnormal profits. Description The topic of this chapter is different from other chapters: it is slightly more complex and related to currencies rather than stocks, but it is nonetheless extremely important.1 From a trading perspective, the bias discussed in this chapter has been documented in several hundred research papers and many books.

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If this line of reasoning is stretched a bit, it means that interest rates and growth expectations are related. In general, countries that have interest rates less than their long-term steady-state interest rate are expected to grow less than countries that have interest rates more than their normal level. Look at the effect on the forward rate. If a country has a low interest rate, it is expected to underperform in terms of economic growth. Therefore, the currency should fall in value in the future. However, the forward rate suggests that lowinterest-rate currencies must appreciate, not depreciate. Perhaps the negative b can be explained in this way. Currencies with lower interest rates tend to fall because of reduced growth expectations, in spite of what the forward rate predicts.

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If the economy is doing poorly and inflation is not a threat, the government may want the currency to fall in value, so that exports increase along with domestic production. Japan fits this scenario perfectly—the Japanese government would like to see the yen fall in value. This is the same scenario as before: 271 272 Beyond the Random Walk low economic growth, low inflation, and low interest rates should be followed by a falling currency resulting in the forward rate bias. Thus, it seems that the role of government in currency markets may be an important factor in the forward rate bias. If the structure of currency markets contributes to the forward rate bias, it will persist until governments stop trying to influence exchange rates—something that is unlikely to happen.

People, Power, and Profits: Progressive Capitalism for an Age of Discontent
by Joseph E. Stiglitz
Published 22 Apr 2019

Some countries have done a better job in structuring them, leading to greater efficiency and equality in market incomes. Inequality is created not just by the rules that affect the incomes individuals receive,38 but also by those that govern how corporations can engage in exploitation. Our financial system is designed to increase inequality: those at the bottom pay high interest when they borrow but get low interest rates when they put their money in the bank. “Reforms” in the financial sector—such as the abolition of limits on interest rates charged—have only made matters worse. Too much of the increasingly limited competition that remains in this sector is directed at how to exploit the unwary.39 There are many reforms that could lead to greater equality.

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The titles suggest the transformative role that the authors believe a UBI would have for our society. 21.Some have suggested that there are also political advantages—universal programs, like Social Security, receive more support, simply because they are universal. There is an old adage that means-tested programs (where eligibility depends on, say, income, i.e., “means”) are mean, in the old English use of the term, meaning stingy. 22.Maintaining ultra-low interest rates can distort the economy and especially the financial sector, encouraging excessive investments in capital-intensive technologies and leading to too-low risk premia. Relying on monetary policy also puts an undue burden on interest-sensitive sectors. 23.OECD data. 24.See Peter Wagner and Wendy Sawyer, “Mass Incarceration: The Whole Pie 2018,” Prison Policy Initiative, Mar. 14, 2018. 25.

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But the story is more complex: to a large extent even the large global forces of technology and globalization originate from and are shaped by policy. Technology is driven by basic research and even in the private sector, its direction is affected by policy. Stronger climate policies would have induced more investment in research to reduce climate emissions. Low interest rates have reduced the cost of capital relative to labor, thus encouraging research and other investments to save labor. Globalization is largely driven by policies that affect cross-border movements of goods, services, capital, and people. 15.That’s not quite accurate: as we noted in note 11, chapter 8, given the low voter turnout, Trump got the votes of “just 26 percent of the voting-age population.” 16.I said as much in my books The Price of Inequality and The Great Divide.

The Cult of We: WeWork, Adam Neumann, and the Great Startup Delusion
by Eliot Brown and Maureen Farrell
Published 19 Jul 2021

Facebook was booming and was on track to return an astounding profit to its early VC backers; the same could be said of the VC-funded Groupon and Twitter. And the advent of Apple’s iPhone in 2007 would unleash a whole new category of company: smartphone apps. In the wake of the financial crisis, money managers—desperate to park their funds somewhere more lucrative than low-interest-rate government bonds—were no longer enticed by housing and banking. Instead, they followed the scent west, boosting shares of publicly traded tech companies like Google and Amazon while flooding venture capital firms with new investment. In 2011, VC firms raised $24 billion from investors, nearly double their haul of 2009.

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Normally a money-losing company like WeWork couldn’t take on large loads of debt. Bond investors wanted to see a company generating cash to repay its debts, or at the very least have some assets that they could seize if a company wasn’t able to make its interest payments. But these weren’t normal times. Low interest rates had emboldened investors to take on risky bets for the promise of higher returns. By 2016, another money-losing startup, Uber, had raised $1.15 billion by tapping the debt markets. Still, Uber’s numbers looked better than WeWork’s. Even though Uber was hemorrhaging money—it was effectively losing money on every ride, subsidizing consumers with venture capital money—its finances were at least headed in the right direction.

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It was the first time that WeWork’s numbers—even with their embellishments and adjustments—sat in front of the media, as well as a wide number of investors who hadn’t also been dazzled directly by Neumann’s sales pitch. Still, plenty of investors remained keen. In late April as they were getting ready to finalize pricing, JPMorgan’s bankers told Minson there was enough demand for WeWork to raise about $200 million more than the $500 million amount they initially expected. In a world of low interest rates, investors were willing to take a gamble on the company for slightly higher returns. Did WeWork want to sell even more debt? their bankers asked. Minson called Neumann. It was Neumann’s thirty-ninth birthday, and he was in a hot tub surrounded by friends at his sixty-acre “farm” in Pound Ridge; Minson explained the demand and asked if he was willing to take on $700 million in debt.

Crisis Economics: A Crash Course in the Future of Finance
by Nouriel Roubini and Stephen Mihm
Published 10 May 2010

Subprime mortgage lenders continued to go under, including giant American Home Mortgage. Credit spreads for corporate firms sharply rose. A run on some money market funds overseen by BNP Paribas only added to the sense that things were going horribly, terribly awry. So did ruptures in the “carry trade,” where investors borrowed in low-interest-rate currencies and invested them in high-interest-rate currencies. The crisis was no longer an isolated problem; it was spreading into new and dangerous territory. As a consequence, the interbank market tightened in August, and the spread between LIBOR and the rates charged by European central banks soared, from 10 basis points to about 70.

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They did so because many of them depended on exports, and the cheaper their currencies remained, the more effectively they could compete in world markets. This kind of intervention helped underwrite exports, but it meant an accumulation of dollars and other currencies at home, fueling a growth in the money supply. The abundance of easy money and low interest rates then contributed to inflation and to asset bubbles, particularly on domestic stock exchanges. At their peak, stocks in China and India hit price-to-equity ratios of 40 or even 50 late in 2007—definite bubble territory. Many of these economies overheated in advance of the American financial meltdown, making them extraordinarily fragile and susceptible to sudden shocks.

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(No surprise there: Goldman was heavily involved in discussions about the AIG bailout during the run-up to the rescue of the ailing firm.) It netted $10 billion more after the Fed guaranteed the senior unsecured debt of banks and bank holding companies. Then there’s all the indirect aid: the low interest rates that slashed Goldman’s borrowing costs; and the Fed’s decision to purchase $1.8 trillion in Treasury debt, mortgage-backed securities, and other instruments, propping up prices and indirectly helping the firm. All told, Goldman probably took upwards of $60 billion in direct and indirect help, then took even more after converting to a bank holding company, when it got access to TARP funds.

Basic Economics
by Thomas Sowell
Published 1 Jan 2000

Investment and Allocation Interest, as the price paid for investment funds, plays the same allocational role as other prices in bringing supply and demand into balance. When interest rates are low, it is more profitable to borrow money to invest in building houses or modernizing a factory or launching other economic ventures. On the other hand, low interest rates reduce the incentives to save. Higher interest rates lead more people to save more money but lead fewer investors to borrow that money when borrowing is more expensive. As with supply and demand for products in general, imbalances between supply and demand for money lead to rises or falls in the price—in this case, the interest rate.

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Federal Reserve System in the early twenty-first century lowered interest rates, in order to try to sustain production and employment, in the face of signs that the growth of national output and employment might be slowing down, the repercussions included an increase in the prices of houses. Lower interest rates meant lower mortgage payments and therefore enabled more people to be able to afford to buy houses. This in turn led fewer people to rent apartments, so that apartment rents fell because of a reduced demand. Artificially low interest rates also provided fewer incentives for people to save. These were just some of many changes that spread throughout the economy, brought about by the Federal Reserve’s changes in interest rates. More generally, this showed how intricately all parts of a market economy are tied together, so that changes in one part of the system are transmitted automatically to innumerable other parts of the system.

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When Oregon passed a law capping the annual interest rate at 36 percent, three-quarters of the hundreds of payday lenders in the state closed down.{444} Similar laws in other states have also shut down many payday lenders.{445} So-called “consumer advocates” may celebrate such laws but the low-income borrower who cannot get the $100 urgently needed may have to pay more than $15 in late fees on a credit card bill or pay in other consequences—such as having a car repossessed or having the electricity cut off—that the borrower obviously considered more detrimental than paying $15, or the transaction would not have been made in the first place. The lower the interest rate ceiling, the more reliable the borrowers would have to be, in order to make it pay to lend to them. At a sufficiently low interest rate ceiling, it would pay to lend only to millionaires and, at a still lower interest rate ceiling, it would pay to lend only to billionaires. Since different ethnic groups have different incomes and different average credit scores, interest rate ceilings virtually guarantee that there will be disparities in the proportions of these groups who are approved for mortgage loans, credit cards and other forms of lending.

Corporate Finance: Theory and Practice
by Pierre Vernimmen , Pascal Quiry , Maurizio Dallocchio , Yann le Fur and Antonio Salvi
Published 16 Oct 2017

Rate that applies to different periods, but which transforms the same sum in an identical manner over the same period. For calculating the interest that is paid out/earned. For calculating the yield to maturity. On maturity, because the principal is lent in full over the whole period. On maturity, so that you can take advantage for as long as possible of a low interest rate on the maximum amount of principal outstanding. At a discount rate equal to the yield to maturity, the present value of future cash flows is equal to the purchase price of the investment. If the discount rate increases, the present value will drop and will never again be equal to the market price of the investment.

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In fact, the explanation for the – apparent – paradox of a 24% rise in earnings per share matched by a destruction of value is that the buyer’s EPS has increased, because the P/E of the company bought by means of debt is higher than the after-tax cost of the debt. Here, B has a P/E of 20 given the 33% premium paid by A on the acquisition. The inverse of 20 (5%) is much higher than the 3% after-tax cost of the debt for A. At the present low interest rates (3 or 4% pre-tax, 2.5% net of taxes), an acquisition paid in cash must be based on a P/E ratio of more than 40 to have a negative impact on the EPS5 of the buyer. Such a situation leaves plenty of margin to manoeuvre. Consider now Company C, which has equity of 1400 with net profit of 140, i.e. a P/E of 10.

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The approach is global, because it is based not on the value of operating assets and liabilities per se, but on the overall returns they are expected to generate. The value of the company is derived by applying a certain multiplier to the company’s profitability parameters. As we saw in Chapter 22, multiples depend on expected growth, risk and interest rates. High expected growth, low risk in the company’s sector and low interest rates will all push multiples higher. The approach is comparative. At a given point in time and in a given country, companies are bought and sold at a specific price level, represented, for example, by an EBIT multiple. These prices are based on internal parameters and by the overall stock market context.

Stop Saving Start Investing: Ten Simple Rules for Effectively Investing in Funds
by Jonathan Hobbs
Published 5 Apr 2017

Their wealth stops growing when they stop working. Working and saving your income each month has zero scalability or longevity to it, as its growth depends on you continuing to add money to your savings account. If you were to lose your job tomorrow, your savings would stop growing. Five cold facts about saving In today’s low interest rate environment, the average savings account pays 0.15% interest per year.3 The average cash ISA pays a bit more interest at 0.43% per year, but this is still far from acceptable! The average person in the UK saves 5.6% of their after-tax salary each year. The average UK salary is £26,364 per year.

Principles of Corporate Finance
by Richard A. Brealey , Stewart C. Myers and Franklin Allen
Published 15 Feb 2014

They realize why short-term rates are usually lower (but sometimes higher) than long-term rates and why the longest-term bond prices are most sensitive to fluctuations in interest rates. They can distinguish real (inflation-adjusted) interest rates and nominal (money) rates and anticipate how future inflation can affect interest rates. We cover all these topics in this chapter. Companies can’t borrow at the same low interest rates as governments. The interest rates on government bonds are benchmarks for all interest rates, however. When government interest rates go up or down, corporate rates follow more or less proportionally. Therefore, financial managers had better understand how the government rates are determined and what happens when they change.

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For example, suppose that a potential manufacturer of crusher machinery offers to sweeten the deal by leasing it to Sangria on favorable terms. Then you could calculate APV as the sum of base-case NPV plus the NPV of the lease. Or suppose that a local government offers to lend Sangria $5 million at a very low interest rate if the crusher is built and operated locally. The NPV of the subsidized loan could be added in to APV. (We cover leases in Chapter 25 and subsidized loans in the Appendix to this chapter.) TABLE 19.2 APV valuation of Rio Corporation ($ millions). APV for Businesses APV can also be used to value businesses.

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Most governments subsidize exports by making special financing packages available, and manufacturers of industrial equipment may stand ready to lend money to help close a sale. Suppose, for example, that your project requires construction of an on-site electricity generating plant. You solicit bids from suppliers in various countries. Don’t be surprised if the competing suppliers sweeten their bids with offers of low interest rate project loans or if they offer to lease the plant on favorable terms. You should then calculate the NPVs of these loans or leases and include them in your project analysis. Sometimes international projects are supported by contracts with suppliers or customers. Suppose a manufacturer wants to line up a reliable supply of a crucial raw material—powdered magnoosium, say.

The Dollar Meltdown: Surviving the Coming Currency Crisis With Gold, Oil, and Other Unconventional Investments
by Charles Goyette
Published 29 Oct 2009

It is true that every inflation ends in a deflation just as every bubble bursts, so the arguments about deflation are serious and need to be met head-on to see if they are applicable, finally, this time. Deflationists make the argument that in a period of a widening credit collapse, the monetary authorities discover that while they can make monetary reserves available in the banking system and contrive low interest rates to make borrowing attractive, borrowers may not be willing to take out loans at any price. If a business has declining sales, shall it borrow for more inventory, paying interest on the borrowed money while the inventory sits on a shelf unused? If a manufacturer already has excess capacity, at what price is it willing to borrow to expand?

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Bonds have a special appeal during deflationary periods when the purchasing power of the dollar can rise. So frightened were investors in hedge funds and other financial instruments as the stock market came tumbling down that they were willing to park their money, at least for the time being, in U.S. Treasuries at historically low interest rates—or even no interest rates! In December 2008, the Treasury auctioned off $30 billion of four-week Treasury bills for a yield of zero percent. It was as if the buyers were saying, “Wrap this money in foil and put it in the freezer, bury it in the lawn behind the White House, but for goodness’ sake don’t put it in the stock market, don’t give it to Bernie Madoff, and don’t buy securitized mortgages.

Before Babylon, Beyond Bitcoin: From Money That We Understand to Money That Understands Us (Perspectives)
by David Birch
Published 14 Jun 2017

They consider the financial crisis as one explanation of the growth in cash held but reject it. Looking at the detailed figures shows that there was a jump in cash held outside of banks around the time of the Northern Rock affair, but as public confidence in the banks was restored fairly quickly, and the impact of low interest rates on hoarding behaviour seems pretty marginal, there must be some other explanation for why the amount of cash out there kept rising. Two rather obvious factors that do seem to support the shape of the sterling cash curve are the increase in VAT to 20 per cent and the continuing rise in self-employment, both of which serve to reinforce the contribution of cash to the shadow economy.

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The resources that can be appropriated through the issuance of central bank liabilities (including currency) that pay less than the market yield on otherwise-similar non-central bank liabilities can be an important source of state revenue, either for the central bank or for its beneficial owner, typically the Ministry of Finance or the Treasury, or for both. For example, over the course of 2014 the stock of euro banknotes and coins increased by €61 billion (0.6 per cent of GDP). For the Federal Reserve, the increase in the stock of coins and notes was $87 billion (0.5 per cent of GDP). Even at the current historically low interest rates, the income obtained is valuable. Incidentally, given some of the discussion around the use of high-value banknotes for illegal activities, it is interesting to note (see table 3) that the United States earns far more in the seigniorage on its $100 bill than other countries earn from their highest-value note because such a high proportion of US currency is held in stashes and hoards outside of the country.

The Armchair Economist: Economics and Everyday Life
by Steven E. Landsburg
Published 1 May 2012

As a minor caveat, the article acknowledged that the picture was not not so rosy for lenders; it referred to this problem as an unfortunate "secondary effect." But an interest rate is like a price. For every borrower there is a lender, and every dollar borrowed is a dollar lent. AH of the advantages of a low interest rate are exactly offset by its disadvantages. Borrowers and lenders matter equally. When we set out to do a cost-benefit analysis, we commit ourselves to treat everybody equally. Buyers are on a par with sellers, borrowers are on a par with lenders, and drug dealers, thieves, and addicts are on a par with police officers, commodities brokers, part; owners of the Chicago White Sox, and saints.

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If restricting supply can increase profits, a monopoly oil industry doesn't wait for political turmoil before it restricts supply. You can claim that the companies profit from political crises, or you can claim that they collude to act as monopolists, but you cannot claim both and be consistent. False monopoly is only one of the recurrent themes in the Sound and Fury File. "Low interest rates are good for the economy" is a theme sounded often by those who fail to recognize that for every happy borrower there is an unhappy lender, or that what is "good for the economy" is nothing more than what is good for the individuals it comprises. Every Thanksgiving, I can count on finding editorials exhorting Americans to eat less meat so that what they forgo will be available to the undernourished.

The Global Minotaur
by Yanis Varoufakis and Paul Mason
Published 4 Jul 2015

Arguably, the chain of events that led to the implosion of communism in Poland and Yugoslavia began in the 1970s with the sharp rise in interest rates soon after those countries had accepted offers of substantial loans from Western financial institutions. It was a similar story in Third World countries, where national liberation movements had grabbed power, often against the West’s best efforts. From the early 1960s up until 1972, Western banks, constrained by the Global Plan’s low interest rates and tough regulatory regime, cast their gaze far and wide, offering large loans to Third World nations, Soviet satellites (e.g. Poland and Bulgaria), and communist countries that were detached (or semi-detached) from Moscow (Yugoslavia and Romania). The loans were used to underwrite much-needed new infrastructure, education, health systems, fledgling industrial sectors, etc.

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German Chancellor Angela Merkel issued her famous nein-cubed: nein to a bail-out for Greece; nein to interest rate relief; nein to a Greek default. That triple nein was unique in the history of public (or even private) finance. Imagine if, on 15 September 2008, Secretary Paulson had said to Lehman Brothers: ‘No, I am not going to bail you out’ (which he did say); ‘No, I shall not organize very low interest rate loans for you’ (which he also probably said); and ‘No, you cannot file for bankruptcy’ (which he would never have said). That last ‘no’ is inconceivable. And yet that is precisely what the Greek government was told. The German government could fathom neither the idea of assisting Greece nor the idea that Greece would default on so much debt held by the French and German banks (about €75 billion and €53 billion, respectively).

The Trouble With Billionaires
by Linda McQuaig
Published 1 May 2013

Gone were the days when the Fed officials would sit back and watch with indifference – even approval – as the nation’s weaker members bobbed helplessly in the water until they were no longer able to keep themselves afloat. The role of the Fed, according to Eccles, was ‘to assure that adequate support is available whenever needed for the emergency financing involved in a recovery program’. But the economy was in such disastrous shape that low interest rates on their own weren’t enough. With little prospect of profits, even low interest rates wouldn’t prod the private sector to invest. Eccles insisted that, given the severity of the Depression, government had to take some initiative; it had to intervene actively with massive spending programmes. He was particularly inspired by the research work being carried out by a young economist named Lauchlin Currie, the director of research at the Fed and later Eccles’s own economic adviser.

The Decadent Society: How We Became the Victims of Our Own Success
by Ross Douthat
Published 25 Feb 2020

What has changed, according to the less solutionist and more pessimistic analysis, is that we’ve entered an age of economic limits—an era of “secular stagnation,” as the chastened neoliberal Larry Summers wrote in 2013, in which “the presumption that normal economic and policy conditions will return at some point cannot be maintained.” For the pessimists, the unusual features of the post-2007 landscape—the persistently low interest rates, the low rate of inflation, the disappointing rate of growth, the great fortunes parked in rent-seeking rather than risk-taking—are actually inevitabilities in a developed world where there just aren’t enough impressive enterprises to invest in; a developed world that inflates bubbles and then pops them (or invests in Theranos and then repents) because that’s all there is for capital to do; a developed world slowly growing accustomed to unexpected limits on its future possibilities.

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But the deficit is still a long-term constraint, both on public investment in good times and countercyclical spending in bad ones, that did not exist in the world of 1955. Likewise, the fact that today’s slower-than-the-1950s growth rate depends on historically high deficits and historically low interest rates doesn’t mean that today’s growth is illusory and destined to evaporate, as some hard-money pessimists assume. But it does suggest that we are, in effect, using our extraordinary wealth to permanently prop up a weak private-sector economy rather than enjoying a strong private-sector economy that increases our extraordinary wealth.

The Truth About Lies: The Illusion of Honesty and the Evolution of Deceit
by Aja Raden
Published 10 May 2021

To satisfy ever-increasing investor demand for MBSs, banks also began engaging in predatory lending practices, by granting loans to people who absolutely couldn’t be expected to pay them back: people with poor credit and low incomes—many of whom didn’t even have steady jobs. Predatory lending practices also involved granting loans with a “teaser rate,” a low interest rate that was initially manageable but would later shoot way up after an arbitrary introductory period was over, kind of like a cat jumping out of a bag you thought contained a pig. Because this weird scam was so new, the various credit-rating agencies—whose job it was to truthfully rate a financial instrument like an MBS for safety—had no idea how to evaluate it.

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Because this weird scam was so new, the various credit-rating agencies—whose job it was to truthfully rate a financial instrument like an MBS for safety—had no idea how to evaluate it. They looked to historical examples of normal (not salted, let alone salted and then bundled) MBSs, leaning on the collective assessment of generations past, as we are wont to do, and declared the bundles in question very safe investments. Oops. The combination of the looser requirements, low interest rates, and AAA ratings drove property values even higher. This led to a rapidly inflating, self-perpetuating system, otherwise known as a giant bubble: the economic version of a large-scale Hoax. First people got excited, then that excitement spread and got others excited, and then they so badly wanted to believe it that—through a spectacular display of motivated reasoning—they recursively found reasons to believe what they already believed.

The New Class Conflict
by Joel Kotkin
Published 31 Aug 2014

In this, both political parties are to blame. Republican fealty to the interests of the wealthy has been long-standing, but now much of the backing for “progressive” causes comes from the very people—Wall Street traders, venture capitalists, and tech executives—who benefit most from the federal bailouts, cheap money, low interest rates, and increasingly anachronistic low capital gains tax rates.57 Prescriptions for Growth Promoting broad-based economic growth—as opposed to simply boosting the incomes of investors and top corporate executives—would not only offer opportunities to America’s middle and working classes, but it is also essential to maintaining the expanded state that both parties have nurtured over past decades.

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McKinnon, “Top Earners Feel the Bite of Tax Increases,” Wall Street Journal, April 13, 2014; Eric Alterman, “Think Again: The Super-Rich and Their Monster,” Huffington Post, November 7, 2013, http://www.huffingtonpost.com/eric-alterman/-issues—media-think-agai_b_4232770.html. 57. “Six Years of Low Interest Rates in Search of Some Growth,” Economist, April 4, 2013; George Anders, “Inside Sequoia Capital: Silicon Valley’s Innovation Factory,” Forbes, March 26, 2014, http://www.forbes.com/sites/georgeanders/2014/03/26/inside-sequoia-capital-silicon-valleys-innovation-factory; Raymond Hernandez and Stephen Labaton, “In Opposing Tax Plan, Schumer Breaks With Party,” New York Times, July 30, 2007. 58.

The Greed Merchants: How the Investment Banks Exploited the System
by Philip Augar
Published 20 Apr 2005

Not only is the product range diverse but the value created by the investment banks needs to be disentangled from the other effects of free market economics, for the two are intricately entwined. During the last quarter of a century, America and Britain have achieved near-perfect economic conditions: reassuringly steady growth, productivity gains, rising employment, low interest rates and – at least for the foreseeable future – the elimination of inflation as a threat. Potential pitfalls have been avoided: deflation has not materialized, recessions have been minimized and economies have not generally overheated. The effect of free market economics and the allied movements of globalization and shareholder value have been widely praised: in ‘the period since 1980 – the age vilified for its rush into globalization – both global inequality and the proportion of the world’s population and number of the world’s people in extreme poverty have fallen.’1 Former US Treasury Secretary Lawrence Summers had no doubt who was responsible: ‘It was impatient, value-focused shareholders who did America a great favour by forcing capital out of its traditional companies and thereby making it available to fund the venture capitalists and the Ciscos and the Microsofts that are now in a position to propel our economy very rapidly forward.’2 The growth, liquidity and ability of capital markets to withstand all kinds of shock were crucial as America led the world’s stock markets to a tenfold increase in capitalization in just two decades.

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It was all about getting volume; now it’s all about margin, making sure there is one.’17 When equity revenues dried up the investment banks quickly switched to fixed income, which grew from being a third of profits in 2000 to two-thirds in 2002. They were helped by favourable market conditions. As interest rates fell to their lowest levels since the 1960s, corporate treasurers rushed to borrow money and to refinance debt at low interest rates. The investment banks were there in a flash, pitching new bond and bond derivatives issues and selling them to fund managers. The yield curve was steep and the proprietary trading departments were able to borrow short, invest long and pick up a huge interest carry. Fixed income people, out of the limelight during the equities bull market, suddenly found themselves the flavour of the month and gained in power, influence and compensation: ‘Bond traders who not long ago were considered second class citizens by their colleagues in investment banking and equities were now back on top of the social pile.’18 The growth of the hedge fund industry also illustrates the investment banks’ ability to latch on to new trends and work up a business around them.

DIY Investor: How to Take Control of Your Investments & Plan for a Financially Secure Future
by Andy Bell
Published 12 Sep 2013

But doing so is a once-in-a-lifetime deal you make with an insurer, and you will be stuck with whatever income they give you for life. Annuities are very unpopular, not least because increases in longevity have meant the rates they pay out are half what they were 15 years ago. Annuity rates have been depressed further by low interest rates and extremely onerous capital adequacy requirements on insurers, meaning that you are effectively investing in a product that tracks gilts. Split between asset classes There are many different rules of thumb when it comes to asset allocation, such as the rule that your equity exposure, as a percentage, should be 100 minus your age.

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The income investor Income investing is a strategy for people at a point in their lives when they want to start drawing income from their assets, while preserving capital, rather than growing their fund. Income investors face a number of big challenges, and changes to interest rates and inflation are but two. Today’s low-interest rate environment is forcing income investors to look beyond cash to riskier but higher-yielding asset classes. They also face the added challenge of generating sufficient income without excessively eroding their capital, which is the income generation engine room. If the capital goes, the income goes with it.

When the Wolves Bite: Two Billionaires, One Company, and an Epic Wall Street Battle
by Scott Wapner
Published 23 Apr 2018

Ten years ago, activist hedge funds had less than $12 billion under management. Today, it’s more than $120 billion, with more than ten funds now managing more than $10 billion each. Why? Some cite the ongoing bull market—the raging rally of stocks since post-crisis 2008—as the catalyst. Companies were flush with cash and could borrow it at record low interest rates, and shareholders were hungry for a bigger piece of that pie. Enter the shareholder activist to get it for them, typically using a familiar playbook—usually a spin-off, share-buyback, or cost-cutting initiative—always in the name of unlocking more value for all shareholders. There is also a case to be made that activism as a technique has become popular because in many cases it has worked.

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As he had been the previous year, Icahn was billed as the closer of the conference—the last speaker before the crowd would break for cocktails to mark the end of the event. Icahn had grown more nervous in recent weeks about the stock market’s high valuation and worried that the Federal Reserve’s easy-money policies of the previous years had artificially inflated the market. Icahn feared that once those policies ended it could get ugly. “What happens when the low interest rate environment ends, no one knows. No one can know,” Icahn said as he pondered worryingly of how stocks might react.4 The topic then turned to Herbalife, with Icahn admitting he now owned seventeen million shares of the company. Onstage with him, I pressed Icahn to elaborate on his position. He said he hadn’t lightened up his stake at all and then made it clear he wasn’t about to get too specific.

Ten Lessons for a Post-Pandemic World
by Fareed Zakaria
Published 5 Oct 2020

This is probably why, when cases spiked after quarantines were lifted, few developing countries even considered reimposing them. After the paralysis comes the inevitable debt crisis. In the United States, Europe, Japan, and China, the economic damage is brutal, but it will be ameliorated by massive government spending to soften the blow. These countries, America above all, can borrow trillions of dollars at low interest rates with relative ease. That’s not the case for poor countries that are already deeply indebted. Capital is a coward, as the saying goes, and in the first months of the pandemic, over $100 billion fled from emerging markets. To keep their economies afloat, these countries will have to take out loans in dollars and at high interest rates, which they must pay back in their own rapidly depreciating currencies.

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Trade, capital flows, and foreign direct investment never recovered to their 2008 levels. People began attributing the crisis to an overly complex and connected global economy, one that benefited capital at the expense of labor—bankers and investors over everyday workers. Then came the recovery, fueled by historically low interest rates and other active monetary policies, which caused stocks and other financial assets to rise in value, further deepening the divide between capital and labor. Populist politicians who railed against “globalism” were elected in major countries, including the United Kingdom and the United States.

Rule of the Robots: How Artificial Intelligence Will Transform Everything
by Martin Ford
Published 13 Sep 2021

When I studied economics in college, this inverse relationship, known as the Phillips curve, was taught as one of the basic principles of the field. In the years since the end of the Great Recession in 2009, however, this relationship has broken down and low unemployment now coexists with very low rates of inflation and low interest rates.15 I believe that an important reason for this is that falling unemployment is no longer associated with increases in wages or consumer demand that are sufficient to drive inflation. As advancing technology, along with globalization, has eroded the ability of most average workers to bargain for higher wages, the mechanism that gets purchasing power into the hands of consumers and drives increasing demand has become less and less effective.

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As advancing technology, along with globalization, has eroded the ability of most average workers to bargain for higher wages, the mechanism that gets purchasing power into the hands of consumers and drives increasing demand has become less and less effective. More evidence comes from the fact that large U.S. corporations have been sitting on enormous amounts of cash, much of which is invested in U.S. Treasury securities paying historically low interest rates. As of the end of 2018, American businesses were hording about $2.7 trillion.16 If the executives running these companies saw evidence of vibrant demand for goods and services, why wouldn’t they invest more of this money in developing new products or ramping up production to meet that increasing demand?

Wall Street: How It Works And for Whom
by Doug Henwood
Published 30 Aug 1998

Mutual funds have grown steadily since Wall Street recovered its reputation after the Depression — 11% a year on average through the 1960s and 1970s, and about twice that ever since. The 1990s have been notable not only for the continued rush of dollars into mutual funds as people despaired of low interest rates — with many of them plunging into bond and foreign stock markets completely unaware of the risks involved, though with dreams of 20-30% returns in perpetuity — but also the sheer proliferation of entities. As of February 1998, there were 6,867 U.S. mutual funds (far more stocks than are listed on the New York Stock Exchange), more than double 1990's number, a birthrate of almost two funds per business day.

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Despite that wage sluggishness, and the good behavior of the general price indexes, the consensus is that the Fed will tighten again before long. This supposition was confirmed by Fed governor Lawrence Lindsey, who said that monetary policy was "not quite in neutral." Neutral, in Fedspeak, is a euphemism for moderately tight; for months the central bank's line has been that its low interest rate policies, which had saved the financial system from the indiscretions of the 1980s, were excessively stimulative now that the financial system had healed, and that it was merely shifting policy back to "neutral" by pushing up rates. Weekend. The lead headline in Sunday's New York Times declares "U.S.

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Credit markets are far from perfect, Keynes argued; there always exists an "unsatisfied fringe" of borrowers who can't find credit because banks turn them down (CWW, p. 190). Or, the banks might say, they can't find enough qualified borrowers to soak up all their lending potential (hard WALL STREET to imagine before 1990). In the 1930s and the early 1990s, low interest rates did not encourage credit expansion because lenders, and possibly borrowers, had been scared by the recent credit implosion. This important notion of credit rationing would be largely forgotten as fantasies of perfect markets infected the economics profession during the 1960s and 1970s, but it would later reappear in the politically cautious "information assymetry" literature.

More: The 10,000-Year Rise of the World Economy
by Philip Coggan
Published 6 Feb 2020

The demise of the South Sea Bubble left the Bank of England unchallenged as Britain’s premier financial institution. And the bank played an important role in the rise of Britain as a global power in the 18th century. The sound finances of Britain and the Netherlands meant that they could borrow at low interest rates, and not only did this make it easier for them to finance military spending, but industry also benefited from access to cheap capital. So sound were the Bank of England’s finances that George Washington remained a shareholder throughout the War of Independence. Another revolutionary leader, Alexander Hamilton, wrote of Britain’s “vast fabric of credit … ’Tis by this alone she now menaces our independence.”3 American finances were chaotic in the aftermath of independence.

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The introduction of deposit insurance, in the wake of the Great Depression, seemed to have solved the problem of banking runs. But a moral hazard had been created, in which there was every incentive for bankers to take risk. In the late 19th century, banks in Britain had equity capital equivalent to 15–25% of their assets. By the 1980s, this cushion was just 5%.15 The long period of low interest rates and rising asset prices meant that bankers who were aggressive in their lending practices had been successful. Those bank executives were rewarded with share options, which soared in value. In turn, the performance of the share price was tied to the annual (or quarterly) change in profits. The result was a focus on short-term gain rather than long-term risks.

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At the same time, investing institutions like pension funds were being pressed, for regulatory reasons, to take a cautious approach. This increased the demand for safe assets such as government bonds. All told, the combination of a lower propensity to invest and a higher propensity to save led to very low interest rates. Real (after inflation) interest rates were 3% or more at the global level through the 1990s and early 2000s but had dropped to less than 1% after 2010.41 Another issue is the impact of demographic change on economic growth. In 1950, a quarter of the Japanese population was aged over 40, and 5% was aged over 65; by 2010, more than half the population was aged over 40 and nearly a quarter was more than 65 years old.

Capitalism Without Capital: The Rise of the Intangible Economy
by Jonathan Haskel and Stian Westlake
Published 7 Nov 2017

The first is low investment. As figure 5.1 shows, for the United States and the UK, investment fell in the 1970s, recovered somewhat in the mid-1980s, and then fell precipitously in the financial crisis. Since then it has not recovered. Now, this would not be so surprising were it not for the second symptom: low interest rates. As figure 5.2 shows, long-run real interest rates have been declining since the mid-1980s and have been particularly low since the financial crisis. But there has been no recovery in investment since then, even though the costs of making such investments are very low. Figure 5.1. Real investment as a percentage of real GDP for twenty-four OECD countries and a restricted sample of eleven countries (Australia, Austria, Denmark, Finland, Germany, Italy, Japan, Netherlands, Sweden, the UK, and the United States).

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Real investment as a percentage of real GDP for twenty-four OECD countries and a restricted sample of eleven countries (Australia, Austria, Denmark, Finland, Germany, Italy, Japan, Netherlands, Sweden, the UK, and the United States). Source: Thwaites 2015. Figure 5.2. Long-run real interest rates for United States and UK. Source: Thwaites 2015. The coincidence of low investment and low interest rates is a puzzle for economists. Once upon a time, central bankers thought they understood what to do about low investment. When businesses got nervous about the future, as they did from time to time, and reduced investment, central banks would respond by lowering their base interest rate, making money cheaper.

Market Sense and Nonsense
by Jack D. Schwager
Published 5 Oct 2012

Although excessive or unwarranted use of leverage is one of the main factors responsible for episodes of large losses by hedge funds, including those severe enough to result in the fund’s demise (blowups), it is important to note that leverage can also be used as a tool to reduce risk through hedging, as in the case of the classic Jones model hedge fund detailed in Chapter 10. Also, the confusion between leverage and risk is one of the major misconceptions among hedge fund investors—a point fully discussed in Chapter 15. Credit risk. Many hedge funds in the credit space pursue a strategy of borrowing money at a relatively low interest rate and investing the proceeds in higher-yielding instruments (e.g., junk bonds). If money is borrowed at, say, 4 percent, and the junk bonds bought yield an average of 8 percent, then the hedge fund will earn a profit of 4 percent on borrowed amounts (and a full 8 percent on the assets under management, which do not have a borrow cost), assuming bond prices are unchanged.

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For example, as of 2012, Treasury bonds had been in a bull market for over 30 years, a fact that would increase their optimized weighting in any portfolio in which they were an asset. Yet, ironically, the fact that T-bonds had been in such a long-term advance made their prospects for future returns less favorable, not more favorable, since the resulting low interest rate levels suggested far more limited scope for a further decline in interest rates (that is, rise in bond prices). See Chapter 6 for a more detailed discussion of this example. The question must always be asked: Are the factors responsible for past returns still likely to be valid for the future?

The Wealth of Humans: Work, Power, and Status in the Twenty-First Century
by Ryan Avent
Published 20 Sep 2016

The rising premium on know-how boosted the value of the skilled cities where firms and individuals were experimenting with more powerful computing and new communications technologies. Yet as we saw in Chapter 7, the increased value generated by productive cities did not translate into massive investment in new construction, due to the limits imposed by building-supply restrictions. Nor did governments take full advantage of low interest rates to invest in new infrastructure. Investment in new transport lines and networks might have helped growing cities like New York and Boston accommodate additional construction, thereby creating two productive outlets for accumulated savings. Alas, that was not to be. Rising inequality – the third factor – exacerbated these difficulties.

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Banks came up with clever ways to package dodgy loans into securities that looked reasonably safe, but which promised a healthy return. The world’s big savers, from China to the very rich, gobbled them up. Yet governments also encouraged the transfer of purchasing power through massive lending. Low interest rates – the necessary consequence of attempts to keep demand on track when savings outstrip investment – reduced the cost of borrowing. Perhaps more importantly, regulators allowed risky financial practices to flourish, and even made regulation less restrictive in some cases as housing prices soared.

Nothing but Net: 10 Timeless Stock-Picking Lessons From One of Wall Street’s Top Tech Analysts
by Mark Mahaney
Published 9 Nov 2021

Perhaps the most important action question is: Did the Covid-19 crisis and the Covid-19 recovery cause a company to become structurally stronger or weaker for the long term? That’s the key question that investors should focus on. ADDRESSING THE RELEVANCY CRITICS So let me get this right. An analyst covering a once-in-a generation secular growth opportunity (the Internet) during a period of unusually low interest rates (2010–2020) decides to try to draw broad stock-picking lessons from a handful of dramatically successful companies (the Big Longs—AMZN, FB, GOOGL, NFLX). Just how relevant could these lessons possibly be? Great question! Let me try to address it. The Internet has been an amazing secular growth opportunity.

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In terms of the unusually low interest environment, there is no doubt that this has been a tailwind behind some of the most successful high-growth tech stocks of the past two decades. If most of the profits for a business are out in the distant future—which is the case for early-stage companies and/or ones in near-term aggressive investment mode—then low interest rates strongly boost the value of those long-term profits. High interest rates reduce them. That’s why high-growth, high-multiple, limited profitability stocks trade off aggressively on rising interest rate fears. I have no idea what will happen to interest rates in the future. I do know that interest rates have been relatively low for some time (10+ years) because inflation concerns have been tempered.

Magic Internet Money: A Book About Bitcoin
by Jesse Berger
Published 14 Sep 2020

Empty Promises “Debts and lies are generally mixed together.” Francois Rabelais, Renaissance Writer & Physician The extent of uncertainty and doubt that central bank policies are capable of producing has been on full display since the onset of the Global Financial Crisis.6 The world has been showered with very low interest rates and inflated currency supplies, enabling enormous debts to be accumulated. This situation has weakened both the soundness of global currencies and broad conviction in future economic prospects. Without credible assets as restraining factors, fiat currencies have and continue to be created and spent with minimal regard to repercussions.

Servant Economy: Where America's Elite Is Sending the Middle Class
by Jeff Faux
Published 16 May 2012

When prices rose, it reduced the real value of the earnings on the debt that they held. Moreover, rising prices meant rising interest rates, which reduced the value of the existing bonds (by paying lower rates) that investors held in their portfolio. As the finance sector grew in political importance, maintaining low interest rates to protect the bondholders grew in importance to the Washington politicians. That high federal deficits always lead to inflation is an economic urban myth. In the modern American experience, there has been virtually no peacetime example of budget deficits triggering inflation and higher interest rates.

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They were also lending at 5 percent to investors, who were buying high-yielding (and high-risk) Brazilian, Turkish, and other emerging countries’ bonds at 10 to 12 percent. Very little of this money was finding its way to investment in the anemic U.S. economy. Moreover, the policy of trying to reflate the economy primarily through providing low-interest rates to banks and investment houses, who could then use the funds to get higher yields around the world, squeezed the small U.S. savers and 401(k) contributors. Retiring workers who had carefully saved for years on the assumption that they could get a 5 percent annual return on their small nest egg found themselves getting less than 1 percent and trying to make up the difference with a part-time job at Burger King.

Zero-Sum Future: American Power in an Age of Anxiety
by Gideon Rachman
Published 1 Feb 2011

“That’s precisely the reason I was shocked because I had been going for forty years or more with very considerable evidence that it was working exceptionally well.”18 The question of what precisely had gone wrong became the subject of fierce debates that will keep economists busy for decades to come. But the most plausible explanations all pointed to weaknesses in Greenspan’s belief in the self-righting, self-regulating magic of the global marketplace. In retrospect, it seemed clear that a credit bubble had built up in the United States, promoted by Greenspan’s policy of very low interest rates and by the “global economic imbalances” that had allowed huge trade surpluses to build up in Asia and then to be recycled in the United States. Greenspan’s faith in deregulation and in the self-interest of the major investment banks as the best guarantee of the health of the financial system also looked complacent and mistaken.

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At the end of his presidency, Clinton was able to point out proudly that the United States was enjoying “its lowest unemployment rate in three decades, the smallest welfare rolls in thirty-two years, the lowest crime rate in twenty-seven years, the highest home ownership in American history, and three consecutive years of budget surpluses.”24 The George W. Bush years saw some economic turbulence with the end of the dot-com bubble, but tax cuts, a housing boom, and the Fed’s policy of low interest rates under Greenspan succeeded in reinflating the economy and prolonging the American expansion. This extended period of global prosperity had one unlikely outcome: it turned economists and central bankers, normally the least charismatic of figures, into the heroes of the age. The veneration of Alan Greenspan in the United States was only the most extreme example of this phenomenon.

How to Own the World: A Plain English Guide to Thinking Globally and Investing Wisely
by Andrew Craig
Published 6 Sep 2015

This fact, combined with financial deregulation and developments in the global debt markets, means that there has been an unprecedented amount of “cheap money” available to anyone who has wanted to buy a house in the last several years. This more than anything is why the price of housing has gone up for such a long time and by so much. When considering where house prices might go from here, it is perhaps most instructive for us to think about whether there will continue to be a vast supply of money at low interest rates. To do so we must understand how interest rates are set and this means we must have a basic understanding of the bond markets. If we consider interest rates first, we should be aware that governments only have a certain amount of power when it comes to setting interest rates. Governments raise money partially from tax but also by selling bonds.

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It has almost always resulted in economic disaster for the country or society involved (ancient Rome, Weimar Germany in the 1920s, Argentina and many other Latin American countries in the 1980s and 2000s, and most recently Zimbabwe). For most of history, neither the UK nor the US played this game. They were strong enough that they could pay back their debts with real money and could keep bond market investors happy buying their bonds at low interest rates. Sadly, this is no longer the case. In the last several years, both the US and UK have had to resort to inventing money to buy their own bonds in order to keep interest rates artificially low. Some of you may have noticed that this is a third option, yet I previously stated that there are only two ways for a government to raise money.

Risk Management in Trading
by Davis Edwards
Published 10 Jul 2014

Debt securities issued by the U.S. government have different names based on maturity. Treasury bills have terms of less than one year. Treasury notes typically have terms of 2, 3, 5, and 10 years. Treasury bonds have a maturity of 30 years. These are generally considered very safe investments and have a correspondingly low interest rate. These all work similarly and are typically referred to by the name Treasuries. Zero Coupon Bonds. As their name implies, zero coupon bonds do not have a coupon payment. Instead, they are issued at a discount to their par value. Asset‐Backed Securities (ABS). An asset‐backed security is a type of collateralized bond that has an asset or pool of assets pledged to (Continued) 50 RISK MANAGEMENT IN TRADING KEY CONCEPT: (Continued ) help repay the bond.

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The first tranche will have the highest priority for receiving cash flows. Other tranches will have progressively lower priority. In the case that one of the borrowers defaults on their obligations, the lowest tranches are the last to get paid. As a result of this structure, the first tranche is an extremely safe investment (usually with a correspondingly low interest rate paid to the lender) and the last tranches are extremely risky (with correspondingly high interest rates). A government can control how much of its currency is in circulation, both by printing more money and by open market activities like borrowing or lending money. Of the two approaches, borrowing money (or repaying loans) is the primary way that governments control how much money is available.

Systematic Trading: A Unique New Method for Designing Trading and Investing Systems
by Robert Carver
Published 13 Sep 2015

CONCEPT: SHARPE RATIO (SR) The Sharpe ratio (SR) measures how profitable a trading strategy or holding an asset has been, or is expected to be. To calculate it you take returns and adjust them for their risk. Strictly speaking you should take the ‘excess’ return over and above a risk free interest rate,26 although this isn’t relevant for a trader using derivatives,27 nor as important in the post 2009 low interest rate era as it was before. Formally it is the mean return for a particular time period divided by the standard deviation of returns for the same time period. So the daily SR would be the average daily return, divided by the standard deviation of daily returns. However I normally use the annualised Sharpe ratio – annualised returns divided by annualised standard deviation.

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When others have to trade Not everyone trades because they are trying to make money. Some are forced to. For example central banks wishing to keep their currency weak – such as Switzerland or Japan – can do so indefinitely if they are comfortable with the ensuing costs.29 A foreign exchange carry trading rule that borrows in low interest rate currencies like Switzerland and invests in high interest rate currencies will be consistently profitable as a result, at least until the currency policy is abandoned (as it was for Switzerland in January 2015). This can lead to sudden losses, making carry a decidedly negative skew strategy. Here are some other examples from different asset classes.

Billion Dollar Loser: The Epic Rise and Spectacular Fall of Adam Neumann and WeWork
by Reeves Wiedeman
Published 19 Oct 2020

It was difficult to meaningfully differentiate their offering from anyone else’s, and the previous two recessions had wiped out office middlemen as tenants vacated and left them stuck with long-term leases. Jake Schwartz, one of GA’s cofounders, spent the 2000s in finance and watched hedge funds rise and fall on a similar premise: the carry trade, which involved borrowing money at low interest rates in order to invest in things that could produce a much higher return—before the bill came due, one hoped. If the returns were less robust than expected, your business could end up underwater. Coworking seemed to require a risk-taking mindset that the GA founders couldn’t stomach, and they decided to scrap the coworking side of their operation.

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A global brand known for providing the kinds of offices that people actually wanted to work in had huge potential alongside anonymous building operators like Brookfield and Vornado. Two percent of the market could make Amazon’s revenues look like a pittance. Investors from Wall Street to Sand Hill Road were also primed to hope. The post-recession era ushered in an age of hypergrowth, where one well-timed hit could make a career. Low interest rates enabled speculative investors to fund risky bets that could produce outsize returns. Individual investors were putting more of their money into index funds, which broadly tracked the economy, leaving mutual fund managers seeking alternatives to prove they could beat a market that was already booming.

Money: Vintage Minis
by Yuval Noah Harari
Published 5 Apr 2018

The way in which the Mississippi Company used its political clout to manipulate share prices and fuel the buying frenzy caused the public to lose faith in the French banking system and in the financial wisdom of the French king. Louis XV found it more and more difficult to raise credit. This became one of the chief reasons that the overseas French Empire fell into British hands. While the British could borrow money easily and at low interest rates, France had difficulties securing loans, and had to pay high interest on them. In order to finance his growing debts, the king of France borrowed more and more money at higher and higher interest rates. Eventually, in the 1780s, Louis XVI, who had ascended the throne on his grandfather’s death, realised that half his annual budget was tied to servicing the interest on his loans, and that he was heading towards bankruptcy.

Beyond the 4% Rule: The Science of Retirement Portfolios That Last a Lifetime
by Abraham Okusanya
Published 5 Mar 2018

If you use rules-based spending methods, like Guyton’s guardrail or Kitces’ ratcheting, withdrawal will naturally be adjusted upwards if alpha is delivered in the first five years of retirement. What low bond yield means for sustainable withdrawal rates There have been concerns – voiced by several leading retirement income experts – that the era of low interest rates and low bond yields makes the SWR framework unlikely to hold up. Their argument is based on evidence that current bond yields are a strong predictor of future bond returns. Bond yields are currently low, so this suggests low returns in the next 10 years. And since the first decade of retirement largely predicts the sustainable withdrawal rate over the entire 30-year retirement, this implies a lower sustainable withdrawal rate.

Modernising Money: Why Our Monetary System Is Broken and How It Can Be Fixed
by Andrew Jackson (economist) and Ben Dyson (economist)
Published 15 Nov 2012

Simultaneously there is less uncertainty about the future behaviour of the economy” (Minsky, 1966, p. 8). Growing confidence means firms are happy to take on more debt, debt-to-equity ratios are further reduced, and this makes firms more susceptible to a rise in interest rates. With rising asset prices and low interest rates (due to the recent recession) economic agents can profit by speculating on the price of assets, and banks can make profits by introducing speculative financing methods. Lending for speculation on assets pushes up the price of assets, and increases feelings of wealth. From the bank’s perspective, rising asset prices mean loans are almost always repaid.

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To conclude, banks contribute only a small proportion of the total tax take, receive massive subsidies, levy hidden inflation taxes and periodically require bailing out at great expense to the taxpayer. Footnotes 1. In 2011 the Bank of England calculated that banks earned just under £109 billion in interest a year. However, this figure is artificially low due to the historically low interest rates. For example, before the Bank of England lowered interest rates (in 2008), banks earned just over £213 billion in interest payments alone. 2. The figures are drawn from analyses conducted by Positive Money combining statistics on the revenues and expenditure of UK banks (published by the Bank of England) and surveys of the finances of British households and small and medium-sized businesses commissioned by UK government departments and held at the UK Data Archive. 3.

The Elusive Quest for Growth: Economists' Adventures and Misadventures in the Tropics
by William R. Easterly
Published 1 Aug 2002

The HIPC effect for the IMF’s share of new external loans isof the same sign andsignificant: the IMF had 4.4 percentage points higher shareof new external loans to HIPCs than to non-HlPCs, controlling for income. The HIPCs got to be HIPCs in part by borrowing from the World Bank and IMF. Third, the results are similar examining the trends in composition of new lending toHIPCs over 1979 to 1997. Private credit disappears and multilateral financing assumes an increased share. World Bank low-interest-rate loans, termed International Development Association (IDA) loans, alone more than tripledtheir share in new lending. The share of private credit in new lending began the period 3.6 times higher than theIDA share; by the endof the period, the share of IDA was 8.6 times higher than that of private financing.

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There was then a huge shift in net transfers from1979-1987 to 1988-1997, a period in which debt ratios stabilized. Large positive net transfers from IDA and bilateral donors offset negative net transfers for IBRD (nonconcessional WorldBank loans),bilateralnonconcessional, and private sources. This was another form of debt relief, since it exchanged low-interest-rate, long-maturity debt-debt that has a large grantelement-for nonconcessional debt. However, remarkably, the netpresentvalue of debtremainedroughly unchanged over this period, at least until the past few years. IDA and bilateral donors were bailing out all the nonconcessional lenders, Forgive Us Our Debts 133 piling on new debt fast enough that the debt burden remained constant even though the nonconcessional lenders were getting their money out.

Rewriting the Rules of the European Economy: An Agenda for Growth and Shared Prosperity
by Joseph E. Stiglitz
Published 28 Jan 2020

Sensible supervision could address such problems by restricting lending in areas where there are nascent bubbles, especially in real estate. This action would encourage more lending to more productive activities. Some central banks take an even more proactive policy by setting minimum levels of lending, say, to small- and medium-sized enterprises. These policies allow more lending without the creation of bubbles, even at low interest rates. They ensure that more of the credit that is created goes to stimulating the economy. ■ Manage supervision in ways that do not exacerbate economic downturns. Now that the ECB has a larger role in bank supervision, it needs to acknowledge fully that the way it engages in banking oversight can have significant macroeconomic consequences.¶ It is one thing when an isolated bank has a problem, but quite another when the banking system of a region or a country is facing difficulties.

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While it may be the case that the ECB may have to be, from time to time, a market-maker as well as a lender of last resort, reforms in the financial system should be designed to make that unlikely.13 If an individual country like Greece cannot borrow, the EU could borrow instead through the ECB and then re-lend the money to Greece. European solidarity should mean that there is at least enough confidence across the EU to provide such lending, provided the country is undertaking reasonable actions to restore its fiscal position. Lending at a relatively low interest rate would free up resources that could be used to help stimulate the economy, thereby generating more tax revenues and reducing social protection expenditures. EU borrowing would address another problem: it would create a single, safe European asset on which banks can rely. Unfortunately, Germany has strongly resisted proposals for a Eurozone bond, backed with collective resources of all members.

Don't Be Evil: How Big Tech Betrayed Its Founding Principles--And All of US
by Rana Foroohar
Published 5 Nov 2019

Meanwhile, Amazon was growing so fast that Jeff Bezos was named Time’s 1999 Person of the Year; that was the year that Americans’ online Christmas shopping doubled, and Bezos took the lion’s share of the orders.1 Markets were booming, but they were also creating what would become a bust. It was a time of easy money and low interest rates, not unlike the years leading up to the financial crisis of 2008, or indeed, the period since then. Back then, one of the triggers for the creation of the dot-com bubble was the Taxpayer Relief Act of 1997, which lowered the top marginal capital gains tax rate in the United States from 28 percent to 20 percent, and in turn made more people more interested in becoming speculative investors.

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I was trawling for information about financial risk and where it might be held, and the economist told me to look at the debt offerings and corporate bond purchases being made by the largest, richest corporations in the world, such as Apple or Google, whose market value now dwarfed that of the biggest banks and investment firms.6 In a low interest rate environment, with billions of dollars in yearly earnings, these high-grade firms were issuing their own cheap debt and using it to buy up the higher-yielding corporate debt of other firms. In the search for both higher returns and for something to do with all their money, they were, in a way, acting like banks, taking large anchor positions in new corporate debt offerings and essentially underwriting them the way that J.P.

Nomad Capitalist: How to Reclaim Your Freedom With Offshore Bank Accounts, Dual Citizenship, Foreign Companies, and Overseas Investments
by Andrew Henderson
Published 8 Apr 2018

Once you make the trip and open your account, Georgian banks offer both ATM and debit Visa Electron cards that can be used anywhere in the world that Visa is accepted. It is also a great tool to have for booking travel online in Europe, as Electron cards incur lower transaction fees from cheap airlines. While bank fees there are rather low, interest rates are quite high. I have even seen 5% interest rates on short-term US dollar term deposits; and if you are willing to bet on the Georgian lari, you can earn even higher yields. If you are willing to get on a plane, I would strongly consider Georgia for its ease of account opening and maintenance.

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For example, $100,000 in gold and $100,000 in real estate would require $200,000 in capital. However, thanks to innovation in Singapore’s gold vault market, you can now purchase as little as $125,000 in gold, store it in a private vault knowing your exposure to paper currency is reduced, and then borrow the $100,000 you need for property at an extremely low interest rate. It also just so happens that Singapore is among the best places to store gold. There is almost zero crime, so the idea of anyone breaking into a super secure facility is rather remote. While you cannot drink water on the subway without being fined, people do carry cash and flash expensive electronics around all the time without issue.

Our Lives in Their Portfolios: Why Asset Managers Own the World
by Brett Chistophers
Published 25 Apr 2023

But banks were now widely held responsible for the crisis, and – in Western nations, at least – they had their wings clipped by regulators as a result. As big banks became ‘more heavily regulated and scrutinized’, a Bloomberg report later observed, private-equity firms moved forcefully out of their shadow: ‘Almost everything that’s happened since 2008 has tilted in [private equity’s] favor. Low interest rates to finance deals? Check. A friendly political climate? Check. A long line of clients? Check … Private equity managers’, the report concluded, ‘won the financial crisis.’24 But it was not just private-equity-focused managers who ‘won’ the financial crisis: this was also true of asset managers more generally.

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From some $46 trillion in 2008, global AUM leapt to $74 trillion six years later, on which the industry earned annual net revenues of approximately $260 billion.25 Not only that, but the burgeoning business of asset management was proving immensely profitable – ‘among the world’s most profitable businesses’, as the authors of a Boston Consulting Group analysis put it.26 By the mid 2010s, then, commentators were unanimous that global finance had seen nothing less than a deep-seated structural shift. Being increasingly ‘risk-averse’, banks, intimated Landon Thomas in the New York Times, were yesterday’s news. Amid ‘super-low interest rates’, the balance of power on Wall Street had instead shifted decisively towards institutions with bigger risk appetites – in particular, towards ‘asset managers, which have been inundated with cash from investors desperate for higher returns’.27 Little wonder that, so as not to lose sight of their ascendant rivals, global investment banks increasingly ploughed resources precisely into expanding their own asset-management arms.28 Andrew Haldane, the cerebral Bank of England economist, in a 2014 speech at the London Business School, perhaps captured the mood best.

Big Debt Crises
by Ray Dalio
Published 9 Sep 2018

But monetization simply swaps one IOU (debt) for another (newly printed money). The situation is analogous to a Ponzi scheme. Since there aren’t enough goods and services likely to be produced to back up all the IOUs, there’s a worry that people may not be willing to work in return for IOUs forever. Low interest rates together with low premiums on risky assets pose a structural challenge for monetary policy. With Monetary Policy 1 (interest rates) and Monetary Policy 2 (QE) at their limits, the central bank has very little ability to provide stimulus through these two channels—i.e., monetary policy has little “gas in the tank.”

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Banks often didn’t require borrowers to show proof of income before receiving a mortgage and they pushed adjustable rate mortgages that enticed borrowers with low “teaser” rates now before rates increased later on. “Subprime” mortgages (e.g., riskier ones) became 20 percent of the market. And as we’ll discuss later in much more detail, banks were able to package this debt in ways that obscured its underlying risks (i.e., “securitization”), helping fuel the easy availability of credit and low interest rates. For all of the debt build-up and frenzied housing activity, the economy didn’t overheat and inflation remained moderate, so the Fed, looking at the average numbers, remained unconcerned. It is typically the case that the worst debt bubbles (e.g., the US in 1929, Japan in 1989) are not accompanied by high and rising goods and services inflation, but by asset price inflation financed by debt growth.

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It still would have been a bad crisis with a bad recession, but not as bad as this crisis turned out to be. There would have been less forced selling and a less dangerous margin spiral, as the FDIC’s systemic risk exemption powers to guarantee liabilities, combined with deposit insurance and the Fed’s discount window, would have had more power and reach. So it was not just low interest rates that fueled the bubble, but rather a combination of easy money, lax regulation, and risky financial innovations. As the Fed was looking at inflation and not debt growth when setting interest rates, and as policy makers allowed the lax regulation of shadow lending channels to continue, the bubble was allowed to grow.

Beyond Outrage: Expanded Edition: What Has Gone Wrong With Our Economy and Our Democracy, and How to Fix It
by Robert B. Reich
Published 3 Sep 2012

We’d end up with the worst of both worlds—a growing ratio of debt to the gross domestic product, coupled with high unemployment and a public that’s furious about losing safety nets when they’re most needed. The proper sequence is for government to keep spending until jobs and growth are restored, and only then to take out the budget ax. The Fed can’t possibly generate a buoyant recovery on its own. Without an expansionary fiscal policy, the Fed’s low interest rates have little effect. Companies won’t borrow in order to expand and hire more workers unless they’re confident they will have customers for what they produce. And consumers won’t borrow money to spend on goods and services unless they’re confident they’ll have jobs. The 2011 downgrade of America’s debt by Standard & Poor’s (S&P) is irrelevant.

A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing
by Burton G. Malkiel
Published 10 Jan 2011

“Japanese earnings are understated relative to U.S. earnings because depreciation charges are overstated and earnings do not include the earnings of partially owned affiliated firms.” Price-earnings multiples adjusted for these effects would be much lower. Were yields, at well under ½ of 1 percent, unconscionably low? The answer was that this simply reflected the low interest rates at the time in Japan. Was it dangerous that stock prices were five times the value of assets? Not at all. The book values did not reflect the dramatic appreciation of the land owned by Japanese companies. And the high value of Japanese land was “explained” by both the density of Japanese population and the various regulations and tax laws restricting the use of habitable land.

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Although land was scarce in Japan, its manufacturers, such as its auto makers, were finding abundant land for new plants at attractive prices in foreign lands. And rental income had been rising far more slowly than land values, indicating a falling rate of return on real estate. Finally, the low interest rates that had been underpinning the market had already begun to rise in 1989. Much to the distress of those speculators who had concluded that the fundamental laws of financial gravity were not applicable to Japan, Isaac Newton arrived there in 1990. Interestingly, it was the government itself that dropped the apple.

The Quants
by Scott Patterson
Published 2 Feb 2010

Muller agreed but wanted to wait one more day before ratcheting up. Meanwhile, the losses were piling up. By then, the quant meltdown was affecting markets across the globe. The Dow Jones Industrial Average tumbled 387 points Thursday. The Japanese yen, which quant funds liked to short due to extremely low interest rates in Japan, surged against the dollar and the euro—an example of more short covering by quant funds as the carry trade fell apart. But the dollar rose against most other currencies as investors snapped it up in a panicked flight to safe, liquid assets, just as they had during Black Monday in October 1987 and in August 1998 when LTCM imploded.

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The fear spread far beyond Wall Street, triggering sharp downturns in global trade and battering the world’s economic engine. On Capitol Hill, the government’s finger-pointing machinery cranked up to full throttle. Among the first called to account: Greenspan. Greenspan, many in Congress believed, had been the prime enabler for Wall Street’s wild ride, too slow to remove the punch bowl of low interest rates earlier in the decade. “We are in the midst of a once-in-a-century credit tsunami,” Greenspan said to Congress in his characteristic sandpaper-dry voice. To his left sat the stone-faced Christopher Cox, head of the Securities and Exchange Commission, in for his own grilling later in the day.

Bad Money: Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism
by Kevin Phillips
Published 31 Mar 2008

It was also a powerful tool of financial expansion, mortgage finance being one of the sector’s weightiest pillars. Virtually all the mega-firms were enthusiastic participants. I don’t think it is any coincidence that the peak of financial services’ share of GDP came in 2004, amid the heyday of low-interest rate refinancings and before California real estate, in particular, started showing early hints of a downturn in 2006. In the end, of course, housing and mortgage finance also led the contraction. It would be convenient to be able to say that these five circumstances accounted for three-quarters or four-fifths of the financial sector’s takeover, so that the chickens coming home to roost in 2007 and afterward were related hatchlings of that same arrogant and misconceived expansion.

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Were inflation to remain or return as a powerful global force, bolstered by Washington’s expected record budget deficits and the Fed’s profligate balance sheet, then the believability of politicized U.S. inflation and GDP data—flawed well beyond opacity—could again pose major difficulties. 5. THE 2010S: A GLOBAL INFLATION TRAP? Nothing, of course, matches inflation and high interest rates for potential menace to the orderly winding down of a massive twenty-five-year bubble of debt and credit instruments blown up around low interest rates. Figure 1.1, on page 7, shows that as of 2007, the present-day U.S. debt bubble on the right side of the page had swollen to a record 340 percent of GDP. This was up from 159 percent in 1975 and 200 percent in the early 1980s at the launching of the Multi-bubble. Amid such levels, prime-rate interest levels in the 8-9 percent range could be devastating, and 5-6 percent inflation figures combined with large-scale borrowing needs could bring such constrictions in their wake.

Prosperity Without Growth: Foundations for the Economy of Tomorrow
by Tim Jackson
Published 8 Dec 2016

In fact, it’s tempting to describe what has emerged in advanced economies in the last decades as a kind of casino economy, where ruthless speculators have used cheap money to gamble on the price of commodities or on property in the hope of making a fast buck before the bubble bursts. Eight years later, the world economy is still reeling from the impacts of this behaviour. The interaction between these two dynamics is also revealing. Low interest rates lead to easy credit, which creates higher asset prices. Capital gains from these assets favour the richer members of society and increase both income and wealth inequality. Since richer households typically have a higher propensity to save than poorer ones, this leads to a further increase in funds, lowering interest rates further and creating even more cheap credit.24 Paradoxically, as inequality increases, poorer households become even less able to service loans.

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Forgoing that possibility runs the risk that the company finds itself at a disadvantage compared with national and international competitors. In this case, it would sell fewer goods, report lower profits to its shareholders, and risk capital flight from the company. At the national level, this dynamic plays out in several ways. Over the long run, productivity can lead to rising wages, low interest rates and higher standards of living. If workers produce more, then they can command higher wages without putting pressure on corporate profits or inflation. Central banks can thus keep interest rates lower than would otherwise be the case, feeding a virtuous cycle of consumer and business and consumer spending and low inflation.

Dark Towers: Deutsche Bank, Donald Trump, and an Epic Trail of Destruction
by David Enrich
Published 18 Feb 2020

He congratulated Trump and then, as an aside, asked about the interest rate that Vrablic’s squad was charging on the loan. Trump said it was well under 3 percent. Byrne couldn’t believe that Deutsche—after its long, bitter history with Trump—was now extending him a nine-figure loan at such a low interest rate. In public, Trump insisted to a journalist that he didn’t really need Deutsche’s money for the Doral acquisition, but he acknowledged that he was nonetheless grateful for the bank’s help. “We have a great relationship,” he said. Chapter 17 Anshu Ascendant Kaiser Wilhelm II had opened the Festhalle event center in Frankfurt in 1909, and its pink colonnaded facade, cavernous main hall, and 120-foot-high cupola ceiling made it an instant landmark in the city’s cultural scene.

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A couple of years later, on the presidential campaign trail, Trump would cite his new Washington hotel as proof of the financial and management acumen he would bring to the White House. And there was some truth to his savvy at wringing every last cent out of his patrons at Deutsche Bank—though that was not necessarily the type of talent Trump was trying to boast about. Like the Doral loan, whose low interest rate had stunned Rich Byrne, the Old Post Office transaction was surprisingly inexpensive for a borrower whose credit history was scarred by repeated defaults. “I’m borrowing money at numbers like 2 percent,” Trump exclaimed to the journalist William Cohan. “It’s crazy! I’ve never seen anything like it.”

Value of Everything: An Antidote to Chaos The
by Mariana Mazzucato
Published 25 Apr 2018

But when real-estate prices appreciate rapidly, as in the US and the UK before 2007 and in hotspots such as London even after the financial crisis, there are alarming implications for measuring. Rising house prices mean rising implicit rentals, and hence rising incomes when the implicit rental is included. The paradoxical result is that a house price bubble, perhaps caused by low interest rates or relaxed lending conditions, will show up as an acceleration of GDP growth. Why? Because households' services to themselves - as their own landlords, charging themselves implicit rentals - are suddenly rising in value, and that is counted as income which adds to GDP. By the same token, if you strip out those imputed rentals, GDP can be shown to have risen more slowly in the years before the financial crash than after 2009.33 Prostitution, Pollution and Production So national accountants' approach to valuation affects the production boundary, sometimes in intriguing ways.

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They can therefore instantly capture (and ‘capitalize') the jump in expected future profit when, for example, a new drug wins approval for hospital use, a social media platform finds a way to monetize its millions of users, or a mining company learns that its once-exotic metal is to be used in the next generation of mobile phones. Owning an asset that suddenly jumps in value has always been a faster way to get rich than patiently saving and investing out of income;31 and the speed differential of asset ‘revaluation' over asset accumulation has been amplified in the present era of historically low interest rates. Revaluation gains in the ‘real' economy are widely hailed as economically efficient and socially progressive. Entrepreneurs who cash in on a genuinely useful invention can claim to have reaped just rewards from genuinely productive risk-taking, especially when they are shown to have displaced hereditary landowners in the charts of ultra-high net worth.

The Millionaire Fastlane: Crack the Code to Wealth and Live Rich for a Lifetime
by Mj Demarco
Published 8 Nov 2010

You can do this for years and still have 10 million dollars left over! Imagine opening your mailbox every month to a $40,000 check-and you didn't have to do anything for it. What kind of trouble can you get into earning $40,000 per month? I bet a lot. Unrealistic? It isn't. This is how I live. Even in this low-interest-rate environment I can find safe investment yields in the 4%–6% range, some tax-free. While most people shudder at the thought of an interest rate increase, I love it. I get a pay raise. A 1% interest rate hike translates into thousands per month for me. And since inflation rises in unison with interest rates, my income has an element of inflation protection.

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Yes, when it comes to my financial plan I'm a control freak, and you should be too. If you aren't in control, then you might become dependent on someone else for your comfort and security. Not for me. Second, I agree that I cannot control interest rates. However, your number (chapter 37) should be large enough to accommodate variances in interest rates. Even in this low-interest-rate environment, I still can find safe, predictable 5% returns because I think globally, not locally. If your nest-egg number is predicated on a 10% yearly return, you are fooling yourself and will become susceptible to interest rate pains. Set the bar low enough to expect variance. MJ, can't a good mentor be a form of a wealth chauffeur?

The Snowball: Warren Buffett and the Business of Life
by Alice Schroeder
Published 1 Sep 2008

On April 1, 2003, as the shareholder meeting drew near, Berkshire announced the acquisition of a mobile-home manufacturer, Clayton Homes. This deal was like many others Berkshire was making at the time—a natural continuation of buying discount assets in the post-Enron slump. The Clayton deal had come about because years of low interest rates had given lenders piggy banks full of cheap money, and that had turned them into pigs.4 Banks were quick to train consumers that low interest rates meant they could buy more stuff for less cash outlay now. Those with equity in houses learned it could be used as a checking account. But whether it was credit cards, houses, or mobile homes, the lenders, in search of growth, increasingly turned to people who were the least able to repay—but wanted to participate in the American dream anyway.5 In the case of mobile homes, the banks lent money to the manufacturers, who used it to lend money to the buyers.

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He felt that the United States of America was never meant to be a country where people with money were a self-perpetuating “class” who constantly gathered more wealth and power unto themselves. The rich, however, had been getting very rich indeed as the stock market continued its resurgence after 9/11. A dozen new hedge funds seemed to sprout every day. They were cashing in on all the leverage from the low interest rates the Federal Reserve had provided. So many people were raking in stock options and taking fees of two-and-twenty percent of other people’s money in private equity funds, hedge funds, and funds of funds, that billionaires were becoming as common as raccoons around a garbage can. A lot of the quick-bucks wealth of the new economy bothered Buffett because of the way it had been transferred in massive amounts from investors to middlemen without producing anything in return.

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We would start selling off pieces of America, like office buildings and companies. “We think that over time the U.S. dollar is likely to decline in value against some of the major currencies,” he said. Therefore, the economy—which had been pretty wonderful over the past twenty years, with both low interest rates and low inflation—could at some point reverse. Interest rates probably would be higher, as would inflation, which would be an unhappy situation. As always when he made predictions, he couldn’t say when. In the meantime, however, he had bought $12 billion of foreign currency to hedge Berkshire’s dollar risks.

Paint Your Town Red
by Matthew Brown
Published 14 Jun 2021

Conservative governments have an incentive to maintain house prices since their voter bloc is concentrated among older homeowners, the economy is increasingly reliant on the wealth effect created by rising house prices, and many MPs are themselves landlords, often with multiple properties. Despite the banking crisis of 2008 and a subsequent dip in value, house prices have increased substantially over the last decade — especially in the South of England — due to government props such as Help to Buy, low interest rates, restricted council house building, and UK property becoming a safe haven asset for wealthy investors in other parts of the world. Intergenerational transfer of housing and landed wealth has emerged as a main driver of continuing inequality. The Conservative government’s 2020 proposal to grant blanket planning permission over wide swathes of England to private landowners and developers is likely to further exacerbate these problems.

Humble Pie and Cold Turkey: English Expressions and Their Origins
by Caroline Taggart
Published 29 Sep 2021

Thunderbolts and lightning A weather phenomenon we might greet with less enthusiasm than cloud nine is a perfect storm, a particularly violent storm produced when a number of different conditions (heavy rains, high winds and low temperatures, for example) occur at the same time. Metaphorically – and only since the 1990s – a perfect storm is a complete catastrophe, again caused by a combination of events that would be bad enough if they occurred separately: The global crash, low interest rates and the raising of their pensionable age created a perfect storm financially for anyone born in the 1950s. Stealing someone’s thunder – taking credit for something they have done or diverting attention from their achievements – is connected not to the weather but to the theatre. The story goes that one John Dennis, largely forgotten except for this anecdote, wrote a play called Appius and Virginia in which he needed to create the effect of a thunderstorm; he came up with the idea of rattling a sheet of tin.

Naked Economics: Undressing the Dismal Science (Fully Revised and Updated)
by Charles Wheelan
Published 18 Apr 2010

If we begin to spend more freely when rates are cut from 7 percent to 5 percent, why stop there? If there are still people without jobs and others without new cars, then let’s press on to 3 percent, or even 1 percent. New money for everyone! Sadly, there are limits to how fast any economy can grow. If low interest rates, or “easy money,” causes consumers to demand 5 percent more new PT Cruisers than they purchased last year, then Chrysler must expand production by 5 percent. That means hiring more workers and buying more steel, glass, electrical components, etc. At some point, it becomes difficult or impossible for Chrysler to find these new inputs, particularly qualified workers.

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Even moderate inflation has the potential to eat away at our wealth if we do not manage our assets properly. Any wealth held in cash will lose value over time. Even savings accounts and certificates of deposit, which are considered “safe” investments because the principal is insured, are vulnerable to the less obvious risk that their low interest rates may not keep up with inflation. It is a sad irony that unsophisticated investors eschew the “risky” stock market only to have their principal whittled away through the back door. Inflation can be particularly pernicious for individuals who are retired or otherwise living on fixed incomes. If that income is not indexed for inflation, then its purchasing power will gradually fade away.

The Innovation Illusion: How So Little Is Created by So Many Working So Hard
by Fredrik Erixon and Bjorn Weigel
Published 3 Oct 2016

For countries in the eurozone, fiscal expenditure will need to increase by around 9 percent of GDP up to 2050 in order to support a graying population.14 And that concerns only the public pension system. In a stress test of about 200 insurance and occupational pension plans, a European authority found significant gaps between assets and liabilities, amounting to a difference of about €750 billion under a scenario of low interest rates similar to current market conditions.15 In the United Kingdom, over 5,000 companies are facing pension deficits.16 It is no better in the United States. For pension plans to hold together, returns have to improve. One estimate of US public pensions, erring on the extreme side, suggests the return on capital is going to drop to such low rates that up to 85 percent of US pension plans risk failure within 30 years.17 More moderately, studying the 25 biggest public retirement systems, Moody’s has estimated that there is a $2 trillion shortfall in US public pension plans.18 Perhaps that estimate overplays or undershoots the real size of the problem, but it is easy to see why they and others are worried about a growing pensions crisis.

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One estimate of US public pensions, erring on the extreme side, suggests the return on capital is going to drop to such low rates that up to 85 percent of US pension plans risk failure within 30 years.17 More moderately, studying the 25 biggest public retirement systems, Moody’s has estimated that there is a $2 trillion shortfall in US public pension plans.18 Perhaps that estimate overplays or undershoots the real size of the problem, but it is easy to see why they and others are worried about a growing pensions crisis. Estimates for the return on investment on pension savings rely on historic financial performances. With historically low interest rates, it becomes necessary for savers and investment funds to increase risks to reach expected returns. A deflationary economy with low nominal growth lowers the possible returns on safe savings. Even if Western economies improved on current trends in the next two decades, they will still be in a low-growth situation.

Tenants: The People on the Frontline of Britain's Housing Emergency
by Vicky Spratt
Published 18 May 2022

As 2021 drew to a close, figures from the Office for National Statistics (ONS) showed British households’ net worth grew to £11.2 trillion in the year 2020/21. This is an increase of 8.4 per cent on 2019 and the highest rate of growth since before the global financial crisis of 2008. What drove this rise in household wealth? Next to pension schemes, land was the largest contributor. The rapidly rising value of property, fuelled by low interest rates and tax breaks for homeowners via the coronavirus Stamp Duty cut, accounted for 40 per cent of this rise. Research by the think tank the Resolution Foundation highlighted that this inflation was merely the confirmation of a longer-term trend. It found that over the past thirty years house prices have added about £3-trillion-worth of housing wealth from main residences alone.

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Mortgages have never been cheaper, which more than compensates for higher prices.’ This was not only completely incorrect, it made no sense. You can’t reap the benefits of cheap credit if your rent is so high that you can’t save for a deposit to get on to the housing ladder in the first place. Cheap credit – low interest rates on mortgages – was not compensating for high house prices, it was fuelling them. ‘Now shut up and start showing some gratitude,’ Delingpole concluded, voicing the irrational contempt that had come to typify the intergenerational conflict between the young and old over housing. Who was he talking about?

The Powerful and the Damned: Private Diaries in Turbulent Times
by Lionel Barber
Published 5 Nov 2020

The British taxpayer is on the hook for several billion pounds and people are raging about an irresponsible financial sector. John Gapper reminds FT readers that operating an open economy carries risks. ‘Until the August financial shock, the world was enjoying an era of enormous financial liquidity, driven by low interest rates and high commodity and property prices. A lot of it flowed into the UK, in the form of both corporate investment and Middle Eastern and Russian billionaires buying big houses. Everyone from Northern Rock to investment banks, ministers and regulators enjoyed the knock-on effects while they lasted.

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‘This [ECB building] embodies our values,’ he says, ‘transparency and independence.’ Under Draghi, the ECB has turned from the German Bundesbank into the Fed, an institution whose instruments for crisis management extend far beyond taming inflation. His loose monetary policies and bond-buying on a massive scale reassured financial markets, even if low interest rates punished savers. What he won’t say, despite my pushing, is that he’s been in permanent warfare with the Bundesbank hawks led by Jens Weidmann. They tried but failed to block his every move in the eurozone crisis, mobilising the German media who have caricatured him as a vampire sucking the blood from German savers.

Aftershock: The Next Economy and America's Future
by Robert B. Reich
Published 21 Sep 2010

The reason is that a larger and larger portion of total income has been going to the top. What’s broken is the basic bargain linking pay to production. The solution is to remake the bargain. President Obama brought the economy back from the brink. His bank rescue and stimulus packages, combined with the Fed’s low interest rates, prevented the Great Recession from turning into another Great Depression. But the nation has not recommitted itself to the basic bargain. The 2010 health reform legislation was a step in the right direction but small in relation to the overall challenge. Consequently, most Americans will continue to experience relatively high unemployment and flat or declining real wages.

The Left Case Against the EU
by Costas Lapavitsas
Published 17 Dec 2018

The flows were spurred by Greek borrowers, primarily the state and the banks, and effectively financed the huge deficit in Greece’s current account, also reflecting the country’s negative saving. Foreign banks did not lead the rapid growth of credit in Greece. The culprit was burgeoning domestic credit expansion by Greek banks, which took advantage of the Eurozone to obtain liquidity cheaply. In a country that had lived with high nominal and real interest rates for decades, the low interest rate environment of the Eurozone offered unprecedented scope for credit expansion, much of it directed toward households. Historically and culturally, household debt has been frowned upon in Greece, but in the late 1990s and the 2000s households borrowed heavily to finance house purchases and consumption.

Red-Blooded Risk: The Secret History of Wall Street
by Aaron Brown and Eric Kim
Published 10 Oct 2011

Although governments have outlawed competition in money issuance, so there is not as much variety available as there should be, there are still different currencies in different countries. Global corporations borrow, spend, and sell in whatever currencies are most advantageous. Generally that means borrowing in low interest rate currencies, contracting future fixed costs in currencies that are inflating, and contracting fixed future revenues in currencies with low inflation rates. In all cases these rules are relative to market expectation; for example, borrowing in a low interest rate currency is no bargain if the forward exchange rate premiums are high enough to offset the interest rate differential. But except in extreme cases, market expectation usually undercompensates, so doing the short-term greedy thing is often best.

That Used to Be Us
by Thomas L. Friedman and Michael Mandelbaum
Published 1 Sep 2011

The bursting of the housing bubble wiped out a whole swath of low-skilled blue-collar jobs (many of the people who were building the houses) just when the intensification of globalization wiped out a whole swath of low- and mid-level white-collar jobs (many of the people who were buying the houses). There is no question that stimulating the economy with short-term measures meant to increase demand (tax cuts, low interest rates, and increased government spending) would help revive some of these jobs. We do have a serious demand problem. But we also have a new structural challenge in the labor market that can only be addressed by more education and more innovation. Here is a simple example of what is happening across the economy.

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Just as baseball players in the 1990s injected themselves with steroids to build muscle artificially for the purpose of hitting more home runs, our government injected steroids into the economy in the form of cheap credit so that Wall Street could do more gambling and Main Street could do more home buying and unskilled workers could do more home-building. The fastest-growing job sectors during the steroid-injected bubble years of the early 2000s were construction, housing, real estate, homeland security, financial services, health care, and public employment—all of them fueled by low interest rates and deficit spending. New value-creating industries grew very little. Warren Buffett likes to say that when the tide goes out, you see who isn’t wearing a bathing suit. The economic tide went out with the financial meltdown and deep recession at the end of the first decade of the twenty-first century, and it showed with brutal clarity who was swimming naked.

No Slack: The Financial Lives of Low-Income Americans
by Michael S. Barr
Published 20 Mar 2012

However, it might be that had these households not used a broker, they would not have been able to obtain any loan. We explore this possibility in more detail later in this chapter. 11. Among those home owners paying interest rates above 10 percent, 35 percent purchased their homes after 2000 during a period with low interest rates. In our data, we are not able to discern why those with high interest rates who bought their homes before 2000 did not refinance amid widespread availability of lower interest rates. 12. We refer to the annual rate of interest reported by the borrower as the APR. However, borrowers could be reporting the note rate rather than the APR.

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Contrary to standard fungibility assumptions, people exhibit different degrees of willingness to spend from their diverse accounts. Compartmentalization can serve useful functions in managing one’s behavior, but it also can yield consumption patterns that are overly dependent on current income and sensitive to labels, which can lead to saving (at low interest rates) and borrowing (at higher rates) at the same time (Ausubel 1991). An understanding of such proclivities may help firms design instruments that bring about more desirable outcomes. For instance, with respect to retirement saving, the tendency to spend one’s savings is lower when monies are not in transaction accounts.

Misbehaving: The Making of Behavioral Economics
by Richard H. Thaler
Published 10 May 2015

There were news reports of consumers sprawled on the hoods of cars at a dealership claiming a particular car before anyone else could buy it. Around this time, I noticed a small story in the Wall Street Journal. A reporter had crunched the numbers and discovered that the economic value of the low-interest-rate loan was less than the value of the rebate. In other words, if consumers used the rebate to increase the down payment they made on the car, thus reducing the amount they had to borrow (though at a higher rate), they would save money. Taking the loan deal was dumb! But it was selling a lot of cars.

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It was huge, and new cars were on display everywhere inside, in the hallways and lobbies. In my first meeting, a vice president of marketing gave me my schedule for the day. I had a series of half-hour meetings with different people in the marketing department. Many of them also seemed to be vice presidents. In that first meeting I asked who was in charge of evaluating the low-interest-rate promotion, which reduced the price of the cars sold by hundreds of millions of dollars. My host was not certain, but assured me it had to be one of the people I would be meeting. By the end of the day I would know. During the day several people described how the interest rate of 2.9% had been determined.

King of Capital: The Remarkable Rise, Fall, and Rise Again of Steve Schwarzman and Blackstone
by David Carey
Published 7 Feb 2012

Until then the buyout boom had been an absolute bonanza for the banks, generating hundreds of millions of dollars each year in investment banking fees. So long as investors were soaking up whatever CLOs the banks could offer, the banks could keep creating and selling those securities, funneling the money into buyout loans and bonds and passing on the risk to outside investors. But suddenly they couldn’t sell them at the low interest rates everyone had expected. If a bank had agreed to float 7.5 percent bonds and the market rate was now 10 percent, it would have to sell the bonds at a discount that would yield that higher amount: A $1,000 bond on which the company paid 7.5 percent would have to be discounted to $750 so the buyer would earn a 10 percent yield on its investment.

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CHAPTER 25 Value Builders or Quick-Buck Artists? The financial crisis called into question everything about private equity—its future, its role in the economy, and its capacity to create value. The business had expanded over three decades in benign economic conditions, with generally rising markets and low interest rates, and that growth plainly owed a lot to the rising economic tide. The debt crisis of the late 1980s and bursting of the equity bubble in the early 2000s were small corrections compared with the global meltdown in 2008 and 2009, which put to the test the industry’s claims that it is a catalyst for value creation.

Money Free and Unfree
by George A. Selgin
Published 14 Jun 2017

Fed outreach materials all agree, on the other hand, in proclaiming 1951 as the year in which the Fed achieved complete independence. “When the Korean War broke out,” the aforementioned Philadelphia Fed publication observes, Fed chairman William McChesney Martin again faced pressure from the Treasury to maintain low interest rates to help provide funds for the war effort. Martin, however, worked closely with the Treasury to break the long-standing practice of supporting government bond interest rates. Since then, the Fed has remained staunchly independent in its use of open market operations to support its monetary policy goals.

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Indeed, on August 24, 2010, Norfolk Southern managed to sell $250 million worth of century bonds bearing a record low yield of just 5.95 percent, despite the risks involved. Still, many investors remained skeptical. As one portfolio manager opined (Bullock 2010). “You are giving a company money for a long period of time with no ability to foresee the conditions in that period of time and for a very low interest rate.” 10. Selgin (1997) presents informal arguments for permitting benign (productivity-driven) deflation, while Rochelle Edge and colleagues (2007), Stephanie Schmitt-Grohé and Martín Uribe (2007), and Niloufar Entekhabi (2008) offer formal arguments. For the history of thought regarding benign deflation, see Selgin (1996b). 11.

Adam Smith: Father of Economics
by Jesse Norman
Published 30 Jun 2018

The crucial question which both the politicians and the new King had to address was a simple one: how to pay down the war debt. As Prime Minister, the elder William Pitt had not scrupled to spend money freely to support the navy and reinforce and reimburse the colonies, using the British government’s unrivalled access to domestic and international credit at low interest rates. In 1757, Britain’s national debt stood at around £75,000,000, or roughly the same as its gross domestic product. But just seven years later this had risen by nearly 75 per cent to £130,000,000, to say nothing of the £250,000 a year required to keep British troops in North America. The bills were coming due, and by the standards of the time the amounts were prodigious.

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In 2014, the average US firm charged prices 67 per cent over marginal cost, compared to 18 per cent in 1980; there is a growing concentration of power among the top fifty firms in leading industries, a huge increase in profitability and evidence of a decline in the number of new firms each year. These factors may help to explain a host of other troubling recent phenomena: relatively low rates of industrial investment, despite low interest rates; sluggish productivity growth; and rising inequality of incomes. There is thus every reason for concern about the loss of effective competition in many advanced economies, and so the loss of economic value to consumers and to the public interest, a loss of value not reflected in share prices, which have become increasingly disconnected from improved economic performance.

The Marginal Revolutionaries: How Austrian Economists Fought the War of Ideas
by Janek Wasserman
Published 23 Sep 2019

Wicksell argued that the divergence of the “money” interest rate (the rate used in indirect, money-based exchange) from the “natural” rate (direct exchange, or barter) determined whether price levels remained stable or fluctuated. Mises acknowledged the existence of a natural rate, yet he denied that divergences owed to the use of money as a medium of exchange. Deviations stemmed from fiduciary media, not money itself. Using Böhm’s theory of roundabout production methods, Mises argued that artificially low interest rates encouraged entrepreneurs to increase their capital investments, since roundabout production processes were more remunerative in low-interest environments. These decisions led to the overextension of credit and a shortage of liquid assets. Collapse occurred if confidence in the solvency of the banking system wavered.

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Hayek’s assessment of the early stages of the Great Depression traced similar positions, which he laid out in his 1929 book Monetary Theory and the Trade Cycle. Following in the tradition of Böhm and Mises, Hayek defended theoretical understandings of business cycles over empirical ones. He saw low interest rates and elevated price levels at the heart of speculative bubbles and economic insecurity. He looked at what caused economies to slip out of equilibrium and identified money as a determining factor. Since money was the basis of exchange and credit and an object of speculation in its own right, it could disrupt the operation of supply and demand if its value fluctuated too greatly.13 Hayek’s response to economic downturns reflected his rejection of the ideas of what he called “quantity theory.”

Visions of Inequality: From the French Revolution to the End of the Cold War
by Branko Milanovic
Published 9 Oct 2023

“On the contrary, it is naturally low in rich, and high in poor countries, and it is always highest in the countries which are going fastest to ruin.” 55 It is not only that high interest is a mark of stagnant societies with insecure property rights (here Smith mentions the Ottoman Empire, India, and China) but that a low interest rate has the advantage of making it difficult for people to live off their wealth without working: “In a country which had acquired its full complement of riches, where, in every particular branch of business, there was the greatest quantity of stock that could be employed … the rate of interest … would be low [enough] as to render it impossible for any but the wealthiest people to live upon the interest of their money.” 56 Thus, by a happy coincidence, what seems economically advantageous, and what is associated with more advanced societies and with lower inequality, is also judged to be ethically preferable.

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And they differ from workers, who are also not active agents, because they cannot invest (their wages being too low) and because their incomes are “passive,” in the sense that they are always at the customary subsistence level. Thus, to ensure growth, profits are necessary. High profits are a sign of progress. This is also very different from Smith, who saw low profits as a sign of prosperity and held up Holland as the example of an advanced economy with a low interest rate and low profits. Interestingly, Ricardo addresses Smith’s point on Dutch prosperity and low interest, but does so by pointing out that its profits (and interest) are low because Holland, which imports all of its food, imposes heavy taxes on it. 34 This increases the nominal wage and squeezes out profits.

Investing Amid Low Expected Returns: Making the Most When Markets Offer the Least
by Antti Ilmanen
Published 24 Feb 2022

This take-risks-and-kick-the-can approach has worked quite well during the past decade – not least thanks to the generous central bankers, for whom even agnostic investors should praise in their evening prayers. The period since the Global Financial Crisis (GFC) has been a time of low growth, low inflation, low interest rates – low everything except realized investment returns, it seems. Some say this is because we borrowed returns from the future: not through standard borrowing (although plenty of that took place too) but rather through the windfall gains from ever-lower yields and ever-richer asset valuations.

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As discussed later, the empirical fact that carry strategies have been profitable could be explained by systematic expectational errors (violations of the uncovered interest parity, the pure expectations hypothesis, etc.). Currency carry gains may reflect the process of balancing out supply and demand for capital across markets. High interest rates can signal an excess demand for capital not met by local savings, while low interest rates suggest an excess supply of capital. Attracting home-biased foreign investors requires some compensation. The presence of non-profit-seeking market participants, such as central banks, may sustain market inefficiencies. Generic risk premium (“1/price effect”). Like value, even if we do not understand the source of the risk premium, any required premium will tend to push the current market price low compared to some fundamental anchor, and thereby boost prospective returns.

The Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Returns
by John C. Bogle
Published 1 Jan 2007

In fact, that positive yield spread of 1.1 percentage points for bonds over stocks is remarkably close to the 1.4 percentage point yield advantage held by bonds during the recent era (since 1974, 6.9 percent average yield on bonds, 5.5 percent average yield on stocks). So even in this era of low interest rates (and low dividend yields), bonds remain relatively competitive. Given these considerations, the question then becomes, not “Why should I own bonds?,” but “What portion of my portfolio should be allocated to bonds?” We’ll tackle that question in Chapter 18. Bond fund managers track the bond market.

Roller-Coaster: Europe, 1950-2017
by Ian Kershaw
Published 29 Aug 2018

Countries preparing to enter the single currency had to meet ‘convergence criteria’ and join an exchange-rate mechanism (ERM) to hold currencies steady and interlinked. Government debt was not to exceed 60 per cent, annual deficits were to be no more than 3 per cent of gross domestic product. Targets were set for low inflation and low interest rates. Currency union without political union was a risk. It had not been tried before. The United States offered no model, since America was in essence a federated nation state with a central government. Without historical precedent, Europe would have to build its institutional arrangements and political framework for its planned single currency from scratch.

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Almost immediately his modernizing aims ran foul of his Finance Minister and the Chairman of the Social Democrats, Oskar Lafontaine, who favoured a traditional programme that looked to Keynesian remedies for Germany’s economic ills. These seemed, however, in arguing for stimulation of demand through higher wages, increased social spending and low interest rates – all of which would have meant higher public debt – to offer solutions from an earlier era that were out of tune with current needs. In March 1999 Lafontaine resigned his government and party positions. Schröder was the plain victor of the internal test of his authority and his policy direction.

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Moreover, Sweden had learned lessons from its own financial crisis of the early 1990s and had built a resilient, stable economy that created a healthy budget surplus in good years, affording some freedom of manoeuvre during the recession. It moved quickly to address financial problems, boosting demand through extremely low interest rates and penalties for banks that did not lend. The changes gradually introduced were consonant with those across most of Europe – privatization of former state monopolies, budgetary restrictions, somewhat greater flexibility in the labour market, and less generous welfare provision (notably pensions).

MONEY Master the Game: 7 Simple Steps to Financial Freedom
by Tony Robbins
Published 18 Nov 2014

At the end of this chapter, you’ll find a quick bond briefing to find out when they can be hazardous to your financial health, and when they can be useful—even great!—investments. Bonds can also be kind of confusing. Like a seesaw, they increase in value when interest rates go down, and decrease in value when rates go up. After all, who wants to buy an old low-interest-rate bond when a shiny new bond with a higher interest rate comes on the market? But one way to avoid worrying so much about price fluctuations in bonds is to diversify and buy into a low-cost bond index fund. And just remember, not all bonds are equal. Greece’s bonds are not going to be as strong as Germany’s.

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At every decision point, you’ll be thinking, “How much am I risking and how much am I keeping secure?” That’s where the game is won or lost! And, as you’ve already seen, the biggest challenge for your Security Bucket today is: What is really secure? We know the world has changed, and even conservative savers have been forced into riskier and riskier investments by crazy-low interest rates. It’s tempting to shoot for bigger returns, especially when the stock market is galloping. You may start thinking, “I’ll never get where I need to go from here.” But you can if you’re willing to play the long game. (And especially if you find some investments that guarantee returns without risking principal—which you’ll learn about soon.)

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“Tony, when looking back through history, there is one thing we can see with absolute certainty: every investment has an ideal environment in which it flourishes. In other words, there’s a season for everything.” Take real estate, for example. Look back to the early 2000s, when Americans were buying whatever they could get their hands on (including people with little money!). But they weren’t just buying homes because “interest rates were low.” Interest rates were even lower in 2009, and they couldn’t give houses away. People were buying during the boom because prices were inflating rapidly. Home prices were rising every single month, and they didn’t want to miss out. Billionaire investing icon George Soros pointed out that “Americans have added more household mortgage debt in the last six years [by 2007] than in the prior life of the mortgage market.”

The House of Morgan: An American Banking Dynasty and the Rise of Modern Finance
by Ron Chernow
Published 1 Jan 1990

A perpetual worrier, he was withering in his view of the optimistic Andrew Mellon: “Meanwhile, the greatest Secretary of the Treasury since Alexander Hamilton grows richer on paper and thinks that all is for the best possible in the best of possible worlds.”22 Leffingwell subscribed to the cheap-money theory of the crash; that is, he blamed excessively low interest rates for the speculation in stock. In 1927, Monty Norman had visited New York and asked Ben Strong for lower interest rates to take pressure off the pound. Strong obliged by lowering his discount rate. Leffingwell believed this had triggered the stock market boom. In early March 1929, when Leffingwell heard reports that Monty was getting “panicky” about the frothy conditions on Wall Street, he impatiently told Lamont, “Monty and Ben sowed the wind.

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In early 1928, while commerce secretary, he was flabbergasted by Coolidge’s cavalier lack of concern about the stock market. And in March 1929, as president, he summoned to the White House Richard Whitney, vice-president of the New York Stock Exchange and brother of Morgan partner George Whitney. Hoover wanted the Exchange to curb speculation—a plea that was ignored. Hoover also blamed the Fed for low interest rates and providing banks with ample reserves, which were then used to finance buying on margin. Now Hoover’s messenger, Harry Robinson, wished to know the answers to two questions: Were the increasing number of stock mergers grounds for concern? And should the federal government take action to stop speculation on Wall Street?

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At the same time, the partners were by no means hostile to all federal intervention to stop the Depression. If they hewed to the balanced-budget dogma and opposed higher taxes, Lamont, Leffingwell, and Parker Gilbert also advocated cheaper money to combat deflation. By contrast, the American Bankers Association attacked Roosevelt’s policy of low interest rates. The obscurantism of their fellow bankers sometimes bothered the Morgan men. “I sometimes wonder whether we ought to continue to give our silent sanction to the American Bankers Association by continuing our membership in it,” Leffingwell said, blaming tight Fed policy in 1936-37 for that year’s downturn.24 In modern parlance, the Morgan partners were sympathetic to macroeconomic management of the overall economy, even if they deplored microeconomic regulation of specific industries.

Success and Luck: Good Fortune and the Myth of Meritocracy
by Robert H. Frank
Published 31 Mar 2016

And the room was designed to replicate Schwarzman’s $40 million co-op at 740 Park Avenue.”18 But Schwarzman believes the government is taking far too much of “his” money. James Surowiecki, an economics writer for the New Yorker, offered these thoughts on the Blackstone executive: The past few years have been very good to Stephen Schwarzman…. His industry, which relies on borrowed money, has benefitted from low interest rates, and the stock-market boom has given his firm great opportunities to cash out investments. Schwarzman is now worth more than ten billion dollars. You wouldn’t think he’d have much to complain about. But, to hear him tell it, he’s beset by a meddlesome, tax-happy government and a whiny, envious populace.

The Scandal of Money
by George Gilder
Published 23 Feb 2016

He concludes, “Compared to the past, companies seem more reluctant to invest in the future.” 3.Nassim Nicholas Taleb and Mark Spitznagel, in a blog post at CNN’s Global Public Square from October 2012, estimate that $2.2 trillion was paid to bankers, chiefly in bonuses, in the United States alone between June 2000 and June 2007, and they project the total to rise to (very roughly) $5 trillion over the course of the decade. “Bankers used leverage to increase profitability and exploited the backstop of public guarantees. The profits largely flow to the employees [i.e., the bankers], while the losses are defrayed by the taxpayers and shareholders and even retirees (through artificially low interest rates). The Fed also provided $1.2 trillion in loans to banks (mostly secret at the time).” 4.Carmen M. Reinhart and Kenneth Rogoff, This Time Is Different: Eight Centuries of Financial Folly (Princeton, NJ: Princeton University Press, 2011). 5.Mark Skousen, Vienna & Chicago, Friends or Foes? A Tale of Two Schools of Free-Market Economics (Washington, DC: Capital Press, 2005).

American Secession: The Looming Threat of a National Breakup
by F. H. Buckley
Published 14 Jan 2020

What can be shown is that the policies of the Federal Reserve and the U.S. government shifted wealth from a large number of dispersed and disorganized losers to a small number of powerful, concentrated winners. The Fed’s near-zero interest rates made banks less willing to extend loans, especially to middle-class small businessmen. The low interest rates were also bad news for people, particularly retirees, who looked to interest from government bonds for their income. “In this way,” noted Joseph Stiglitz, “there was a large transfer of wealth from the elderly to the government, and from the government to the bankers.”17 The Communist Manifesto proclaimed that “the history of all hitherto existing society is the history of class struggles.”

Big Mistakes: The Best Investors and Their Worst Investments
by Michael Batnick
Published 21 May 2018

But he was highly levered when the crash came, and the belief that his ability to track credit cycles and economic expansions and contractions had failed him. The fund lost in 32% in 1930 and another 24% in 1931.19 He had misread the current conditions, and his macro insights after the crash were no better. “With low interest rates, enterprise throughout the world can get going again…commodity prices will recover and farmers will find themselves in better shape.”20 Keynes had accomplished more in 10 years than most economists would accomplish in a lifetime, and brilliant as he was, his superior intellect did not provide him with superior insights into short‐term market movements.

Firefighting
by Ben S. Bernanke , Timothy F. Geithner and Henry M. Paulson, Jr.
Published 16 Apr 2019

Commercial banks, investment banks, insurance companies, mortgage companies, finance companies, pension funds, and mutual funds from the United States and around the world provided this credit; what’s more, they often borrowed to provide that credit, accumulating $36 trillion worth of leveraged assets financed with fragile funding. As a nation, America was living beyond its means—and living off the savings of other countries. A tidal wave of foreign money was pouring into the United States, as global investors frustrated by low interest rates and scarce investment opportunities at home looked abroad for better and safer yields. Ben called this seemingly insatiable demand for assets that generated decent returns a “global savings glut,” and it created a lot of dry tinder. The greatest part of the credit boom took place in the U.S. mortgage market.

The Psychology of Money: Timeless Lessons on Wealth, Greed, and Happiness
by Morgan Housel
Published 7 Sep 2020

This fear was exacerbated by the fact that exports couldn’t be immediately relied upon for growth, as two of the largest economies—Europe and Japan—sat in ruins dealing with humanitarian crises. And America itself was buried in more debt than ever before, limiting direct government stimulus. So we did something about it. 2. Low interest rates and the intentional birth of the American consumer. The first thing we did to keep the economy afloat after the war was keep interest rates low. This wasn’t an easy decision, because when soldiers came home to a shortage of everything from clothes to cars it temporarily sent inflation into double digits.

Investing to Save the Planet: How Your Money Can Make a Difference
by Alice Ross
Published 19 Nov 2020

The boom in wealth While the push for a low-carbon economy is already creating climate change billionaires in the corporate space, there is also a new wave of wealthy individuals who aren’t themselves climate change entrepreneurs but who are looking to invest their money in climate change solutions. Since the global financial crisis of 2008, there has been a boom in wealth. The top 1 per cent have been getting richer, as low interest rates in the past decade incentivised them to invest more, while savers earned less on their money. According to the Knight Frank wealth report, the number of so-called ultra-high-net-worth individuals around the world – those with a net worth of $30m or more – rose by 6.4 per cent in 2019 to 513,200, an extra 31,000 people from the year before alone.

On the Brink: Inside the Race to Stop the Collapse of the Global Financial System
by Henry M. Paulson
Published 15 Sep 2010

Structural differences in the economies of the world had led to what analysts call “imbalances” that created massive and destabilizing cross-border capital flows. In short, we were living beyond our means—on borrowed money and borrowed time. The dangers for the U.S. economy had been obscured by an unprecedented housing boom, fed in part by the low interest rates that helped us recover from the downturn that followed the bursting of the late-’90s technology bubble and the impact of the 9/11 attacks. The housing bubble was driven by a big increase in loans to less creditworthy, or subprime, borrowers that lifted homeownership rates to historic levels.

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Although fourth-quarter earnings at the nation’s banks were as bad as I had feared, I was encouraged by what appeared to be a light at the end of the tunnel. Bankers throughout the country were telling me that the earnings environment had improved significantly in January. It didn’t surprise me that the banks could make good money with the government support programs and low interest rates. What surprised me was that it had taken so long. Friday, January 16, was my last working day at Treasury. I am not a particularly sentimental man, and though we had all enjoyed an extraordinary camaraderie at Treasury, I had planned no parting words or special ceremony. Jim Wilkinson and Neel Kashkari came by in the later afternoon; they wanted to be with me in the last moments I was in the office.

After the Music Stopped: The Financial Crisis, the Response, and the Work Ahead
by Alan S. Blinder
Published 24 Jan 2013

But the episode didn’t instill confidence in the United States Treasury. The Fed pitched in, too, by establishing the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility. (AMLF, if you must know. And try saying the full title fast.) The AMLF was created to extend nonrecourse loans at low interest rates to banks willing to purchase high-quality asset-backed commercial paper from money market funds—who needed to sell it desperately because they were experiencing runs. Let’s dwell on the awkward word nonrecourse for a moment, because it’s important and this is not the last time you’ll see it.

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FIGURE 14.4 Total Reserves, Required Reserves, and Excess Reserves (in billions of dollars) SOURCE: Federal Reserve Board 2012 Interest Rates Near Zero Have you checked the interest rates on your bank accounts lately? They are stunningly low. That’s because the Federal Reserve’s extraordinary monetary policies have been holding the federal funds rate down to a range between zero and 25 basis points since December 2008. To call such a low interest rate abnormal is an understatement. Figure 14.5 displays the history of the federal funds rate from 1990 to 2012. The post-Lehman experience stands out. Except for the period 2002–2004, the funds rate has always been at least 3 percent, and generally higher. Normalizing interest rates is probably the most obvious piece of the Fed’s exit strategy; it will certainly be the most obvious to the general public.

The Lost Bank: The Story of Washington Mutual-The Biggest Bank Failure in American History
by Kirsten Grind
Published 11 Jun 2012

No one seemed to know what to do about it. Across the country, thousands of banks like Washington Mutual were losing money just as rapidly, and some were beginning to fail. Interest rates had shot up past 20 percent, forcing the banks to pay a high rate on certificates of deposit. At the same time, banks were receiving back only a low interest rate payment from loan customers, most of whom had 30-year fixed-rate mortgages. The difference between those two numbers was what caused Washington Mutual, and 80 percent of the banks like it across the country, to bleed so much money. Meanwhile, new customers, scared of the much higher rate, didn’t want to take out a mortgage.

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This was true at a number of other banks as well, but the size of WaMu’s mortgage portfolio caused it to stand out. The hedging model, said the senior manager working on it, was in “a terrifying state.” The model wasn’t built well enough to handle the rush of homeowners trying to refinance their mortgages. WaMu’s patchwork of systems for making mortgage loans did not help. A homeowner would lock in a low interest rate through a WaMu loan officer, but before WaMu’s arduous loan processing system could recognize the rate lock, the rate might increase, dramatically. WaMu still had to honor the customer’s lower rate. “It was a real piece of sloppiness,” said the WaMu senior manager. The bank announced that it expected its mortgage banking income to swing from a profit of about $1.3 billion in 2003 to just several hundred million dollars in 2004.

Investment: A History
by Norton Reamer and Jesse Downing
Published 19 Feb 2016

However, this had no real meaningful impact because great wealth was required for effective voting.58 The English stock market began at the turn of the eighteenth century in the coffeehouses on Exchange Alley, a street near the Royal Exchange marketplace in London.59 At Jonathan’s Coffeehouse, John Castaing began offering a price list for securities that were being bought and sold privately in the city as early as 1698, bringing some order to the prevailing chaos and marking an important step toward the organization of trading in London.60 Traders at the time were even licensed by the City of London.61 Though several coffeehouses served as centers for information and financial transactions, Jonathan’s became the most important and dominated the market for exchange.62 The stock exchange in many ways represented a social benefit. While the Bank of England was the original organ designed to help issue government debt, the stock exchange also helped England to The Democratization of Investment 87 borrow money at historically low interest rates and to raise substantial war money in the seventeenth and eighteenth centuries.63 In turn, the need to raise these funds helped the stock market to develop. However, these new opportunities also came with challenges. The South Sea Bubble of 1720, as described earlier, rocked the English financial markets.

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The grip of these major players on the market was tightened by the creation of the Group Association, which largely standardized the rates paid.17 The major difficulty faced by these companies at the time was the Depression’s effect on interest rates. The returns on investment were sharply curtailed by these low interest rates, and consequently, the cost to employers to provide for a given stream of payouts in retirement increased fairly drastically. A few insurers responded to the low interest Retirement and Its Funding 107 rates by discouraging the sale of more plans, despite the new demand for them, because many managed their risk in terms of one companywide interest rate being applied to all the contracts they insured.

Tailspin: The People and Forces Behind America's Fifty-Year Fall--And Those Fighting to Reverse It
by Steven Brill
Published 28 May 2018

That compelled him, he later told the Financial Crisis Inquiry Commission, to move aggressively into the subprime market. When he did, Countrywide’s standards were thrown overboard. Mozilo didn’t just jump into subprime lending. He added bells and whistles to the practice, such as expanding the use of adjustable rate mortgages, or ARMs, that lured borrowers in with initially low interest rates that would spike up after a year or two. Another innovation, “Option ARMs,” let borrowers pick their initial monthly payments for the first few years, only to have to face double or triple the monthly payments later on. “Exploding ARMs” featured particularly low, often negligible initial payments.

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After 2009, Obama repeatedly proposed infrastructure plans of the kind Republicans might have supported if a Republican had been in the White House proposing them—public-private partnerships, in which the government would establish an “infrastructure bank” to make loans to private investors to rebuild airports, for example, or repair and then maintain water systems, highways, and ports. The investors would then pay back the loans through management fees paid by local governments or from tolls or other fees collected from those who benefited from the improvements. Despite the need for these investments and the jobs they would create, and despite the abnormally low interest rates that would make the financing of such projects especially alluring, Republicans in Congress refused to consider them. * * * — In the heyday of the infrastructure boom, in 1971, the Port Authority of New York and New Jersey—which was responsible for much of the infrastructure in the New York metropolitan area and was soon to open the World Trade Center—announced plans to build a second train tunnel under the Hudson River.

The-General-Theory-of-Employment-Interest-and-Money
by John Maynard Keynes
Published 13 Jul 2018

Circa 2000, the conventional wisdom was that 2 percent inflation was sufficiently high that episodes in which monetary policy lost traction because of the zero lower bound on interest rates would be rare and brief. Obviously that turned out to be wrong. Moreover, worries about “secular stagnation”—about a shortage of investment opportunities leading to persistently low interest rates even during periods of expansion, which in turn makes depression-like episodes highly likely, even the norm—have made a comeback. With a sharp slowdown in working-age population growth in advanced economies, xlii Introduction by Paul Krugman and an apparent slowdown in productivity growth, Keynes’s bleak vision of the future absent consistent government support for demand may be coming true after all.

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In Russia and Central Europe after the war a currency crisis or flight from the currency was experienced, when no one could be induced to retain holdings either of money or of debts on any terms whatever, and even a high and rising rate of interest was unable to keep pace with the marginal efficiency of capital (especially of stocks of liquid goods) under the influence of the expectation of an ever greater fall in the value of money; whilst in the United States at certain dates in 1932 there was a crisis of the opposite kind—a financial crisis or crisis of liquidation, when scarcely anyone could be induced to part with holdings of money on any reasonable terms. (4) There is, finally, the difficulty discussed in section iv of chapter 11, p. 144, in the way of bringing the effective rate of interest below a certain figure, which may prove important in an era of low interest-­ rates; namely the intermediate costs of bringing the borrower and the The Psychological and Business Incentives to Liquidity 183 ultimate lender together, and the allowance for risk, especially for moral risk, which the lender requires over and above the pure rate of interest. As the pure rate of interest declines it does not follow that the allowances for expense and risk decline pari passu.

Affluenza: When Too Much Is Never Enough
by Clive Hamilton and Richard Denniss
Published 31 May 2005

As more people set their hearts on bigger and better homes they bid up the price of the housing available, and to have what they want they must take out bigger mortgages. This means they commit a larger share of their future income to buying the house of their dreams. For the first time in our history we have a housing affordability crisis at a time of record high incomes and record low interest rates. House & Garden magazine has captured the new mood: ‘By purchasing high-price, high-profile furniture, people are not only treating themselves to the thrill of the big spend and a beautiful object, they’re also creating an environment which makes them feel special’.4 Redundant rooms must be filled with furnishings, appliances, carpets and curtains.

The Gig Economy: A Critical Introduction
by Jamie Woodcock and Mark Graham
Published 17 Jan 2020

South Korea, for instance, is investing public money in platforms in the hope that they will ultimately contribute to economic growth.6 Kenya, likewise, is rushing to sign up people to its Ajira Digital programme: a scheme that intends to turn up to a million young Kenyans into platform workers as a way of tackling the youth unemployment crisis in the country. The gig economy, particularly in the case of ‘lean platforms’, is successfully taking advantage of this context, which ‘ultimately appears as an outlet for surplus capital in an era of ultra-low interest rates and dire investment opportunities rather than the vanguard destined to revive capitalism’ (Srnicek, 2017: 91). The glut of money made by companies in the technology industry is increasingly being held outside of the home country of the firm, not brought back for fear of taxation and without anywhere profitable to invest.

Playing With FIRE (Financial Independence Retire Early): How Far Would You Go for Financial Freedom?
by Scott Rieckens and Mr. Money Mustache
Published 1 Jan 2019

Originally we had planned on renting in Bend for a year or so and getting the lay of the land, but we scrapped those plans and decided to start our house hunt after just a few weeks. Even though we were scheduled to be house-sitting in Hawaii from April to June, we were hoping to find a house beforehand so we could lock in a low interest rate. Besides, we wanted to take our time finding a new home in Bend, and we didn’t want to waste a year’s worth of rent that could be building equity in a house. 157 PLAYING WITH FIRE 158 were experiencing, this mountainous area gets serious snowstorms, and the temps can stay in the teens for a week at a time.

The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success
by William Thorndike
Published 14 Sep 2012

Simple as that.”4 In a 2009 article, Barron’s described ExxonMobil’s “distinctive” corporate culture with its “relentless focus on returns at the expense of ego.”5 Not coincidentally, this frugal culture produced exceptional results, and ExxonMobil has consistently led the oil and gas industry in return on equity over the last quarter century. A Prediction Today, the combination of record corporate cash levels and generally low interest rates and P/E ratios presents a historic opportunity for aggressive capital allocation. This situation is particularly pronounced among the largest, bluest-chip technology businesses—companies like Cisco, Microsoft, and Dell—many of which are still run by members of their founding management teams, have enormous cash balances, and trade at unprecedented single-digit P/E multiples.

Capital in the Twenty-First Century
by Thomas Piketty
Published 10 Mar 2014

The fact that governments in the wealthiest countries (United States, Japan, Germany, France, and Britain) could borrow at exceptionally low rates (just over 1 percent) in 2012–2013 attests to the importance of central bank stabilization policies, but it also shows that private investors have no clear idea of what to do with the money lent by the monetary authorities at rates close to zero. Hence they prefer to lend their cash back to the governments deemed the most solid at ridiculously low interest rates. The fact that rates are very low in some countries and much higher in others is the sign of an abnormal economic situation.21 Central banks are powerful because they can redistribute wealth very quickly and, in theory, as extensively as they wish. If necessary, a central bank can create as many billions as it wants in seconds and credit all that cash to the account of a company or government in need.

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Public debate, especially in Europe but also in China and the United States, has taken an increasingly pragmatic turn, with discussion of the need for major investment in the search for new nonpolluting technologies and forms of renewable energy sufficiently abundant to enable the world to do without hydrocarbons. Discussion of “ecological stimulus” is especially prevalent in Europe, where many people see it as a possible way out of today’s dismal economic climate. This strategy is particularly tempting because many governments are currently able to borrow at very low interest rates. If private investors are unwilling to spend and invest, then why shouldn’t governments invest in the future to avoid a likely degradation of natural capital?53 This is a very important debate for the decades ahead. The public debt (which is much smaller than total private wealth and perhaps not really that difficult to eliminate) is not our major worry.

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A logically more satisfactory procedure would introduce the fact that the substitutability of natural capital for other forms of wealth is far from infinite in the long run (as Roger Guesnerie and Thomas Sterner have done). In other words, if natural capital is destroyed, consuming fewer iPhones in the future will not be enough to repair the damage. 53. As noted, the current low interest rates on government debt are no doubt temporary and in any case somewhat misleading: some countries must pay very high rates, and it is unlikely that those that are borrowing today at under 1 percent will continue to enjoy such low rates for decades (analysis of the period 1970–2010 suggests that real interest rates on long-term public debt in the rich countries is around 3 percent; see the online technical appendix).

Numbers Rule Your World: The Hidden Influence of Probability and Statistics on Everything You Do
by Kaiser Fung
Published 25 Jan 2010

Unsurprising, such asymmetric costs coax loan officers into rejecting more good customers than necessary while reducing exposure to bad ones. It is no accident that these decisions are undertaken by the risk management department, rather than sales and marketing. The incentive structure is never static; it changes with the business cycle. During the giant credit boom of the early 2000s, low interest rates pumped easy money into the economy and greased a cheap, abundant supply of loans of all types, raising the opportunity cost of false positives (missed sales). At the same time, the economic expansion lifted all boats and lessened the rate of default of the average borrower, curtailing the cost of false negatives (bad debt).

The Globalization of Inequality
by François Bourguignon
Published 1 Aug 2012

For others, the expansion of credit essentially resulted from households trying to stop their consumption from falling behind the U.S. average and getting into debt as a result. Of course, any or all of these hypotheses are part of an explanation of the crisis, but none of them fully explain it. While rising inequality may well have played an important role, the crisis itself was facilitated by other factors. Historically low interest rates caused by the flow of Asian capiRaghuram G. Rajan, Fault Lines: How Hidden Fractures Still Threaten the World Economy (Princeton, NJ: Princeton University Press, 2010); Stiglitz, The Price of Inequality. 12 Daron Acemoglu, “Thoughts on Inequality and the Financial Crisis,” presentation at the American Economic Association, 2011; http:// economics.mit.edu/files/6348. 11 Globalization and Costly Inequality139 tal into the United States, the loosening of monetary policy following the 9/11 attacks and the dot-­com crisis of the early 2000s had lowered the cost of credit and led banks to lend more and therefore to take on more risk.

Models. Behaving. Badly.: Why Confusing Illusion With Reality Can Lead to Disaster, on Wall Street and in Life
by Emanuel Derman
Published 13 Oct 2011

The gaps between rich and poor, managers and workers, and owners and employees have widened. Economic models have misfired and financial models have proved to be enormously inaccurate. More recently the prescribed cure of a Keynesian stimulus to jump-start spending and employment has had only a muted effect. Low interest rates, the Federal Reserve’s cure for past crises and the progenitor of future ones, are being prescribed again. Lessons have not been learned. I wasn’t surprised by the failure of economic models to make accurate forecasts. Any assurance economists pretend to with regard to cause and effect is merely a pose or an illusion.

The Simple Path to Wealth: Your Road Map to Financial Independence and a Rich, Free Life
by J L Collins
Published 17 Jun 2016

Bonds provide income, tend to smooth out the rough ride of stocks and serve as our deflation hedge. 3. Cash. Cash is good to have around to cover routine expenses and to meet emergencies. Cash is also king during times of deflation. The more prices drop, the more your cash can buy. But when prices rise (inflation), its value steadily erodes. In these days of low interest rates, idle cash doesn’t have much earning potential. I suggest you keep as little as possible on hand, consistent with your needs and comfort level. We used to keep ours in VMMXX (Vanguard Prime Money Market Fund). At the time interest rates were higher and money market funds typically offered better interest rates than bank savings accounts.

Warren Buffett Accounting Book: Reading Financial Statements for Value Investing (Warren Buffett's 3 Favorite Books)
by Stig Brodersen and Preston Pysh
Published 30 Apr 2014

Now, you would still receive your par value of $1,000 back at the end of the 30 years, and you would still receive $1,500 in coupon payments over the 30-year period, but your purchasing power will remain unchanged. Takeaways from this chapter Let me summarize the interaction between interest rates, inflation, bonds and stocks here: Low interest rates High interest rates Low inflation Stocks Bonds High inflation Stocks Stocks Bonds are preferred in the situation where inflation is low and interest rates are high.

The Great Crash 1929
by John Kenneth Galbraith
Published 15 Dec 2009

In the summer of 1929 a few stern words from on high, a rise in the discount rate, a tough investigation into the pyramid schemes of the day, and the house of cards on Wall Street would have tumbled before its fall destroyed the whole economy. In 2004 the FBI warned publicly of "an epidemic of mortgage fraud." But the government did nothing, and less than nothing, delivering instead low interest rates, deregulation, and clear signals that laws would not he enforced. This was fuel for fires. The Greenspan Doctrine held that bubbles cannot be prevented, that the governments task is merely to clean up afterward. The Greenspan practice was to create one bubble after another, until finally one came along so vast that it destroyed the system on the way by.

Meet the Frugalwoods: Achieving Financial Independence Through Simple Living
by Elizabeth Willard Thames
Published 6 Mar 2018

Here is a step-by-step plan that can serve as your guide for getting started: Determine your goals. What do you want out of life? Where do you want to be in five years, ten years, forty years? In what ways are your finances helping or hindering your progress toward these goals? Pay off any high-interest debt as quickly as possible (note: a fixed, low-interest rate mortgage is not included in this category). Debt is a drain on your long-term net worth and the financial equivalent of a ball and chain around your ankle. If you have high-interest debt you probably know all too well how expensive it can be. Do yourself a favor, pay it down and don’t go into debt again.

The Gig Economy: The Complete Guide to Getting Better Work, Taking More Time Off, and Financing the Life You Want
by Diane Mulcahy
Published 8 Nov 2016

If we added these costs in, the total cost would be higher. Finally, these examples don’t include the mortgage interest deduction. These simplified examples illustrate that the total home cost, even without tax increases or ongoing maintenance or upgrades, is more than double the price the homeowner paid. And this is in a low-interest-rate environment. As recently as the mid-2000s, mortgage rates ranged from five to seven percent, compared to the recent three- to four-percent environment. But What if I Really Want to Own a Home? Home ownership is not always a bad financial idea, but for most middle-class Americans it is.

Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned in School
by Andrew Hallam
Published 1 Nov 2011

What caused the financial crisis of 2008–2009? The greed of the banks not looking after the best interests of their customers, coupled with the ignorance of those who bought homes they couldn’t afford. Caught up in the housing boom, buyers purchased homes they couldn’t really pay for, and when the dangerously enticing, low interest rates finally rose, they couldn’t make their mortgage payments. Unsurprisingly, many were forced to sell their homes, creating a surplus in the housing market. When there’s a surplus of anything, people aren’t willing to pay as much for those items—so they fall in price. Houses were no exception.

Damsel in Distressed: My Life in the Golden Age of Hedge Funds
by Dominique Mielle
Published 6 Sep 2021

Housing prices weren’t the only ones reaching speculative extremes; around the globe risk premia (the extra profit you earn to hold risky investments) in general had compressed to radical lows, which pushed hungry investors to go after ever more illiquid, opaque, complex investments. Innovative but complex financial investments such as mortgage securitizations, credit default swaps (a financial contract akin to an insurance policy that pays out in the case of a corporate bond default), and carry trades (where one borrows money at a low interest rate to buy an asset that should provide a higher return) ballooned. Everyone, and I do mean everyone, was encouraged to use debt recklessly. The banking industry was permitted to leverage their balance sheets thirty-five times, meaning they could burden their capital structure with thirty-five times more debt than equity—instead of ten times in the ’70s and ’80s, and twenty times in the ’90s.

The Relentless Revolution: A History of Capitalism
by Joyce Appleby
Published 22 Dec 2009

In the Dutch example there were challenging contradictions between appearances and reality with puzzling divergences between expectations based upon established truths and what actually happened. Without mines, how did the Dutch come to have plenty of coin? With few natural resources for export, how could the Dutch engross the production of other countries? How did the Dutch have low interest rates and high land values? How were high wages maintained with a burgeoning population? How could high prices and widespread prosperity exist simultaneously in the Low Countries? Throughout the middle decades of the seventeenth century the Dutch were formidable rivals to English merchants and sources of raw data of incalculable value.

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Mounting foreclosures, beginning in 2007, put the brakes on the subprime mortgage joyride, but the problems went deeper. China’s great savings had made borrowing cheap. American consumers apparently decided to let the Chinese do the saving while they spent in a grand style. At the same time, low interest rates drove the managers of capital to seek new ways to get more for their money, even if they had to invent fancy stratagems to do so. The trauma began with the failure of Lehman Brothers, an event that did not stir the U.S. government to act. The incredibly tight “sink-or-swim together” union of world financial institutions became apparent.

Who Stole the American Dream?
by Hedrick Smith
Published 10 Sep 2012

Leaders from both parties as well as business-oriented task forces advocate responding to this challenge with a national infrastructure bank to spark the financing of a ten-year plan to improve our ports, airports, and commercial and commuter rail systems, as well as our bridges and highways. Because of current low interest rates and high unemployment, one economic study pointed out that it will “never be cheaper” for the nation to undertake a major infrastructure push because “capital costs are now at historic lows … and labor is in abundant supply….” The U.S. Chamber of Commerce estimates that $10 billion to $30 billion in government start-up funds could attract up to $600 billion in private investments.

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Not only have those families been hurt, but the dead housing market has put a damper on a strong economic recovery. For those twenty-two million homeowners—mostly creditworthy borrowers who are paying their mortgages regularly—it’s a catch-22. Most can’t afford to sell their homes and take a loss. Many would like to benefit from today’s low interest rates (around 4 percent) and shed their old 7 to 10 percent bubble-era rates. That would give them more cash to spend and to fuel the economics of the virtuous circle and lift the economy. But they are trapped. Banks won’t approve loans for more than the value of the house, and government-backed enterprises such as Fannie Mae and Freddie Mac have balked at writing down loans they have guaranteed in the past, because on their books they would lose some money.

Why Stock Markets Crash: Critical Events in Complex Financial Systems
by Didier Sornette
Published 18 Nov 2002

Such a nonlinear sensitivity is not just a theoretical construction; it has been recently documented in the context of the sensitivity of the money demand to interest rate. Using a survey of roughly 2,700 households, Mulligan and Sala-i-Martin [311] estimated the interest elasticity of money demand (the sensitivity or log-derivative of money demand to interest rate) to be very small at low interest rates. This is due to the fact that few people decide to invest in interest-producing assets when rates are low, due to “shopping” costs. In constrast, for large interest rates or for those who own a significant bank account, the interest elasticity of money demand is significant. This is a clear-cut example of a threshold-like behavior characterized by a very nonlinear response.

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Money, Greed, and Risk: Why Financial Crises and Crashes Happen (Times Books, London). 310. Moss de Oliveira, S., de Oliveira, P. M., and Stauffer, D. (1999). Evolution, Money, War and Computers (Teubner, Stuttgart-Leipzig). 311. Mulligan, C. B. and Sala-i-Martin, X. (2000). Extensive margins and the demand for money at low interest rates, Journal of Political Economy 108, 961–991. 312. Nature.com (1999). Nature Debates, Is The Reliable Prediction of Individual Earthquakes a Realistic Scientific Goal? http://helix.nature.com/debates/ earthquake/. 313. Newman, M. E. J. (2001). The Struture of Scientific Collaboration Networks, Proceedings of the National Academy of Sciences, USA 98, 404–409. 314.

The Washington Connection and Third World Fascism
by Noam Chomsky
Published 24 Oct 2014

There is a return to the “free market,” in theory, but it is selectively applied, with no serious control over monopoly power, employer organizations and collective action, but with control over wages, both directly and by means of a banning of strikes and the destruction or state control of unions. Deflationary policies and an open door tend to weaken domestic business and enhance the power of foreign companies that can borrow abroad at relatively low interest rates. Thus, foreign investment often takes the form of buying out “non-competitive” local businesses in an accelerated process of denationalization.43 Takeovers are financed commonly with resources raised in the poorer country, either in local capital markets or through reinvested local earnings.

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Internal corruption assumed the form of plain stealing on a new and larger scale, and the discriminatory manipulation of bank credit and the privileged exploitation of state monopolies.42 As noted by Anderson: Most banks operated under military supervision and were compelled to offer huge credits and unrealistically low interest rates to senior officers (or cukong working with them). Very often these cheap credits were not used for productive investment, but for real-estate speculation, land grabbing, luxury housing, and so forth. Second was the survival of a number of important state monopolies, which in effect legally excluded indigenous entrepreneurs from certain economic fields.

The Battle of Bretton Woods: John Maynard Keynes, Harry Dexter White, and the Making of a New World Order
by Benn Steil
Published 14 May 2013

The revival of the book following the 2008 economic crisis was largely based on the notion that it was a reliable tract on depression economics, if not in fact a “general theory” that could be applied in boom times as well, as Keynes had held. In early 1937, though, it was far from clear that The General Theory had much to offer in the way of immediate policy guidance. The British economy had been growing since 1932, with balanced budgets, low interest rates, and solid private-sector investment, particularly in building. Growth was 4.9 percent in 1936, 3.5 percent in 1937; unemployment, though still high at 8.5 percent, had fallen steadily year on year since 1932.99 Economic orthodoxy appeared to be alive and well. But after the seemingly revitalized American economy went into a nosedive in the summer, Britain’s downturn followed.

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Britain had been bankrupted by two world wars; it could not pay for vital imports without foreign support in the form of dollars or gold. The United States, in contrast, still pays its bills in a currency it prints. In spite of its large and growing debt, it has sold record new issues of it at record low interest rates in a time of transatlantic financial crisis. The dollar still accounts for 60 percent of global foreign exchange reserves (down from 70 percent a decade ago), and even 75 percent of global imports from countries other than the United States.39 During the 2008 financial crisis, the Fed was able to take extraordinary actions to support the domestic credit markets; in contrast, central banks from Sweden to Australia were obliged to sell foreign assets for dollars to do the same.40 At present, the United States has no need to accommodate calls for it to sacrifice its exorbitant privilege to some vague vision of the global good.

A Generation of Sociopaths: How the Baby Boomers Betrayed America
by Bruce Cannon Gibney
Published 7 Mar 2017

From 2010 to 2015, the government paid an average of 2.47 percent on new ten-year Treasury debt; subtracting inflation, the real rate of interest traveled to around 1.5 percent or lower.37 Basically, extraordinary circumstances allow the United States to borrow essentially for free, a situation that will almost certainly change over the very long term. Hoping for higher interest rates is in some sense an act of optimism, because the past decade of exceptionally low interest rates has been the result of economic distress. Optimism has its own costs, though. During the period of exceptionally low rates, from FY 2010 to FY 2015, gross interest on the debt cost about $360–450 billion annually, and the average was roughly 85–90 percent of the present annual budget deficit (in other words, if we owed no interest, the annual federal budget would essentially balance if we view intragovernmental debt as “debt”).38 Should rates rise, so will interest costs—the question is whether new economic growth produces enough additional tax revenue to cover the increased cost.

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* Another paradox quickly resolved: Even though total energy use has grown, nuclear plants can supply 20 percent of needs because existing facilities have been expanded and become significantly more efficient. However, many plants are necessarily quite old and need to be replaced. New reactors have an initial carbon cost, as all major construction projects do, but produce very little carbon afterward. As most plants are expensive and require significant initial borrowing, the present era of very low interest rates significantly mitigates their once considerable expenses, which were often disastrous during the years of high interest rates, but should not be so now. * To be fair, several other countries, including normally forward-thinking peers in Europe, have taken restrictive positions as well. They have their own, often different, reasons for the strategy and we will see how they do, too

Statistical Arbitrage: Algorithmic Trading Insights and Techniques
by Andrew Pole
Published 14 Sep 2007

A corollary of the Janus story (the redemption detail was published in the Financial Times on Friday, October 10) is that almost certainly more ‘‘disruption’’ should have been anticipated for October. Morningstar (Financial Times, Thursday, October 9) advised investors to reduce or eliminate holdings in mutual funds from Alliance Capital and Bank of America, as managers of those funds had also engaged in timing schemes. 9.6.1 Interest Rates and Volatility With very low interest rates, the value of a dollar a year from now (or five years or ten years) is essentially the same as the value of a dollar today. Notions of valuation of growth are dramatically different than when higher interest rates prevail, when time has a dollar value. With such equalization of valuations and with discriminatory factors rendered impotent, volatility between similar stocks will decrease.

Elsewhere, U.S.A: How We Got From the Company Man, Family Dinners, and the Affluent Society to the Home Office, BlackBerry Moms,and Economic Anxiety
by Dalton Conley
Published 27 Dec 2008

People travel between counties the way they used to travel between neighborhoods,” Nick Paumgarten noted in April 2007 in The New Yorker. “The number of commuters who travel ninety minutes or more each way—known to the Census Bureau as ‘extreme commuters’—has reached 3.5 million, almost double the number in 1990. They’re the fastest-growing category, the vanguard in a land of stagnant wages, low interest rates, and ever-radiating sprawl. They’re the talk-radio listeners, billboard glimpsers, gas guzzlers, and swing voters, and they don’t— can’t—watch the evening news.”13 Paumgarten tells us of one man who won the Midas muffler-sponsored “longest commute” award for his round-trip daily total of 372 miles (seven hours) to Cisco Systems in San Jose, California.

The Oil Factor: Protect Yourself-and Profit-from the Coming Energy Crisis
by Stephen Leeb and Donna Leeb
Published 12 Feb 2004

If you’re feeling desperately poor, as you’d expect all those with huge market losses to feel, you’re not likely to take on more debt even if it’s interest-free, nor are you likely to do much shopping. Rather, you’re going to try to save money for a while. But this wasn’t how consumers reacted in 2000-2002, which is why the economy held firm. One overwhelming positive held back the forces of economic carnage—rising home prices. The ultra-low interest rates made mortgages on new homes exceedingly affordable and sharply increased the demand for homes. Home prices went up across the board. Wait a minute, you might protest. Didn’t we just say that consumers who had lost so much money in stocks weren’t likely to go out and spend? Yes, we did. But buying a home is not just a purchase, it’s an investment.

Pity the Billionaire: The Unexpected Resurgence of the American Right
by Thomas Frank
Published 16 Aug 2011

One of them asks whether the financial crisis was brought on “by a failure of capitalism, or by an abuse of it by the government?” The answer is simple, and Beck’s Founding Father character enlightens us: “Under true free-market capitalism, the government would have no involvement in homeownership whatsoever.” They wouldn’t encourage it through artificially low interest rates, Fannie and Freddie, tax breaks, or a “Community Reinvestment Act,” but they wouldn’t discourage it either.* Rates would be set by market participants, based on risk, reward, and a clear understanding that making bad loans would result in bankruptcy.† Do you see how awesome that would be, reader?

The Wisdom of Finance: Discovering Humanity in the World of Risk and Return
by Mihir Desai
Published 22 May 2017

Some of de la Vega’s commentary seems remote. He explains, for example, that the dividends of the Dutch East India Company “are sometimes paid in cloves . . . just as the directors see fit.” Other parts of his story are remarkably current, as when he provides an explanation of how frothy markets are driven by excessively low interest rates and how a bankrupt company is restructured. Rather than dryly articulating the nature of those markets, he told a story—a conversation between a merchant, a philosopher, and a shareholder. The merchant and the philosopher are archetypes of the doer and the thinker. Puzzled by how financial markets work, they consult the shareholder for insight.

Bitcoin: The Future of Money?
by Dominic Frisby
Published 1 Nov 2014

He’s a former fund manager from the City, I discover, and he’s obviously been given stick for working there. I put him at ease by saying I write for MoneyWeek magazine. It’s impossible to make any money now as an independent, he says. He used to buy distressed companies, but there are no distressed companies any more. Low interest rates have meant that what should have died lives on. If he wants to set up a fund, the regulation is so onerous that he would need to raise £100 million to make it viable. That’s impossible. Regulation has just re-enforced the monopolies of the banks. Big corporations like regulation because only they can afford it.

House of Debt: How They (And You) Caused the Great Recession, and How We Can Prevent It From Happening Again
by Atif Mian and Amir Sufi
Published 11 May 2014

This pushes interest rates down as money flows into the financial system where nobody is borrowing. Eventually, interest rates should become low enough to induce businesses to borrow and invest, which should help make up for lower consumer spending. Further, savers in the economy, those less affected by the decline in house prices, should be induced to spend more—extremely low interest rates should encourage savers to buy a new car or remodel their kitchen. This process is aided by the central bank, which typically responds to a crisis by pushing down short-term interest rates. Spending by savers and investment by businesses should fill in for the gap left by borrowers cutting back, and the aggregate economy should escape unharmed.

The Great American Stickup: How Reagan Republicans and Clinton Democrats Enriched Wall Street While Mugging Main Street
by Robert Scheer
Published 14 Apr 2010

Thus, although his six-year reign at Fannie Mae was successful in generating huge profits, it also saw systemic accounting troubles—some called it fraud—that would force Raines to return some of his huge pay package, as well as a conveniently shortsighted view of the housing market as bubble-proof. “We don’t think that there is a housing bubble in the country,” he told Black Enterprise magazine for an extensive profile in the May 2003 issue. Crediting low interest rates, he added, incorrectly, “People’s incomes are higher so they can afford more housing and, obviously, the owners of the house [will] try to raise the price when they’re selling it.” In fact, as was clear even then, real income for the vast majority of Americans—and especially those served by Raines’s “American Dream Initiative” program—had been barely rising throughout the Clinton bubble.

ECOVILLAGE: 1001 ways to heal the planet
by Ecovillage 1001 Ways to Heal the Planet-Triarchy Press Ltd (2015)
Published 30 Jun 2015

Tensions around scheduling work and financing childcare are discussed in long community meetings. There has always been a tradition of ‘openly speaking one’s thoughts and emotions’, which is both provocative and essential. Financial security has been a constant struggle. Kibbutzim in our region agreed to pay off our high interest loans from banks. In return we repay them at low interest rates. Funding the ‘luxurious simplicity’ of rural, communal living in our region is a challenge because of the high cost of electricity and well water. In our desert climate, there’s almost no rain which means all water must be purchased! 60 of the 280 Kibbutzim in Israel are still income-sharing communes.

Strong Towns: A Bottom-Up Revolution to Rebuild American Prosperity
by Charles L. Marohn, Jr.
Published 24 Sep 2019

I’m skeptical of the convenience of these theories because they seem to affirm what we want to believe – that our economy is healthy and going to continue growing. I think it more likely that our economy, like the cities that sit at its foundation, is sick and trying to reset to a stable equilibrium. It is only by robbing our families of wealth – using artificially low interest rates to punish those who save and reward those who borrow – that we’ve pulled as much future consumption forward as possible. And where our families have fallen short, public borrowing has filled the gap. I have witnessed countless local governments make up for cash-flow shortfalls with debt. As a professional engineer, without fully understanding what I was suggesting, I recommended many such tradeoffs.

The Complete Guide to Property Investment: How to Survive & Thrive in the New World of Buy-To-Let
by Rob Dix
Published 18 Jan 2016

To know how to structure your portfolio to survive a crash, it helps to understand the sequence of events that leads to a property investor “going under”: The portfolio is in a “negative cashflow” situation, meaning that rents don’t cover expenses and the investor must subsidise the portfolio with cash from elsewhere. This could result from a spike in interest rates – which didn’t happen with the 2008 crash, but often does. Alternatively the investor may have been in negative cashflow even at low interest rates, because they were speculating on capital growth rather than keeping an eye on income. At some point, the investor can’t put in any more cash, and therefore can’t afford to meet the portfolio’s expenses. In order to avoid repossession, they’re forced to sell quickly at a low price – low because prices will be falling anyway, and even lower because of the need to sell fast.

Internet for the People: The Fight for Our Digital Future
by Ben Tarnoff
Published 13 Jun 2022

This was a popular strategy in the 1990s boom and one successfully pursued by Amazon, though it never burned through as much cash as Uber. But macroeconomic conditions in recent decades have made it even easier to source capital for such ventures. As the scholar Nick Srnicek points out, permanently low interest rates, the legacy of the Federal Reserve’s response to the financial crisis of 2007–2008 and its very long aftermath, have reduced the returns on various financial assets. “The result is that investors seeking higher yields have had to turn to increasingly risky assets—by investing in unprofitable and unproven tech companies, for instance,” he writes.

Third World America: How Our Politicians Are Abandoning the Middle Class and Betraying the American Dream
by Arianna Huffington
Published 7 Sep 2010

By 2005, subprime mortgages had skyrocketed to 20 percent of the market.63 Fueling the boom was the development of securitized mortgages—including collateralized debt obligations (CDOs)—in which mortgages of varying degrees of risk were bundled together in “tranches” and sold to investors.64 Since lenders were selling off the risk to someone else, they felt much freer to make loans to borrowers who never would have been able to qualify for a prime mortgage. The Fed did its part, too, contributing extremely low interest rates and lax oversight to the increasingly toxic housing mix. In the words of economist Dean Baker, “The Federal Reserve Board completely failed to do its job.”65 And both sides of the political aisle aided and abetted the bubble. Even after a spate of accounting scandals, many Democrats continued to support Fannie Mae and Freddie Mac, seeing them as valuable facilitators of affordable housing.66 Between 2004 and 2007, Fannie and Freddie became the top buyers of subprime mortgages—exceeding $1 trillion in loans.67 George W.

The Handbook of Personal Wealth Management
by Reuvid, Jonathan.
Published 30 Oct 2011

Due diligence could be a lengthy process and even more so in this cautious environment. This is a trying time since while spending time and money on researching an asset, one can be out bid by another buyer. Of course there should be no compromise on this stage of the purchase. Some projects come with a transferrable loan – these existing loans may be at a low interest rate, having been negotiated a few years back. Meetings with two or three bank managers are always recommendable when visiting a country to view projects in order to ensure that you get the best mortgage deal. Apart from reliable legal advice, an international insurance company will need to be involved sometimes at a very early stage when insurance on title is occasionally required by the lender.

Tomatoland: How Modern Industrial Agriculture Destroyed Our Most Alluring Fruit
by Barry Estabrook
Published 6 Jun 2011

If a lender ever had to foreclose on a Rural Neighborhoods’ property, he could sell it to a landlord who could fill it with eager renters, not marginalized farmworkers, which makes it more likely that a bank will extend credit to Kirk. Unlike most heads of charitable organizations, Kirk lives with the possibility of bankruptcy. Rural Neighborhoods may borrow at low interest rates through government programs, but the money it invests has to be paid back like any mortgage. Rents in its developments are set at a level that allows Rural Neighborhoods to break even, but higher than expected vacancy rates can quickly turn break-even budgeting into a losing proposition. “We are a risk-taking organization,” Kirk said.

After the New Economy: The Binge . . . And the Hangover That Won't Go Away
by Doug Henwood
Published 9 May 2005

And while the federal government stopped borrowing for a while in the late 1990s—though the George W Bush administration has returned to the trough—households and businesses have most certainly not, nor has the U.S. as a nation collectively stopped borrowing abroad.To take just one extreme example, the Wall Street Journal (Zuckerman 2000) reported: While home buyers once needed a 20% down payment—and thus needed a degree of financial well-being—today over 40% of new-home mortgages are with down payments of less than 10%, according to SMR Research, a financial-research firm. "At least a quarter of aU new mortgages go to people who are basically broke, and the figure could be much higher," says Stuart Feldstein, president of SMR. Rampant borrowing continued through the recession that began in March 2001, with low interest rates prompting enormous home-equity withdrawals. After the New Economy And the issue of the private sector's unique and ineffable contribution to technological development is one of the most mystified aspects of U.S. economic life.Yesterday s favorite miracle, the Internet, was initially a project of the Pentagon, as was the computer itself; the government picked up the basic R&D tab for decades, when neither Wall Street nor private industry showed any interest.

Blindside: How to Anticipate Forcing Events and Wild Cards in Global Politics
by Francis Fukuyama
Published 27 Aug 2007

The experience was so searing that neither the East Asian countries nor the IMF will soon forget what happened. East Asia is also sitting on an immense stock of foreign exchange reserves to lessen the risk that it will ever again experience a liquidity shock. The developing countries are currently enjoying good growth rates because of high commodity prices and low interest rates in the old industrial countries. They are enjoying the benefits of positive terms of trade and low borrowing costs. The strongest currency in the world during 2005 was the Zambian kwacha, which appreciated by 27 percent against the U.S. dollar because robust copper prices produced an influx of foreign capital to Zambia.

Weapons of Math Destruction: How Big Data Increases Inequality and Threatens Democracy
by Cathy O'Neil
Published 5 Sep 2016

Even worse than filching dumb money from people’s accounts, the finance industry was in the business of creating WMDs, and I was playing a small part. The troubles had actually started a year earlier. In July of 2007, “interbank” interest rates spiked. After the recession that followed the terrorist attacks in 2001, low interest rates had fueled a housing boom. Anyone, it seemed, could get a mortgage, builders were turning exurbs, desert, and prairie into vast new housing developments, and banks gambled billions on all kinds of financial instruments tied to the building bonanza. But these rising interest rates signaled trouble.

Rebel Cities: From the Right to the City to the Urban Revolution
by David Harvey
Published 3 Apr 2012

By then, the housing lobby, led by Fannie Mae, was welded into an autonomous center o f ever-growing affluence, influence, and power capable of corrupting everyth ing from C ongress and the regulatory agencies to prestigious academic economists ( including Joseph Stiglitz), who produced reams of research to show that their activities were very low-risk. The influence of these institutions, coupled with the low interest rates favored by G reenspan at the Fed, unquestionably fueled the boom in housing production and realization.22 As G o e tzmann and Newman remark, finance (b acked by the state) can build cities and suburbs, but it cannot necessarily m ake them pay. So what fueled the demand? F I CT I T I O U S CAP ITAL A N D F I CT I O N S THAT CA N N OT LAST To understand the dynamics we have to understand how pro ductive and fictitious capital circulation combine within the credit system in the context of property markets.

Tyler Cowen-Discover Your Inner Economist Use Incentives to Fall in Love, Survive Your Next Meeting, and Motivate Your Dentist-Plume (2008)
by Unknown
Published 20 Sep 2008

But when the money is lent out and repayments are required on a frequent basis, the entrepreneurial borrowers find it easier to keep their relatives at bay. Of course micro-credit can misfire. Many people would start new businesses in any case. They use their micro-credit loans to support lazy relatives. Some individuals borrow from the micro-lenders at a low interest rate and then use that money as collateral to borrow even more from extortionate local lenders at a much higher rate. The money is spent on a television set and the result is perpetual indebtedness and greater desperation, not a new enterprise. In Hyderabad, India, economists are studying how micro-credit changes people's lives.

Branding Your Business: Promoting Your Business, Attracting Customers and Standing Out in the Market Place
by James Hammond
Published 30 Apr 2008

I never cease to be amazed at how deficient company representatives are in this vital area of verbal communication, in both the words that are spoken and the approach taken. Let me give you a personal example. Some time ago I received a direct mail piece through my door advertising a credit card with a very low interest rate. The promotion also included a free MP3 player, which looked good in 112 Making sense of the senses the picture. So I filled in the paperwork and within a week my card arrived. So far, so good. Then, three days later, I received another mailing from the same company offering the identical credit card but with an even lower rate of interest, plus a DVD player that was obviously worth considerably more than the small MP3 player in the original mailing.

Investing Demystified: How to Invest Without Speculation and Sleepless Nights
by Lars Kroijer
Published 5 Sep 2013

However, you should amend this and not buy other government bonds in the proportions of the bonds outstanding that are shown in Figure 7.2.4 Earlier, we discussed how a highly rated government bond in the right currency provided the best investment for risk-averse investors, albeit at very low interest rates (at the time of writing). As an example, if I’m a UK-based investor looking for the lowest-risk investment for the next five years in sterling, I should buy five-year UK government bonds, perhaps in the form of inflation-protected bonds. Figure 7.2 Government debt in $ billions Based on data from Bank for International Settlements, end quarter 2 2012, www.bis.org As we are now considering adding other government and corporate bonds to the rational portfolio of minimal risk bonds and equities, we should not just blindly add all the world’s government bonds (see Figure 7.3).

The Wealth Dragon Way: The Why, the When and the How to Become Infinitely Wealthy
by John Lee
Published 13 Apr 2015

For me, it was a great deal. I eventually got the property valued at £305,000 and I was able to take out a 90 percent mortgage on it for £274,000—but I had only paid £250,000. The day I bought that house I made a £24,000 profit, on top of the £31,000 in equity I now had in the property. The mortgage was at a very low interest rate. It was during the era of subprime mortgages and I had a mortgage broker who knew all the best deals. Of course we now know that the subprime mortgage market undermined the global financial markets and partly caused their crash, but at the time you just took advantage of whatever was on offer.

The Fix: How Bankers Lied, Cheated and Colluded to Rig the World's Most Important Number (Bloomberg)
by Liam Vaughan and Gavin Finch
Published 22 Nov 2016

By repackaging crappy, subprime home loans into mortgagebacked securities and flogging them to unsuspecting investors as AAA rated, there was a case to be made that the bankers had committed mortgage fraud and should be criminally prosecuted. But going after bank executives was not as easy as it sounded and, as the DOJ liked to point out, there were other considerations.1 The European debt crisis, which started in Greece and Portugal, was now churning up markets globally. Lenders still relied on government loans and record low interest rates to survive. Justice was obliged to consider the collateral consequences of any enforcement action it took, and it argued that prosecuting banks and their executives would have a destabilizing, maybe even a catastrophic, effect on firms employing hundreds of thousands of people, as well as the broader economy.2 The decision not to prosecute rested largely with one man: the head of the criminal division, Lanny Breuer.

The Unbanking of America: How the New Middle Class Survives
by Lisa Servon
Published 10 Jan 2017

But consumer advocates, bolstered by Warren’s study, argued that claims about bankruptcy fraud were overblown. Most people filed for bankrupty legitimately as a response to hardship, rather than an escape from paying up for their lavish overspending. They felt stuck and could see no other way out. Low interest rates and easy access to credit made credit cards a simple option for people experiencing financial stress, and credit card companies did everything they could to entice new categories of customers. In 1983, only 43 percent of US households had a MasterCard, Visa, or other general-purpose credit card.

Fully Automated Luxury Communism
by Aaron Bastani
Published 10 Jun 2019

What is more, ageing will diminish growth. In 2016 the research division of the US Federal Reserve published a paper detailing how changed demographics will render central banks powerless to raise long-term interest rates. Citing an example based on the changing demographics of the United States it concluded, ‘low investment, low interest rates and low output growth are here to stay … the US economy has entered a new normal’. These trends are observable across the Americas, Europe and Asia. While the default policy response in recent decades has been calls for greater immigration (with a few exceptions such as Japan), given ageing is one of the inevitable consequences of the Second Disruption – an experience that has and will continue to visit every society – that is clearly inadequate.

Work Optional: Retire Early the Non-Penny-Pinching Way
by Tanja Hester
Published 12 Feb 2019

Another option for homeowners is to consider opening—but not using—a home equity line of credit (HELOC) before you leave your career. The approval process for a HELOC is similar to getting a mortgage, so it helps enormously to have regular income and is much easier to secure the line of credit while you still have continuous income. If you can find an offer for a HELOC with a low interest rate, low origination and management fees, and no hidden penalties, it may be worth opening the line of credit just to have available as a backup plan. For landlords, rental properties are a built-in source of capital in your portfolio and could potentially be sold if needed to free up cash, but this potentially comes with a lot of strings attached.

Open: The Progressive Case for Free Trade, Immigration, and Global Capital
by Kimberly Clausing
Published 4 Mar 2019

When growth in household incomes does not keep pace with expectations, the economic status of many households becomes less secure. One general marker of financial strain on households is rising household debt (fig. 2.7). While some categories of debt have not increased, the overall trend of increasing household debt is particularly notable given the very low interest rates since 2009. Why Are These Trends Important? In addition to the clear economic consequences for the middle class, these troubling trends have grave consequences for society. Stagnant incomes are harmful during recessions, since income gains that are concentrated at the top are less likely to fuel consumption and, in turn, greater production of goods and services.

The New Silk Roads: The Present and Future of the World
by Peter Frankopan
Published 14 Jun 2018

The problem, said Zheng, is that the way the administration is going about it ‘is hurting the companies it should be helping’ as a result of the imposition of tariffs.70 Many other of the world’s largest companies, as well as young, promising start-ups, either have plans to expand in China, or are already doing so. Trade wars put pressure on their business models, their share prices and on those who have invested in their futures. Historically low interest rates, coupled with hefty corporate tax cuts, have concealed the dangers somewhat, but they are not that hard to see. The shares of General Motors and Fiat Chrysler slumped by 8 per cent and 16 per cent respectively, for example, in a single day after cutting forecasts either on the basis of increased metals costs, reduced expectations in China – or both.71 ‘We’re America, Bitch’ sounds better in the corridors of power in Washington than it does in the boardrooms of North America – or to pensioners whose savings have reduced in value in the process.

When More Is Not Better: Overcoming America's Obsession With Economic Efficiency
by Roger L. Martin
Published 28 Sep 2020

Meanwhile, the US government’s two vehicles for promoting American home ownership, Fannie Mae and Freddie Mac, were aggressively pursuing their assigned goals by securitizing bundles of mortgages so that banks could get those mortgages off their balance sheets and have greater capacity to make more mortgage loans. Each policy made lots of sense on its own—promoting a stimulated economy and the expansion of American home ownership. But put together, they added up to something quite problematic. The low interest rates spurred a housing bubble, which burst, driving Fannie and Freddie into near insolvency requiring gigantic government bailouts while also contributing to the onset of the global financial crisis. If the economy really were like a machine, in which any given subsystem operates independently and does not influence any other subsystem, we would probably have been protected from this downside.

Mastering Blockchain: Unlocking the Power of Cryptocurrencies and Smart Contracts
by Lorne Lantz and Daniel Cawrey
Published 8 Dec 2020

Figure 6-9 shows the rise and fall of tulip prices during what became known as Tulip Mania. Figure 6-9. Market rise and fall during the Dutch Golden Age’s Tulip Mania In the 1990s, people invested fortunes in seemingly any publicly traded company with “.com” in its name. This investment was fueled by low interest rates, which encouraged people to borrow and spend. Prices went up and up, eventually leading to the so-called dot-com crash, where the bottom fell out of the market and many companies were wiped out (see Figure 6-10). While there were gigantic losses for many investors, some of these dot-com companies did survive and thrive—most notably Amazon, which transformed itself from an online bookseller into a retail and computing infrastructure behemoth.

China's Superbank
by Henry Sanderson and Michael Forsythe
Published 26 Sep 2012

At the same time it sold three-year notes to central banks in Africa who could shift their reserves away from the US dollar, the first time they had bought yuan bonds. European, African, and Middle Eastern investors made up 60 percent of the buyers, the bank said.84 It was the beginning of the Chinese government’s ability to sell debt in its own currency internationally at low interest rates, a privilege the United States had enjoyed since the end of World War II. And CDB was the desired vehicle, as all illusion that it was a commercial bank was fading from view. China had kept its financial system closed to foreign competition to build it up, and now it was using it to expand its currency overseas.

Scotland’s Jesus: The Only Officially Non-Racist Comedian
by Frankie Boyle
Published 23 Oct 2013

And to this day my gran still uses Bisto instead of stockings. Can’t say I approve; seems to me to be a pretty racist way of robbing a post office. But don’t despair, there are lots of ways to make a bit of extra cash. My tip is to go along to your local shopping centre dressed as a fountain. Quantitative easing and low interest rates are just ways to make money for speculators by taking it almost directly from savers. There’s no point in saving any more. I’ve less interest in my bank account than I have in the Blue reunion. William Hague’s said there’s only one true growth strategy for the UK. Work harder. Advice that really paid off for that horse in Animal Farm.

Two and Twenty: How the Masters of Private Equity Always Win
by Sachin Khajuria
Published 13 Jun 2022

The young partner is excited about the deal because the situation does not call for the type of plain vanilla lending where it would be difficult to negotiate hard as a creditor. The credit markets are so frothy that “ordinary” lending would end up being executed at unfavorable terms, at a very low interest rate and with weak creditor protections. That is the kind of deal he would prefer to decline. Instead, he is keen to engage in this situation because it is not an ordinary one. He can lend to PetCare at scale in a complex situation. The terms of this specialized lending are more favorable, and as a lender, he won’t even mind very much if he has the chance to take the target over.

Tomorrow's Capitalist: My Search for the Soul of Business
by Alan Murray
Published 15 Dec 2022

.… The worst mistake we can make at this point is to get so caught up in imagining what could happen that we forget our own agency in determining what will happen.”18 When I spoke with Mulligan, she told me about her evolution on the issue. Mulligan joined Guardian in 2008, in the midst of the Great Recession. Guardian “wasn’t wildly impacted by the recession, but I was looking around and seeing so many of my friends losing jobs.” When she became CEO in 2011, she realized a combination of pervasive low interest rates and technological change was going to drive huge disruption for her company and her employees. “I said to myself, I don’t want to be one of those companies that has to turn all these people out on the streets.”19 Mulligan made several practical moves. She started a program to teach people in the company’s call centers to write code, joined a program to teach actuaries to be data analysts, and developed a program of “train in, train out,” which provided two years’ tuition at a local community college for workers whose jobs were eliminated.

Good Profit: How Creating Value for Others Built One of the World's Most Successful Companies
by Charles de Ganahl Koch
Published 14 Sep 2015

These improvements demonstrate Koch’s vision of consuming fewer resources across all our businesses. Capital is also a critical resource that we strive to conserve and optimize, consistent with our vision, by allocating it to its highest and best use. This applies to our liquid assets as well as our businesses. Prior to the current artificially low interest rate environment, our philosophy was to invest excess liquidity in short-term low-risk instruments. In order to get an attractive return on our growing liquidity in this new environment, our business development, treasury, and pension management groups created the capabilities to make more complex, higher-return investments.

Age of the City: Why Our Future Will Be Won or Lost Together
by Ian Goldin and Tom Lee-Devlin
Published 21 Jun 2023

House prices in cities like London, Paris, San Francisco and Sydney have grown much faster than median incomes in recent decades, making it hard to accumulate the savings needed to transition from renting to owning. The correction in house prices underway at the time of writing will not be enough to meaningfully change that picture over the long run. There are two main culprits behind the decline in housing affordability. The first is years of low interest rates, which until very recently made debt unusually cheap. That made it possible for those who already had the initial capital for a deposit to pay more for a home, either for themselves or as a rental investment, pushing up prices and making it harder for those without a deposit to get on the property ladder.

What Went Wrong: How the 1% Hijacked the American Middle Class . . . And What Other Countries Got Right
by George R. Tyler
Published 15 Jul 2013

Galbraith, along with Olivier Giovannoni and Ann J. Russo, documented that between 1969 and 2006, monetary policy was systematically engineered in the year preceding elections to produce lower interest rates on behalf of Republican incumbents: “The pattern is reasonably plain: periods of sustained, abnormally low interest rates all begin during Republican administrations. All end following an election involving a Republican incumbent or his immediate successor…. We find that in the year before presidential elections, the term structure of interest rates deviates sharply from otherwise-normal values. When a Republican administration is in office, the term structure in the pre-election year tends to be steeper, by values estimated at up to 150 basis points, and monetary policy is accordingly more permissive….

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(Greenberg Quinlan Rosner), 183–84 Greenhouse, Steven (New York Times reporter), 158, 337, 472n10, 473n27, 486n65–66, 504n36, 504n46, 509n2, 529n28, 532n15, 537n45, 537n51 Greenspan, Alan (Federal Reserve Chairman), 28, 80–85, 219, 383-4, 386 Age of Turbulence, 119 Amartya Sen and, 82 Ayn Rand and, 35-6, 81–82, 85, 119, 219, 387 banking deregulation, benefits of, 81 capital gains taxation, 226–27 cause of the credit crisis, housing bubble, low interest rates and, 85, 220–23 Charles Keating employed, 78–79 deficits, endorsement of, 204, 208 harmed productivity, 386 monetary policy, manipulated, 219 Net Capitalization Rule, abandonment of, 218 pay-as-you-go budget rules, abandoned, 209 reputational concerns rendered regulations unnecessary, 81 Social Security funding, 196 subprime mortgages, 120 tax cuts and appearance at Senate Budget Committee, 209 Greenstone, Michael, 234 Growth ceiling, GDP of US potential, 398-400 Grubert, Harry (US Treasury), 277–78, 457 Guerrera, Francesco (Financial Times journalist), 432 H Hacker, Jacob S.

The Power Law: Venture Capital and the Making of the New Future
by Sebastian Mallaby
Published 1 Feb 2022

In the decade to January 1, 2020, Morgan Stanley and Goldman Sachs saw their stock prices rise 77 percent and 36 percent, respectively. Meanwhile, the S&P 500 index rose by 189 percent, and technology giants soared. Apple was up 928 percent. Sequoia and other venture boutiques were the winners from this shake-up. During the first decade of the twentieth-first century, investors had responded to low interest rates by reaching for yield the Wall Street way: they had loaded up on subprime mortgage debt, which paid a few percentage points above the normal interest rate. When this strategy ended in disaster in 2007–2008, investors reached for yield the Valley way: they bet on private tech companies. As with the subprime wagers, the idea was to take extra risk for extra reward.

…

Fortuitously, the financial crisis coincided with the advent of smartphones, cloud computing, and the mobile internet, setting up an opportunity to build brilliant businesses atop the new platforms: it was the perfect moment to switch capital from financial engineering to technology. The average venture fund launched in 2011 outperformed the S&P 500 index by 7 percent per year, and, as we have seen with Sequoia, the top venture funds outperformed by much more than that.[83] The longer the Fed persisted with its policy of low interest rates, the more the search for technology-driven yield gathered momentum. Seizing on Yuri Milner’s coattails, banks, private-equity firms, and hedge funds crowded into the game. By 2020, Tiger Global was managing an astonishing $40 billion worth of assets, and Lone Pine and Coatue, two other offshoots of Julian Robertson’s Tiger Management, vied to compete with it.

The Simple Living Guide
by Janet Luhrs
Published 1 Apr 2014

The no-annual-fee cards sometimes carry higher interest rates, but this shouldn’t matter since you will not charge anything over what you actually can pay off at the end of the month. (Remember, this card is for after your debts are paid. Before they are paid, your credit card should be one with a low interest rate. The savings from that low rate will offset any annual fee if your debts are significant. Do your math to make sure that the annual fee is offset by the lower interest rate.) Do not use the card except for honest-to-goodness emergencies or instances where you need it, such as to rent a car.

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Vicki Robin is coauthor with Joe Dominguez of Your Money or Your Life (New York: Viking Penguin, 1992). Where to Save and Invest There are two general types of investments: short term and long term. Short-term investments are those that you can dip into fairly easily, such as passbook savings accounts. These pay low interest rates. Long-term investments pay higher yields, and you need to leave them alone for long periods of time. Before doing any serious investing, first you should put aside money for an emergency reserve account. Use your pocket change, $5 here, $10 there, and slowly build up a three- to six-month reserve of basic living expenses.

Birth of the Euro
by Otmar Issing
Published 20 Oct 2008

To achieve this, the Maastricht Treaty gives the European Central Bank clear priority for the goal of price stability and endows its decision-makers with independence so that they can take the necessary decisions to achieve that end. A currency lives by the trust of the population in monetary stability! Trust in stability and in the credibility of policy translates into low interest rates, greater investment and higher employment. That is the contribution that monetary policy makes. Gaining this trust is hard, and in the run-up to monetary union we can see that the euro has already gained a remarkable degree of confidence from the financial markets looking forward. We need to build on this capital.

Meltdown: How Greed and Corruption Shattered Our Financial System and How We Can Recover
by Katrina Vanden Heuvel and William Greider
Published 9 Jan 2009

These products were supposed to be tools to firm up poor credit and bridge low-income borrowers to prime loans. For years, they remained a tiny, if troubling, share of overall lending, accounting for just 5 percent of all mortgage originations in 1994. The problems started when the housing market took off at the turn of the millennium, driven by historically low interest rates, skyrocketing sales prices and the resulting global rush to invest in the U.S. mortgage market. Suddenly, subprime loans turned into trapdoors—increasingly exotic products through which lenders, desperate to feed the mortgage investment beast, lured people into needless debt. By 2004 subprime loans were 20 percent of home loans—and half of all home-purchase and refinance borrowers had one in 2006.

A World in Disarray: American Foreign Policy and the Crisis of the Old Order
by Richard Haass
Published 10 Jan 2017

Depending upon spending and revenue assumptions, it is a question of when and not if the amount of debt comes to exceed or far exceed GDP. This could well happen by 2030. The cost of servicing the debt will begin to rise rapidly, consuming an ever-larger percentage of GDP and federal spending. Some contend that this analysis of U.S. debt is too negative.7 They tend to predict higher revenues, continued low interest rates, and larger than expected cost savings in the medical domain. Such a future is of course possible, but so too is a worse than expected future based on slower growth, higher rates, higher than expected medical costs owing to a larger aging population, and much higher than imagined costs associated with adapting to the many effects of climate change.

The Complacent Class: The Self-Defeating Quest for the American Dream
by Tyler Cowen
Published 27 Feb 2017

Circa 2014, the index stood at about 20 percent, and it is slated to fall well below 10 percent by 2022, given projected demographics. It is hard to see how the United States might escape this dynamic. If anything, the problem will become worse. For instance, the U.S. federal budget would be even less free for discretionary allocation if current interest rates were not so low, as the low interest rates mean U.S. government interest payments on its debt are very low. Under plausible projections from the Office of Management and Budget, which consider the possibility of higher interest rates in the future, interest payments on the debt would go from their current 6 percent of the federal budget up to about 13.5 percent of the budget.

A Brief History of Neoliberalism
by David Harvey
Published 2 Jan 1995

During the Clinton presidency it ended up choosing the former over the latter and therefore fell directly into the neoliberal fold of policy prescription and implementation (as, for example, in the reform of welfare).20 But, as in the case of Felix Rohatyn, it is doubtful if this was Clinton’s agenda from the very beginning. Faced with the need to overcome a huge deficit and spark economic growth, his only feasible economic path was deficit reduction to achieve low interest rates. That meant either substantially higher taxation (which amounted to electoral suicide) or cutbacks in the budget. Going for the latter meant, as Yergin and Stanislaw put it, ‘betraying their traditional constituencies in order to pamper the rich’ or, as Joseph Stiglitz, once chair of Clinton’s Council of Economic Advisors, later confessed, ‘we did manage to tighten the belts of the poor as we loosened those on the rich’.21 Social policy was in effect put in the care of the Wall Street bondholders (much as had happened in New York City earlier), with predictable consequences.

Average Is Over: Powering America Beyond the Age of the Great Stagnation
by Tyler Cowen
Published 11 Sep 2013

The problem could become even larger if people live longer than expected under current estimates or if financial crises, wars, environmental problems, or other major disasters keep down the rate of economic growth. There is another potential danger. The United States, circa 2012, has been enjoying especially low interest rates for government borrowing, and a spike in interest rates could make the fiscal problem much worse. There is plenty of downside risk in our current fiscal situation, even if it is likely some number of years out. Keep in mind that, as I write, the US government is borrowing about forty cents out of every dollar it spends, an unsustainable state of affairs.

The Glass Cage: Automation and Us
by Nicholas Carr
Published 28 Sep 2014

Growth and employment are “diverging in advanced countries,” says economist Michael Spence, a Nobel laureate, and technology is the main reason why: “The replacement of routine manual jobs by machines and robots is a powerful, continuing, and perhaps accelerating trend in manufacturing and logistics, while networks of computers are replacing routine white-collar jobs in information processing.”28 Some of the heavy spending on robots and other automation technologies in recent years may reflect temporary economic conditions, particularly the ongoing efforts by politicians and central banks to stimulate growth. Low interest rates and aggressive government tax incentives for capital investment have likely encouraged companies to buy labor-saving equipment and software that they might not otherwise have purchased.29 But deeper and more prolonged trends also seem to be at work. Alan Krueger, the Princeton economist who chaired Barack Obama’s Council of Economic Advisers from 2011 to 2013, points out that even before the recession “the U.S. economy was not creating enough jobs, particularly not enough middle-class jobs, and we were losing manufacturing jobs at an alarming rate.”30 Since then, the picture has only darkened.

The New Sell and Sell Short: How to Take Profits, Cut Losses, and Benefit From Price Declines
by Alexander Elder
Published 1 Jan 2008

The emerging markets—also wild swings, as they responded to the threat of total deflation. On the upside, what was remarkable was how much support the U.S. Fed gave the market. Despite the animosity and even hatred that much of the media and general public had for Wall Street and the financial markets, the Fed was unwavering in its support—low interest rates, buy-backs, etc. The recovery bounce was much stronger than anyone (including me) anticipated. Some, including me, would describe it as unapologetic manipulation. I think the Fed refers to it as “saving the international financial system,” which it appears they did. This chart (Figure 9.16) offers a view of the vertiginous decline in the financial sector.

How to Speak Money: What the Money People Say--And What It Really Means
by John Lanchester
Published 5 Oct 2014

This might not sound like a big deal, but central banks, perhaps because they’re acutely aware how many things aren’t under their control, highly prize the few things that are—so the act of binding themselves in advance to a particular course of action upsets them. However, the unprecedented recent years of crazy-low interest rates and kooky new policies such as QE have made the markets very anxious about what happens when there’s a change in direction; this in turn has led to a demand for something resembling forward guidance. In effect, the markets are asking for a bit of notice before the banks turn off the money hose.

Rethinking Money: How New Currencies Turn Scarcity Into Prosperity
by Bernard Lietaer and Jacqui Dunne
Published 4 Feb 2013

Over time, the system grew to include up to a quarter of all the businesses in Switzerland. Although the value of the WIR is pegged to the Swiss franc (1 WIR = 1 Swiss franc), all debts in WIR have to be settled in WIR. There is no convertibility into national currency. Participants can also borrow— that is, secure lines of credit from the cooperative—in WIR currency at low interest rates ranging from 1 to 1.5 percent. All such loans need to be backed by inventory or other assets. The interesting feature of the WIR is that the currency issuance automatically tends to be countercyclical. During a recession, when regular banks reduce lending, businesses use more WIR to meet their needs.

The Economics of Belonging: A Radical Plan to Win Back the Left Behind and Achieve Prosperity for All
by Martin Sandbu
Published 15 Jun 2020

Olivier Blanchard and Daniel Leigh, “Growth Forecast Errors and Fiscal Multipliers” (IMF Working Paper 13/1, 3 January 2013), https://www.imf.org/en/Publications/WP/Issues/2016/12/31/Growth-Forecast-Errors-and-Fiscal-Multipliers-40200. 16. Christopher House, Christian Proebsting, and Linda Tesar, “Austerity in the Aftermath of the Great Recession,” VoxEU, 11 April 2017, https://voxeu.org/article/austerity-aftermath-great-recession. 17. Olivier Blanchard, “Public Debt and Low Interest Rates” (presidential address, American Economic Association, January 2019), https://www.aeaweb.org/aea/2019conference/program/pdf/14020_paper_etZgfbDr.pdf. Chapter 9. A Smarter Financial System 1. For a view of why this was, see Martin Sandbu, “Talking ’bout a Revolution,” Financial Times, 19 April 2013, https://www.ft.com/content/91a3782a-a80f-11e2-b031-00144feabdc0. 2.

The Autonomous Revolution: Reclaiming the Future We’ve Sold to Machines
by William Davidow and Michael Malone
Published 18 Feb 2020

One reason they did this was to spur capital investment to raise productivity, which was presumed to be monetizable. But suppose the rules don’t work that way anymore. Suppose that a lot of that capital investment is used to finance the growth of non-monetizable productivity that actually slows economic growth. Non-monetizable productivity may be one of the reasons that the low interest rates of the past decade have had a smaller than anticipated effect on the overall economy. Societal phase change might be rendering the old rules for economic policy obsolete. PROGRESS WITHOUT PROFIT The challenges that non-monetizable productivity poses for the middle class in the world’s developed countries will soon spread to emerging economies as well.

Nine Crises: Fifty Years of Covering the British Economy From Devaluation to Brexit
by William Keegan
Published 24 Jan 2019

Balls had delivered a powerful critique of Osborne’s policy in his Bloomberg speech of August 2010 when, bizarrely, in view of his economic qualifications, he had not yet been appointed shadow Chancellor. Insofar as there was a macroeconomic justification for the austerity policy, it was that the fiscal squeeze would be counterbalanced by monetary policy – low interest rates, quantitative easing (a silly euphemism for expanding the money supply). But the confidence was not there, and the banks were not lending. Indeed, the official figures for credit growth were going backwards. As Wolf pointed out in the 2013 Wincott Lecture, ‘Monetary policy clearly and decisively failed to promote recovery.

China's Great Wall of Debt: Shadow Banks, Ghost Cities, Massive Loans, and the End of the Chinese Miracle
by Dinny McMahon
Published 13 Mar 2018

Money raised from WMPs has been invested in tea, diamonds, wine, shares traded on stock exchanges, commodities, foreign currency—anything banks think will deliver a return. But for the most part, WMPs are a blend of three things: corporate bonds, loans to banks (which banks then use to make their own loans), and corporate loans. The combination mixes risk and return. Loans to banks are extremely safe but have low interest rates; loans to companies are more risky but pay more. Put them together and you get a pretty safe investment with a decent return. Most of the fund-management industry—whether trusts, insurance companies, securities firms, money-market funds, or P2P portals—deploy their resources in similar ways.

A Little History of Economics
by Niall Kishtainy
Published 15 Jan 2017

If they were so low, why did the depression go on for so long, they wondered? They concluded that money and interest rates don’t affect overall demand in the economy that much. Keynesians came to believe that what really spurred investment was businesspeople’s feelings of optimism (what Keynes had called their ‘animal spirits’), not a low interest rate. The conventional economic thinking, which Keynesian economics replaced, said that attempts by the government to keep the economy moving, whether through fiscal or monetary policy, would be useless. The economy would find its own way back from a recession to ‘full employment’, the situation in which all the workers and factories were employed.

Smarter Investing
by Tim Hale
Published 2 Sep 2014

The UK market fell during the period November 2007 to February 2009 by over 40%, and the economy was deeply in recession. By the time of this third edition, we have suffered through the Eurozone crisis (which may well raise its ugly head again), double dip recession, quantitative easing (printing money), record low interest rates and the signs of a few shoots of recovery. Equity markets in 2013 have roared ahead, pricing in better future earnings. What does all this tell us? Not a lot really, other than we have virtually no idea what lies ahead of us in the next few years, and no one else does either. You’ll find lots of opinions but, inevitably, no real certainty.

Finding Alphas: A Quantitative Approach to Building Trading Strategies
by Igor Tulchinsky
Published 30 Sep 2019

Whereas Russell 2000 candidates include rising microcaps as well as declining large caps, the S&P 500 index already is at the top of the market capitalization range and can only add either new large- or megacap IPOs or rising small- and midcap names that have outperformed recently, thus exposing the index to long momentum factor risk. CONCLUSION The rise of index products has created not only a new benefit for the average investor in the form of inexpensive portfolio management, but also new inefficiencies and arbitrage opportunities for many active managers. An extended period of low interest rates has allowed the proliferation of cheaply financed strategies, while the rise of passive investing has created market microstructure distortions, in part as a result of rising ownership concentration. Fortunately, new index constructions (and associated funds) also have proliferated in recent years, allowing investors to slice and dice passive portfolios in myriad ways that avoid several index drawbacks, including market impact and valuation distortions.

Less Is More: How Degrowth Will Save the World
by Jason Hickel
Published 12 Aug 2020

House prices are astronomically high, to the point where a normal two-bedroom flat may cost £2,000 a month to rent, or £600,000 to buy. These prices bear no relationship to the cost of the land, materials and labour involved in building a house. They’re a consequence of policy decisions, such as the privatisation of public housing since 1980, and the low interest rates and quantitative easing that have pumped up asset prices since 2008. Meanwhile, wages in London have not kept pace – not even close. To cover the gap, ordinary Londoners have had to either work longer hours or take out loans (which represent a claim on their future labour), just to access a basic social good they used to be able to get for a fraction of the cost.

The Enablers: How the West Supports Kleptocrats and Corruption - Endangering Our Democracy
by Frank Vogl
Published 14 Jul 2021

In the foreword to the 2020 debt tables, World Bank president David Malpass noted: “The landscape of development finance is marked by the growing debt vulnerabilities of low- and middle-income countries. The post-2008 financial crisis era is characterized by a rapid rise in lending to them, fueled by factors including buoyant commodity prices, quantitative easing, and low interest rates in high-income countries. With increased access to international capital markets, many low- and middle-income countries shifted away from traditional sources of financing and experienced a sharp rise in external debt, raising new concerns about sustainability.” Also see IMF, “External Sector Report 2020: Global Imbalances and the COVID-19 Crisis,” published in August 2020. 2.

Road to Nowhere: What Silicon Valley Gets Wrong About the Future of Transportation
by Paris Marx
Published 4 Jul 2022

Meanwhile, financing was abundant, not just because decades of inequality had caused more wealth to flow to those at the top, but also due to policy choices taken to combat the recession. The trillions of dollars printed by the Federal Reserve and other central banks through quantitative easing and the low interest rates that persisted throughout the 2010s created an environment that boosted the stock market even as most workers’ prospects continued to stagnate, which benefited venture capitalists and made it much easier for new companies in the tech sector to access capital. Such a dynamic granted investors, influential founders, and executives at the dominant companies in the industry a significant degree of power in shaping what the post-recession economy looked like—and who it served.

Heads I Win, Tails I Win
by Spencer Jakab
Published 21 Jun 2016

The ripple effects spread from Moscow to London, Manhattan, and, fairly quickly, to LTCM’s headquarters in Greenwich, Connecticut. While LTCM hadn’t bet much on the risky Russian market itself, many competitors that mimicked its strategies, such as borrowing money in Japanese yen to take advantage of that country’s very low interest rates and then buying assets in other currencies, had. When their losses mounted, they were forced to sell their safe holdings and unwind those financing arrangements in a hurry. Under that selling pressure, surefire bets started exhibiting irrational prices as too many traders sprinted for the exits at once.

Jared Bibler
by Iceland's Secret The Untold Story of the World's Biggest Con-Harriman House (2021)

The historic yield on the Icelandic currency is 10 to 20%. And financial markets try to capitalize on things like this: there is a thing called the carry trade where one can borrow cheap and invest rich. So you can borrow Japanese yen, or US dollars, or Swiss francs, and then buy Icelandic government bonds. You could borrow at a low interest rate in those days, maybe a couple of per cent, and buy Icelandic government bonds that were paying much more: maybe 10%. As an investor this is the equivalent of printing money. There were even savings products offered by Japanese banks to Japanese housewives where they could put their low-yielding yen into a domestic savings account and buy Icelandic krónur that way.

Uncomfortably Off: Why the Top 10% of Earners Should Care About Inequality
by Marcos González Hernando and Gerry Mitchell
Published 23 May 2023

The stamp duty holiday introduced in July 2020 to kick-start the housing market, together with increased demand for larger properties due to homeworking, has contributed to the fastest rise in house prices since 2005.44 The average age for owning your first home is now 33 and a third of those first-time owners will have had help from ‘the bank of mum and dad’, partnering or government support.45 After more than a decade of low interest rates and rising house prices following the 2008 financial crisis, the 2020s are now seeing interest rates and house prices increase – and sharply so. This could have serious political repercussions if highly indebted homeowners – having been sold the idea of home ownership as a rite of passage and ploughed hard-earned savings into their deposits – were to see mortgages become increasingly unaffordable or unavailable, as indeed we saw in the market response to Truss’s 2022 mini-budget.

House of Cards: A Tale of Hubris and Wretched Excess on Wall Street
by William D. Cohan
Published 15 Nov 2009

Naturally, the success of the securitization of the CRA loans—the first deal and many subsequent ones were several times oversubscribed— led to an explosion of such deals. The buyers of the loans, according to Dale Westhoff in a May 1998 article in Mortgage Banking, “were money managers and insurance companies buying the loans strictly because of their investment appeal,” offering yields in excess of 7.5 percent, which in a low-interest-rate environment looked very attractive. Sewell saw the direct linkage from HUD's political pressure to the fissure in the credit markets a decade later. “So that's how we get from there to here,” he wrote, “from crude attempts at social engineering during the early, heady days of the first Clinton administration to the turmoil on Wall Street.”

…

In a separate interview, Roberts said that the 1995 changes to the CRA revised “how it was enforced and it put a wad of power in the hands of community organizations to damage banks that they felt weren't doing enough for poor people. These community organizations became the dispensers of money for zero-down mortgages for poor people, again a lovely thing, but it didn't turn out so well.” When combined with Greenspan's low-interest-rate policies and the Taxpayer Relief Act of 1997, which increased the capital gains exclusion on the sale of a home to $500,000, the HUD policies dramatically increased the demand for housing and the price of housing, Roberts wrote. “Between 1997 and 2005, the average price of a house in the U.S. more than doubled,” he explained.

The Bogleheads' Guide to Investing
by Taylor Larimore , Michael Leboeuf and Mel Lindauer
Published 1 Jan 2006

We recommend doing that simply because it's the highest, risk-free, tax-free return on your money that you can possibly earn. Credit card balances are the most insidious of all. You might think you are outsmarting the credit card companies when you transfer existing balances from one card to another promising you a low interest rate for the next several months. Don't fall for it. Pay them off. By maintaining a revolving balance, you are making the credit card companies richer and you poorer. For example, the typical household today carries an average credit card balance of approximately $8,000. Let's assume this household makes the minimum monthly payment of $160 and is being charged an interest rate of 18.9 percent.

Guide to business modelling
by John Tennent , Graham Friend and Economist Group
Published 15 Dec 2005

Repayment ranks before all equity Long-term loan finance with a cash flow profile to match the cash profile of a project Preference shares Sometimes given a repayment date otherwise like ordinary shares Options and warrants These are the right to buy ordinary shares on a future date at a predetermined price Debentures Fixed with a predetermined repayment date Bonds Fixed with a predetermined repayment date 149 Types of funding Duration Cost Risk of repayment to investor Purpose Convertibles Permanent capital first as debt then as equity. There can be a repayment option if the share price at conversion is not attractive A low interest rate return for a set period, followed by conversion into ordinary shares providing the share price has achieved a specified level While the convertible is in the form of debt it usually ranks after other debt. Once converted to ordinary shares, the risk is as per other shares Long-term finance with a low initial cost Loans Often fixed with a predetermined repayment date and sometimes interim repayments of capital A percentage return that can be fixed or variable.

Throwing Rocks at the Google Bus: How Growth Became the Enemy of Prosperity
by Douglas Rushkoff
Published 1 Mar 2016

K., 229 Circuit City, 90 Citizens United case, 72 Claritas, 32 click workers, 50 climate change, 135, 227–28, 237 coin of the realm, 128–29 collaboration as corporate strategy, 106–7 colonialism, 71–72 commons, 215–23 co-owned networks and, 220–23 history of, 215–16 projects inspired by, 217–18 successful, elements of, 216–17 tragedy of, 215–16 worker-owned collectives and, 219–20 competencies, of corporations, 79–80 Connect+Develop, 107 Consumer Electronics Show, 19 Consumer Reports,33 contracting with small and medium-sized enterprises, 112 cooperative currencies, 160–65 favor banks, 161 LETS (Local Exchange Trading System), 163–65 time dollar systems, 161–63 co-owned networks, 220–23 corporations, 68–82 acquisition of startups, growth through, 78 amplifying effect of, 70, 73 Big Shift and, 76 cash holdings of, 76, 77–78 competency of, 79–80 cost reduction, growth through, 79–80 decentralized autonomous corporations (DACs), 149–50 Deloitte’s study of return on assets (ROA) of, 76–77 distributive alternative to platform monopolies, 93–97 evaluation of, 69–74 extractive nature of, 71–72, 73, 74, 75, 80–82 growth targets, meeting, 68–69 income inequality and, 81–82 limits to corporate model, 75–76, 80–82 managerial and financial methods to deliver growth by, 77–79 monopolies (See monopolies) obsolescence created by, 70–71, 73 offshoring and, 78–79 personhood of, 72, 73–74, 90, 91 recoding of, 93–97, 125–26 repatriation and, 80 retrieval of values of empire and, 71–72, 73 as steady-state enterprises, 97–123 Costco, 74 cost reduction, and corporate growth, 79–80 Couchsurfing.com, 46 crashes of 1929, 99 of 2007, 133–34 biotech crash, of 1987, 6 flash crash, 180 Creative Commons, 215 creative destruction, 83–87 credit, 132–33 credit-card companies, 143–44 crowdfunding, 38–39, 198–201 crowdsharing apps, 45–49 crowdsourcing platforms, 49–50 Crusades, 16 Cumbrian Pounds, 156 Curitiba, Brazil modified LETS program, 164–65 Daly, Herman, 184 data big, 39–44 getting paid for our own, 44–45 “likes” economy and, 32, 34–36 in pre-digital era, 40 Datalogix, 32 da Vinci, Leonardo, 236 debt, 152–54 decentralized autonomous corporations (DACs), 149–50 deflation, 169 Dell, 115–16 Dell, Michael, 115–16 Deloitte Center for the Edge, 76–77 destructive destruction, 100 Detroit Dollars, 156 digital distributism, 224–39 artisanal era mechanisms and values retrieved by, 233–34 developing distributive businesses, 237–38 digital industrialism compared, 226 digital technology and, 230–31 historical ideals of distributism, 228–30 leftism, distinguished, 231 Pope Francis’s encyclical espousing distributed approach to land, labor and capital, 227–28 Renaissance era values, rebirth of, 235–37 subsidiarity and, 231–32 sustainable prosperity as goal of, 226–27 digital economy, 7–11 big data and, 39–44 destabilizing form of digitally accelerated capitalism, creation of, 9–10 digital marketplace, development of, 24–30 digital transaction networks and, 140–51 disproportionate relationship between capital and value in, 9 distributism and, 224–39 externalizing cost of replacing employees in, 14–15 industrialism and, 13–16, 23–24, 44, 53–54, 93, 101–2, 201, 214, 226 industrial society, distinguished, 11 “likes” and similar metrics, economy of, 30–39 platform monopolies and, 82–93, 101 digital industrialism, 13–16, 23–24, 101–2, 201 digital distributism compared, 226 diminishing returns of, 93 externalizing costs and, 14–15 growth agenda and, 14–15, 23–24 human data as commodity under, 44 income disparity and, 53–54 labor and land pushed to unbound extremes by, 214 “likes” economy and, 33 reducing bottom line as means of creating illusion of growth and, 14 digital marketplace, 24–30 early stages of e-commerce, 25–26 highly centralized sales platforms of, 29 initial treatment of Internet as commons, 25 “long tail” of widespread digital access and, 26 positive reinforcement feedback loop and, 28 power-law dynamics and, 26–29 removal of humans from selection process in, 28 digital transaction networks, 140–51 Bitcoin, 143–49, 150–51, 152 blockchains and, 144–51 central authorities, dependence on, 142 decentralized autonomous corporations (DACs) and, 149–50 PayPal, 140–41 theft and, 142 direct public offerings (DPOs), 205–6 discount brokerages, 176–78 diversification, 208, 211 dividends, 113–14, 208–10 dividend traps, 113 Dorsey, Jack, 191–92 Draw Something, 192, 193 Drexler, Mickey, 116 dual transformation, 108–9 dumbwaiter effect, 19 Dutch East India Company, 71, 89, 131 eBay, 16, 26, 29, 45, 140 education industry, 95–97 Eisenhower administration, 52–53, 63, 75 Elberse, Anita, 28 employee-owned companies, 116–18 Enron, 133, 171n Eroski, 220 eSignal, 178 EthicalBay, 221 E*Trade, 176, 177 Etsy, 16, 26, 30 expense reduction, and corporate growth, 78–79 Facebook, 4, 31, 83, 93, 96, 201 data gathering and sales by, 41, 44 innovation by acquisition of startups, 78 IPO of, 192–93, 195 psychological experiments conducted on users by, 32–33 factors of production, 212–14 Fairmondo, 221 Family Assistance Plan, 63 family businesses, 103–4, 231–32 FarmVille, 192 favor banks, 161 Febreze Set & Refresh, 108 Federal Reserve, 137–38 feedback loop, and positive reinforcement, 28 Ferriss, Tim, 201 feudalism, 17 financial services industry, 131–33, 171–73, 175 Fisher, Irving, 158 flash crash, 180 flexible purpose corporations, 119–20 flow, investing in, 208–10 Forbes,88, 173, 174 40-hour workweek, reduction of, 58–60 401(k) plans, 171–74 Francis, Pope, 227, 228, 234 Free, Libre, Open Knowledge (FLOK) program, 217–18 Free (Anderson), 33 free money theory, local currencies based on, 156–59 barter exchanges, 159 during Great Depression, 158–59 self-help cooperatives, 159 stamp scrip, 158–59 tax anticipation scrip, 159 Wörgls, 157–58 frenzy, 98–99 Fried, Jason, 59 Friedman, Milton, 64 Friendster, 31 Frito-Lay, 80 front running, 180–81 Fulfillment by Amazon, 89 Fureai Kippu (Caring Relationship Tickets), 162 Future of Work initiative, 56n Gallo, Riso, 103–4 Gap, 116 Gates, Bill, 186 General Electric, 132 General Public License (GPL) for software, 216 Gesell, Silvio, 157 GI Bill, 99 Gimein, Mark, 147 Gini coefficient of income inequality, 81–82, 92 global warming, 135, 227–28, 237 GM, 80 Goldman Sachs, 133, 195 gold standard, 139 Google, 8, 48, 78, 83, 90–91, 93, 141, 218 acquisitions by, 191 business model of, 37 data sales by, 37, 44 innovation by acquisition of startups, 78 IPO of, 194–95 protests against, 1–3, 5, 98–99 grain receipts, 128 great decoupling, 53 Great Depression, 137, 158–59 Great Exhibition, 1851, 19 Greenspan, Alan, 132–33 growth, 1–11 bazaars, and economic expansion in late Middle Ages, 16–18 central currency and, 126, 129–31, 133–36 digital industrialism, growth agenda of, 14–15, 23–24 highly centralized e-commerce platforms and, 29 startups, hypergrowth expected of, 187–91 as trap (See growth trap) growth trap, 4–5, 68–123 central currency as core mechanism of, 133–34 corporations as program and, 68–82 platform monopolies and, 82–93, 101 recoding corporate model and, 93–97 steady-state enterprises and, 98–123 guaranteed minimum income programs, 62–65 guaranteed minimum wage public jobs, 65–66 guilds, 17 Hagel, John, 76–77 Hardin, Garrett, 215–16 Harvard Business Review,108–9 Heiferman, Scott, 196–97 Henry VIII, King, 215, 229 Hewlett-Packard UK, 112 high-frequency trading (HFT), 179–80 Hilton, 115 Hobby Lobby case, 72 Hoffman, Reid, 61 Holland, Addie Rose, 205–6 holograms, 235 Homeport New Orleans, 121 housing industry, 135 Huffington, Arianna, 34, 35, 201 Huffington Post, 34, 201 human role in economy, 13–67 aristocracy’s efforts to control peasant economy, 17–18 bazaars and, 16–18 big data and, 39–44 chartered monopolies and, 18 decreasing employment and, 30–39 digital marketplace, impact of, 24–30 industrialism and, 13–16, 18–24, 44 “likes” economy and, 30–39 reevaluation of employment and adopting policies to decrease it and, 54–67 sharing economy and, 44–54 Hurwitz, Charles, 117 IBM, 90–91, 112 inclusive capitalism, 111–12 income disparity corporate model and, 81–82 digital technology as accelerating, 53–54 Gini coefficient of, 81–82, 92 growth trap and, 4 power-law dynamics and, 27–28, 30 public service options for reducing, 65–66 IndieGogo, 30, 199 individual retirement accounts (IRAs), 171 industrial farming, 134–35 industrialism, 18–24 branding and, 20 digital, 13–16, 23–24, 44, 53–54, 93, 101–2, 201, 214, 226 disempowerment of workers and, 18–19 human connection between producer and consumer, loss of, 19–20 isolation of human consumers from one another and, 20–21 mass marketing and, 19–20 mass media and, 20–21 purpose of, 18–19, 22 value system of, 18–19 inflation, 169 Instagram, 31 Intercontinental Exchange, 182 interest, 129–31 investors/investing, 70, 72, 168–223 algorithmic trading and, 179–84 bounded, 210–15 commons model for running businesses and, 215–23 crowdfunding and, 198–201 derivative finance, volume of, 182 digital technology and, 169–70, 175–84 direct public offerings (DPOs) and, 205–6 discount brokerages and, 176–78 diversification and, 208, 211 dividends and, 208–10 flow, investing in, 208–10 high-frequency trading (HFT) and, 179–80 in low-interest rate environment, 169–70 microfinancing platforms and, 202–4 platform cooperatives and, 220–23 poor performance of do-it-yourself traders and, 177–78 retirement savings and, 170–75 startups and, 184–205 ventureless capital and, 196–205 irruption, 98 i-traffic, 196 iTunes, 27, 29, 34, 89 J.

The Willpower Instinct: How Self-Control Works, Why It Matters, and What You Can Doto Get More of It
by Kelly McGonigal
Published 1 Dec 2011

And when the rewards of our actions are far off in the future, we can try to squeeze a little extra dopamine out of neurons by fantasizing about the eventual payoff (not unlike those lotto commercials). Some economists have even proposed dopaminizing “boring” things like saving for retirement and filing your taxes on time. For example, imagine a savings account where your money is protected, and you can take it out whenever you want—but instead of getting a guaranteed low interest rate, you are entered in lotteries for large cash prizes. People who buy lottery tickets but don’t have a dollar in the bank might be much more enthusiastic about saving their money if every deposit they made gave them another chance to win $100,000. Or imagine if by filing your taxes on time and honestly reporting all income and deductions, you had a shot at winning back the entire year’s taxes.

World Economy Since the Wars: A Personal View
by John Kenneth Galbraith
Published 14 May 1994

Monetary policy was graced by effects not only mysterious but magical. This has not invariably been so. In the nineteen-thirties, the prestige of monetary policy was, for a time, very low. The Federal Reserve System, deeply uncertain in its purpose, had failed to arrest the speculative boom of the late twenties; low interest rates and easy money were equally ineffective in dealing with the great depression. Bankers, in these years, as a result of error, unhappy accident and the enthusiastic denigration of left-wing critics, had suffered a severe decline in popular esteem. Down with them went the faith in monetary policy.

22 Days in May: The birth of the Lib Dem - Conservative coalition
by Laws, David
Published 22 Nov 2010

During the initial meeting, the Conservative team explained our belief that the achievement of a further spending reduction of £6 billion in 2010 would be regarded by the financial markets as a test of whether a Conservative/Liberal Democrat Government was capable of carrying through the necessary deficit reduction plan. This view is shared by the Treasury and the Bank of England. The Conservative negotiating team also takes the view that reassurance of the financial markets (and hence maintenance of a low interest rate economy) depends on: a. an explicit agreement between the two parties that the bulk of the structural deficit will be eliminated over the course of the next five years; and b. a further explicit agreement between the parties that the necessary fiscal tightening will be achieved mainly through spending reduction rather than tax increase.

Who Are We—And Should It Matter in the 21st Century?
by Gary Younge
Published 27 Jun 2011

A year later, it turned out that every person in the picture had left to work abroad. But then things started to change. As a well-educated, Englishspeaking country within the European Union, with low corporate taxes, Ireland became a magnet for international capital. Thanks to the Eurozone’s low interest rates, property prices rose stratospherically. Wages soon followed. At times during the early part of this century, the property section of the Irish Times was actually bigger than the news section. Between 1987 and 2007, the number of passengers using Dublin Airport increased almost sevenfold; during the same period, the number using British airports did not quite double.

Grave New World: The End of Globalization, the Return of History
by Stephen D. King
Published 22 May 2017

The lack of a foreign exchange ‘safety valve’ is particularly unfortunate in a world of high debt and ultra-low inflation – precisely the conditions facing many Southern European countries in the years following the 2008 financial crisis. Ultra-low inflation tends to be associated with ultra-low interest rates. If, under these circumstances, a country within a single currency area is still uncompetitive, it will have no choice but to push prices and wages lower. The outstanding nominal amount of debt, however, will not change. Nor, unhelpfully, will debt service costs, because, with interest rates at or close to zero, the cost of borrowing cannot fall much further.30 As a result, the real level of debt actually goes up.

The Impulse Society: America in the Age of Instant Gratification
by Paul Roberts
Published 1 Sep 2014

A person or company with the right connections or technology or timing could reap an enormous return in a fraction of the time and for a fraction of the effort necessary in the real world. You saw the miracle on Wall Street, where raiders flipped entire companies for imperial sums. You saw it in the consumer culture, with serial refinancers and the part-time speculators. You saw it in the policy world, with low interest rates and the Greenspanian hope that a real estate bubble would restore postwar prosperity. By the early 2000s, the entire society had embraced the idea that instant returns were not only possible, but, by definition, preferable to returns that required effort or patience or hard choices. In this, financialization is the very essence of the Impulse Society, which is all about cutting to the largest return as quickly as possible, while avoiding any inefficiency (work, social obligations, norms) that might slow things down.

I Will Teach You To Be Rich
by Sethi, Ramit
Published 22 Mar 2009

Pay as much as possible toward your student loans and then, once they are paid off, start investing. Do a hybrid 50/50 approach, where you pay half toward your student loans (always paying at least the minimum) and send the other half into your investment accounts. Technically, your decision comes down to interest rates. If your student loan had a super-low interest rate of, say, 2 percent, you’d want to pursue option one: Pay your student loans off as slowly as possible because you can make an average of 8 percent by investing in low-cost funds. However, notice I said technically. That’s because money management isn’t always rational. Some people aren’t comfortable having any debt at all and want to get rid of it as quickly as possible.

The Post-American World: Release 2.0
by Fareed Zakaria
Published 1 Jan 2008

As a consequence, Western Europe rebuilt itself from the ashes of World War II, and Japan, the first non-Western nation to successfully industrialize, grew over 9 percent a year for twenty-three years. In both periods, these “positive supply shocks”—an economist’s term for a long-run spike in production—caused long, sustained booms, with falling prices, low interest rates, and rising productivity in the emerging markets of the day (Germany, the United States, Japan). At the turn of the twentieth century, despite robust growth in demand, wheat prices declined by 20 to 35 percent in Europe, thanks to American granaries.3 (Similarly, the price of manufactured goods has fallen today because of lower costs in Asia, even as demand for them soars.)

The Two-Income Trap: Why Middle-Class Parents Are Going Broke
by Elizabeth Warren and Amelia Warren Tyagi
Published 17 Aug 2004

The lender wins every possible way—high profits if the family manages to make all its payments, and higher profits if the family does not. The results are in. After two decades of mortgage deregulation, today’s homeowners are three and a half times more likely to lose their homes to foreclosure than their counterparts a generation ago.53 This defies the economists’ expectations. Today’s record low interest rates and rising home prices should have translated into a falling rate of home foreclosure, not a rising one. The only explanation is a lending industry run amok. The rise in “loan-to-own” lending, the disappearance of the down payment, and the explosion in high-interest, subprime refinances have taken their toll, as a growing number of families learn the painful consequences of getting trapped by a mortgage industry that has been allowed to make up its own rules.

Peers Inc: How People and Platforms Are Inventing the Collaborative Economy and Reinventing Capitalism
by Robin Chase
Published 14 May 2015

This transformation can be felt every time we answer a work email after hours, every time a person works from home, every time we sell something of real value on eBay, every time we rent out our private car or spare bedroom, every time we pick up some extra money from tutoring, cooking, consulting, driving, moving, or designing in our “free” time. The current capitalist economy is showing signs of weakness. Job creation is inadequate to meet demand: Youth around the world are having trouble acquiring first jobs. Recovery from economic downturns is slower. Very low interest rates limit the usefulness of one of government’s most relied-upon financial tools. The economic benefit of expansion that does happen is collected by the top 1 percent.18 The structure of the Peers Inc economy is increasing the pressure on the status quo as companies choose to let peers, rather than employees, do the work.

The Big Short: Inside the Doomsday Machine
by Michael Lewis
Published 1 Nov 2009

After the first day of trading, the tranche that took losses when the underlying bonds experienced losses of more than 15 percent of the pool--the double-A-rated tranche that Cornwall had bet against--closed at 49.25: It had lost more than half its value. There was now this huge disconnect: With one hand the Wall Street firms were selling low interest rate-bearing double-A-rated CDOs at par, or 100; with the other they were trading this index composed of those very same bonds for 49 cents on the dollar. In a flurry of e-mails, their salespeople at Morgan Stanley and Deutsche Bank tried to explain to Charlie that he should not deduce anything about the value of his bets against subprime CDOs from the prices on these new, publicly traded subprime CDOs.

925 Ideas to Help You Save Money, Get Out of Debt and Retire a Millionaire So You Can Leave Your Mark on the World
by Devin D. Thorpe
Published 25 Nov 2012

Buy a clunker for cash and drive that for a year or two. Check your W-4 (1.usa.gov/aAqpWr). When you bought a home, you may have put yourself in a position to exceed the standard deduction on your income tax return because the mortgage interest is deductible. (If you have a modest home and you financed at very low interest rates, you may not.) Talk to your tax advisor to determine if your mortgage interest would allow you to file a new W-4 with your employer, changing the number of “allowances” you claim. Increasing the number of allowances will decrease the taxes withheld from your paycheck and also reduce the refund you’ll get after you file your return.

The Great Depression: A Diary
by Benjamin Roth , James Ledbetter and Daniel B. Roth
Published 21 Jul 2009

JANUARY 6, 1941 Russel Weisman points out today that the Federal Reserve recommendations have come too late to prevent inflation. To adopt the plan means higher interest rates and “hard money” policy. The gov’t debt is now $45 billion and may rise to $80 billion in the next 5 years. The gov’t must continue its easy money policy at low interest rates so it can carry this huge debt. An increase in interest would break the gov’t bond market, stop further gov’t loans during the war crises, create fear and bring on dreaded inflation immediately. This means the easy-money policy must continue during the war crisis. Gov’t debt and bank reserves will increase.

Everything for Everyone: The Radical Tradition That Is Shaping the Next Economy
by Nathan Schneider
Published 10 Sep 2018

But gradually some of those farmers started forming electric cooperatives—utility companies owned and governed by their rate-payers—and strung up their own lines. Many bought cheap power from dams on federal land. Their ingenuity inspired a New Deal program, which Franklin Roosevelt initiated in 1935 and Congress funded the following year. The Department of Agriculture began dispensing low-interest-rate loans across the country. The farmers used them to organize co-ops, even as corporate competitors tried to undermine them, building stray “spite lines” through their prospective territories. But the cooperators prevailed. Together with the policy nudge from Washington, they brought electricity to most of the unserved areas within a decade.

The Fourth Age: Smart Robots, Conscious Computers, and the Future of Humanity
by Byron Reese
Published 23 Apr 2018

Put another way, if you are a business owner and have $1,000 to invest in your business, overall you will make more money investing in new technology than in spending the $1,000 on overtime for your employees. There are a number of policy initiatives that could offset this, including increasing worker productivity through training, reducing the direct taxation of labor, thereby lowering its price, and ending artificially low interest rates that encourage capital investments in technology over labor. One must ask if income inequality is actually the thing we should be concerned about, rather than, say, the incomes of the nonrich in absolute terms. The fact that technology allows some people to create billions in wealth more easily than before is not a bad thing in and of itself.

Straight Talk on Trade: Ideas for a Sane World Economy
by Dani Rodrik
Published 8 Oct 2017

Maximum Gain for Minimum Pain In a 2005 article, Ricardo Hausmann, Andres Velasco, and I sought to identify these binding constraints to growth in specific settings.8 For example, an economy in which the main constraint on growth was poor access to finance should exhibit different symptoms (high interest rates, strong responsiveness of domestic investment to foreign capital inflows, and so on) than an economy whose main problem was low profitability of private investment (low interest rates, ample liquidity in the banking system, and so on). When entrepreneurship is hampered primarily by market failures rather than government failures, the country may rank high on standard creditworthiness measures like transparency or institutional quality, but private investment will remain low.

Deep Value
by Tobias E. Carlisle
Published 19 Aug 2014

Had they fully understood the economic consequences of the transaction, they may have grieved for the quarter of the thriving military electronics business given up for a three-quarter share in a dying mechanical tabulating machine business. From 1968 onward, the veneer of growth, glamour, and high technology smeared over the conglomerates failed to conceal the increasingly bloated and sluggish businesses underneath. Until then, the booming stock market, low interest rates, and generally bountiful conditions for business had hidden many of the manager’s sins, and allowed them to “build [the] house from the roof down,” as one humorist described it.29 As the market turned 106 DEEP VALUE and interest rates climbed, the heavily cyclical businesses owned by the conglomerates returned to earth, putting the lie to the claim that diversification allowed them to ride out a downturn.

Trade Wars Are Class Wars: How Rising Inequality Distorts the Global Economy and Threatens International Peace
by Matthew C. Klein
Published 18 May 2020

Germany’s state-owned Landesbanken played a much larger role, especially after they lost access to government guarantees on their debt in 2005. Those subsidies had suppressed their funding costs and made it worthwhile for them to lend to Germany’s small and medium-sized family-owned industrial companies. Without state support, however, loans to safe borrowers at low interest rates were no longer worth the trouble. Despite being woefully unprepared to invest outside their home markets, the Landesbanken therefore decided to search for opportunities abroad. Between January 2005 and October 2008, fully 46 percent of the total growth in German bank lending to foreigners can be explained by the engorgement of the Landesbanken.43 Although German banks were major participants in America’s mortgage boom, that activity was funded mostly by dollars sourced from the United States rather than by German savers.

A History of the World in Seven Cheap Things: A Guide to Capitalism, Nature, and the Future of the Planet
by Raj Patel and Jason W. Moore
Published 16 Oct 2017

But by 1458, eight mines produced more than fifty thousand marks (12.5 tons) a year.28 European silver, and to a lesser extent African gold,29 provided the crucial material basis for the extraordinary growth of commodity exchange starting in the late fifteenth century.30 This first modern silver boom “either allowed merchants in distant centers to take up funds for commercial activity secure in the knowledge that their bills on these markets would be met when they fell due, or made abundant funding available to those proffering bills to finance their trade. In such circumstances money markets where commercial credit could be funded at relatively low interest rates drew trade towards them and effected a realignment of commercial activity in accordance with . . . central European mining activity.”31 The silver boom didn’t just make money—it also produced one of the first modern working classes, devastated landscapes, and provoked modernity’s first great worker and peasant revolt, the German Peasants’ War of 1525.

The Man Who Broke Capitalism: How Jack Welch Gutted the Heartland and Crushed the Soul of Corporate America—and How to Undo His Legacy
by David Gelles
Published 30 May 2022

“Every planning meeting Jack ran was always the same,” recalled Gary Wendt, the longtime head of GE Capital. “He’d tell everyone else to cut costs, and he’d tell me to grow the business.” But GE Capital was much more than just a profit engine for Welch. It was also a tool he used to secure low interest rates, cut GE’s taxes, and smooth out its quarterly earnings. For one thing, it allowed GE to take full advantage of its sacred AAA credit rating. That pristine financial bill of health allowed GE to borrow money at a lower cost than its competitors, giving the company an edge in an industry where fractions of a percentage point can make or break an investment.

Private Equity: A Memoir
by Carrie Sun
Published 13 Feb 2024

“You don’t want to hear about Boone, Billions, or Carbon? Which is it?” “All of it.” Silence. “Are you jealous of Boone?” “Stop saying his name!” “But he’s my boss.” Josh paused for half a beat. “He’s not even a good investor, you know. He got lucky.” “Please stop—” “He got lucky on timing and low interest rates and rode the tech wave.” “You’re wrong.” “Facebook? C’mon. Anyone with half a—” “Stop. Boone is a genius.” A waiter came over. I scanned the menu as Josh ordered his wine. “I’ll have this one,” I said, pointing to a rosé cocktail; then, with my index finger, I traced over the menu to the lower right-hand side.

The Age of Turbulence: Adventures in a New World (Hardback) - Common
by Alan Greenspan
Published 14 Jun 2007

That was why, David explains, electrifying America's factories took dozens of years. But eventually millions of acres of one-story plants embedding electric-motor-driven power dotted America's Midwest industrial belt, and growth in output per hour finally began to accelerate. The low-inflation, low-interest-rate period of the early 1960s, as best I can judge, was owing to the application for commercial use of World War II military technology, as well as the large backlog of invention built up during *I recall visiting in t h e 1960s a tall and narrow stamping plant built at t h e t u r n of t h e century.

…

Thus, without a change of policy, a higher rate of inflation can be anticipated in the United States. I know that the Federal Reserve, left alone, has the capacity and perseverance to effectively contain the inflation pressures I foresee. Yet to keep the inflation rate down to a gold standard level *Included in this period was t h e seemingly anomalous low-inflation, low-interest-rate period of t h e early 1960s, which had many of t h e characteristics of today's global disinflation. As I noted earlier, its cause was in a way similar to t h e aftermath of t h e cold war, in t h a t it was noneconomic: t h e delayed application for commercial use of gains in military technology during World W a r II and t h e large backlog of invention built up during t h e 1930s. 482 More ebooks visit: http://www.ccebook.cn ccebook-orginal english ebooks This file was collected by ccebook.cn form the internet, the author keeps the copyright. 

Escape From Rome: The Failure of Empire and the Road to Prosperity
by Walter Scheidel
Published 14 Oct 2019

Chris Bayly considers a wide range of attributes from stable institutions, access to New World resources, a culture of vigorous critique, and a symbiotic relationship between warfare, finance, and commercial innovation born of intense conflict.75 Focusing more narrowly on Britain, Jack Goldstone singles out the survival of common law, parliamentarianism, tolerance amid intolerant societies, and the consequent flourishing of a culture of science and innovation. Hegemonic empire would likely have stifled all of these.76 In his inquiry into the causes of Britain’s success, Peer Vries accepts the relevance of high wages, cheap energy, and low interest rates but insists that without sustained technological and scientific progress, modern development would have been impossible or fizzled out. He also emphasizes the critical role of the mercantilist and fiscal-naval state in enabling imports and exports in sectors that proved critical for industrial takeoff.77 According to Joel Mokyr, increases in the stock of knowledge and its practical application go a long way in accounting for Britain’s success.

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See also maritime exploration and expansion; New World; specific countries controlling colonial empires Columbus, Christopher, 193, 431, 439, 450, 462–64 commercial transactions and credit: Bourgeois Revaluation, 489–90; Charles V using credit to finance wars, 199; in China, 398–99, 588n226; in Europe and England (post-1500), 356–57, 376, 381–82, 580n77, 581n103; low interest rates, effect of, 497; in Roman empire, 504; unifying set of customs and rule for, 516. See also mercantilism common law tradition, 378, 497, 498 communalism, 14, 352–53, 376, 416, 474 comparative scholarship, 21–22, 26, 502; analytical comparison between equivalent units, 23; premodern rule and, 42–48; variable-oriented parallel demonstration of theory, 23 competition: (Second) Great Divergence and, 18; significance of, 15; stifled by empire, 17, 339–41, 343, 396 Confucianism, 320–23, 393, 394, 395, 406, 442, 480, 482, 490, 583n143, 594n23 Congjian Yan, Shuyu Zhouzilu, 437–38 Conrad I (German ruler), 164 Conrad II (German ruler), 166, 177 Constantine I (Roman emperor), 194, 314, 508, 519, 601n33 Constantinople, 135–36, 139, 140, 142–44, 148, 152, 204, 223; patriarch of, 316 constitutionalism, 361, 375, 380 Coptic language, 311 corruption, 129, 342, 381, 403, 407–9, 506, 508 Cosandey, David, 260 cotton industry and trade, 424–27, 589n20 Council of Chalcedon (451), 133, 346 Council of Clermont (1095), 347 Council of Nicaea (325), 346 councils and synods, 348–51 counterfactual, significance of use of, 23–26, 215, 540n39 counterfactual scenario for France and England (seventeenth century), 208–10 counterfactual scenario for Holy Roman Empire and Habsburgs, 200–201, 215, 512–13, 559n55 counterfactual scenario for Mongol empire, 185–92, 215 counterfactual scenario for Napoleon, 211–12, 215 counterfactual scenario for Ottoman empire, 206–8 counterfactual scenario for overseas exploration, 454–71; changing orientation to New World (East is West), 459–67, 460–61, 463; Chinese economic development, 468–71; shortcuts to access goods, 455–59 counterfactual scenario for Roman empire, 11, 110–23, 521–26, 525, 602n45; eastern hostilities as source of, 111–20; Etruscization of Rome and, 552n2; Hannibal and Carthage as source of, 118–19, 521, 524, 553n16; Italian domestic developments as source of, 110–11, 120–22, 521; Macedonian intervention in Italy as source of, 114–17, 521, 553n17; Persian invasion of southern Italy as source of, 522, 552n5; Social War (91–89 BCE) as source of, 120; warfare between rival factions of Roman aristocracy as source of, 121, 554nn21–22 counterfactual scenario for sixteenth-century European powers, 200–204 counterfactual scenario for Song empire, 583n157 Counter-Reformation, 484 Crassus, 83 credit.

Understanding Asset Allocation: An Intuitive Approach to Maximizing Your Portfolio
by Victor A. Canto
Published 2 Jan 2005

Correctly anticipating the size cycles would have generated a 23 percent average annual return, or 548 basis points in excess of the small-cap returns. Selecting the wrong size would have lowered the annual returns to 8.7 percent, or 425 basis points below the returns of the large-cap stocks. The Style Cycles We can use a similar basket of indicators to determine style cycles.5 Low interest rates—which are the product of sound monetary policy, in my view—have resulted in a lengthening of investor horizons. This, in turn, has had a powerful effect on market valuation. When investors have longer horizons, rather obviously, they can incorporate events into their valuation schemes that are further in the future.

Currency Wars: The Making of the Next Gobal Crisis
by James Rickards
Published 10 Nov 2011

The economy was not growing nearly fast enough to reduce unemployment significantly from the very high levels reached in early 2009. The traditional cure for a weak economy in the United States has always been the consumer. Government spending and business investment might play a role, but the American consumer, at 70 percent or more of GDP, has always been the key to recovery. Some combination of low interest rates, easier mortgage terms, wealth effects from a rising stock market and credit card debt has always been enough to get the consumer out of her funk and get the economy moving again. Now the standard economic playbook was not working. The consumer was overleveraged and overextended. Home equity had evaporated; indeed many Americans owed more on their mortgages than their houses were worth.

Nudge: Improving Decisions About Health, Wealth, and Happiness
by Richard H. Thaler and Cass R. Sunstein
Published 7 Apr 2008

Borrowers might also consider such exotic products as interest-only loans, under which the borrower makes no payments toward the principal on the loan, meaning that it is never paid off unless the house is sold (with luck, at a profit) or the borrower either wins the lottery or refinances the loan. Many variable-rate mortgages are further complicated by so-called teaser rates—a low interest rate applies for a period of a year or two, after which the rate (and payments) go up, sometimes dramatically. Then there is the matter of fees, which can vary greatly; points, which are fixed payments the borrower makes in order to receive a lower interest rate; and prepayment penalties that must be paid if the loan is repaid early.

Affluenza: The All-Consuming Epidemic
by John de Graaf , David Wann , Thomas H Naylor and David Horsey
Published 1 Jan 2001

The average American possesses 6.5 credit cards, for a nationwide total of 1.2 billion.2 One in three high school seniors and 83 percent of college undergraduates have cards. The more you have, the more you’re likely to be offered. The son of coauthor Thomas Naylor was sent an offer for a card when he was only twelve! A steady stream of such offers fills American mailboxes, each offer with its own incentives: frequent-flier miles, introductory low interest rates, lower minimum payments. According to the Guinness Book of World Records, one American now has a whopping 1,497 credit cards, a dubious honor.3 “There’s a lot of marketing ploys from the credit card companies to not only encourage customers but have those customers carry as much debt as possible,” Oetjen says.

Brexit, No Exit: Why in the End Britain Won't Leave Europe
by Denis MacShane
Published 14 Jul 2017

There was permanent tension between Paris and Berlin over the exchange-rate value of the French franc and Deutschmark, all well told in David Marsh’s books on European central banking and the problems of the euro. In the 1980s inflation was still strong – running at about 10 per cent in France (13.6 per cent in 1980). Today there is price stability in France at around 1.5 per cent, though some economists believe that to be too low. Low interest rates mean France saves between €30 and €60 billion a year in debt payment. Between 1986 and 1992 the difference in borrowing costs – the spread, in technical jargon – between Germany and Italy was 5.1 per cent. In 2016 it was 1.4 per cent. The spread between German and French borrowing costs was 1.9 per cent between 1986 and 1992.

Confessions of a Microfinance Heretic
by Hugh Sinclair
Published 4 Oct 2012

Would this “new information,” which was irrefutably known at the point of the presentation to Calvert, appear in this new document? I couldn’t go home now. The Calvert document was largely copied and pasted from the ASN-Novib document. The same myths about the smoothly operating IT system, the same low interest rates, even large chunks of text explaining the political environment of Nigeria were simply lifted from ASN-Novib’s document into the Calvert proposal—even though they were known, without doubt, to be false. The author was even thoughtful enough to copy some spelling mistakes. In the discussion of interest rates the word “flat” had been removed, obscuring this questionable practice from Calvert, although it had been mentioned in the original document presented to ASN-Novib.

Early Retirement Extreme
by Jacob Lund Fisker
Published 30 Sep 2010

Rather than focusing on stable operation like in nuclear power plants, financial engineering was used to leverage to maximize profit using relatively tiny differences between the strong opposing forces of assets and liabilities--that is, in the most general sense, by borrowing large amounts of money at a low interest rate and lending/sending it back out at a slightly higher rate. This tight coupling led to cascading failures, where failing parts caused other parts to fail, and so on, until a buffer was created by the taxpayers with the government as a proxy. Any part that is so tightly coupled that it can't be saved in the time it takes to decouple, will fail.

Singularity Rising: Surviving and Thriving in a Smarter, Richer, and More Dangerous World
by James D. Miller
Published 14 Jun 2012

With the high interest rate the business would essentially be saying: We know that you all focus much more on the money you have today than how much you could have next year, but some of you do at least care a little bit about the far future. So we offer you this deal: lend us money now and we will promise to pay you a whopping amount next year, far more than you give us today. In contrast, long-term-oriented people would be willing to lend the business money even if they would receive only a small amount of interest. Low interest rates indicate that enough people have a long-term orientation that they’re willing to lend in exchange for receiving a small return.184 Economist Gregory Clark has shown that in England between AD 1250 and the dawn of the industrial revolution in 1800, interest rates fell by an astonishing amount.185 The interest-rate decline might have been caused by evolutionary selection pressures operating on English farmers, making them more long-term-oriented.

All About Asset Allocation, Second Edition
by Richard Ferri
Published 11 Jul 2010

First, people wanted to put their money into something they could see and touch after experiencing a collapse in the stock market. Second, mortgage Real Estate Investments FIGURE 185 9-9 Housing Price Index, Year-over-Year National Price Change, 1974–2009 20% 15% 10% 5% 0% –5% –10% Dec-10 Dec-05 Dec-00 Dec-95 Dec-90 Dec-85 Dec-80 Dec-75 –20% originators offered record low interest rates along with new mortgage products that required little money down. Third, the U.S. government provided buying incentives in the form of easy qualification rules and great tax benefits. Figure 9-10 reflects the 30-year mortgage rate as reported by the Federal Home Loan Mortgage Corporation. When I wrote the first edition of this book in 2005, I stated that the gains in home prices may be close to peaking.

Mathematics of the Financial Markets: Financial Instruments and Derivatives Modelling, Valuation and Risk Issues
by Alain Ruttiens
Published 24 Apr 2013

FX swaps are commonly used in treasury operations and speculation.2 For example, FX swaps can be used in treasury operations for a company facing scheduled mismatches in dates of cash in and cash out in a foreign currency. A typical example of speculative trading is the carry trade. It consists of an FX swap as Borrow/Lend, without hedging it by a forward operation, as has been done here. It allows us to take advantage of the differential of borrowing and lending rates, that is, by borrowing a low interest rate currency XXX and lending a high interest rate currency YYY, but at the risk of currency spot prices fluctuations. In other words, the carry trade speculation comes to the same as speculating that at the end of the period, the current spot market of XXX/YYY will quote higher than the forward price synthesized by the borrowing and lending operations.

Better, Stronger, Faster: The Myth of American Decline . . . And the Rise of a New Economy
by Daniel Gross
Published 7 May 2012

Inports affect taxpayers in a different way. America’s population of older companies is struggling to keep up with promises made to employees regarding retirement benefits and health care. GM and Chrysler filed for bankruptcy in large measure because of their inability to do so. Poor market returns, low interest rates, and management’s refusal to set aside adequate resources have led to persistent shortfalls in corporate pensions. According to a fall 2011 report by Credit Suisse, America’s largest companies, the constituents of the S&P 500, have a collective $388 billion in unfunded liabilities, with pensions only 77 percent funded in the aggregate.3 Many of those are at large industrial companies where U.S. operations may be relatively stagnant or shrinking.

Liar's Poker
by Michael Lewis
Published 1 Jan 1989

The American homeowner became, to Rubin and the research department, a sort of laboratory rat. The researchers charted how previously sedentary homeowners jumped and started in response to the shock of changes in the rate of interest. Once a researcher was satisfied that one group of homeowners was more likely than another to behave irrationally, and pay off low-interest-rate mortgages, he would inform Rubin, who then bought their mortgages. The homeowners, of course, never knew that their behavior was so closely monitored by Wall Street. The money made in the early years was as easy as any money ever made at Salomon. Still, mortgages were acknowledged to be the most mathematically complex securities in the marketplace.

The Corruption of Capitalism: Why Rentiers Thrive and Work Does Not Pay
by Guy Standing
Published 13 Jul 2016

The previous trend towards more people owning their homes has gone into steep reverse. More are living in overcrowded or inadequate accommodation; more young adults are living with parents, unable to set up a household of their own; and homelessness is increasing, including among families with children. In Britain and elsewhere, low interest rates and tax breaks have propelled property prices to levels that have put home ownership out of reach for many and, coupled with the abolition or erosion of rent controls, generated an increasingly expensive private rental market. Landlordism has become a feature of global rentier capitalism. It has not been resurrected by chance or by free markets.

The Emperor's New Road: How China's New Silk Road Is Remaking the World
by Jonathan Hillman
Published 28 Sep 2020

Among the deals he signed in Beijing was an agreement to start feasibility studies for the railway between Indonesia’s capital and its fourth-largest city. China also agreed to create a $50 billion joint loan facility, of which it would provide the lion’s share.70 A month later, Tokyo responded with an offer of its own to build the railway. It would provide a loan for 74 percent of the project costs with a very low interest rate and long repayment and grace periods. Japan’s shinkansen, or bullet-train, technology was already used in China, Taiwan, and the United Kingdom, and Japanese diplomats like to remind foreign audiences that the trains’ safety record is unparalleled. Chinese firms had built more kilometers of high-speed railway than anyone else in the world, but their experience abroad was still limited.

Easy Money: Cryptocurrency, Casino Capitalism, and the Golden Age of Fraud
by Ben McKenzie and Jacob Silverman
Published 17 Jul 2023

Both crypto and the “easy money” policies from which this book derives its title sprang from the same roots: the Global Financial Crisis (GFC), also known as the subprime crisis. ° ° ° In 2008, an economic earthquake shook the foundation of the global economy. Unbeknownst to most Americans, pressure had been building underneath the surface of the housing market for years. Two of its biggest drivers were financial deregulation and low interest rates—a decades-long, mostly bipartisan political effort to grow the financial sector combined with a policy intended to stimulate the economy in the wake of the first dot-com bubble. Between 2000 and 2003, the Federal Reserve—the Fed, the nation’s central bank—lowered interest rates from 6.5 percent to 1 percent.

The Unusual Billionaires
by Saurabh Mukherjea
Published 16 Aug 2016

Shoes and the write-offs against this company resulted in the bank posting losses of Rs 10 crore in its second year of operation, after having reported a profit of Rs 3 crore in its first year of operation. Axis Bank suffered on the deposits side of its balance sheet too. Banks offer three types of accounts to retail customers: current accounts, savings accounts (better known as CASA) and term deposits. Since banks don’t pay interest to current account holders and only pay very low interest rates to savings accounts holders, CASA deposits are a cheap source of funds for banks compared to term deposits. Thus, building up a high CASA ratio is a key component of any bank’s strategy and HDFC Bank is the leading exponent of the high-CASA ratio strategy. However, building a high CASA ratio also requires huge investment in building a branch-cum-ATM network and spending on advertisements.

The Atlantic and Its Enemies: A History of the Cold War
by Norman Stone
Published 15 Feb 2010

An immediate loan was launched, successfully, and a team of experts set about the problem of the franc, recognizing that no country with self-respect could tolerate more than two zeroes on the notes. But that meant far deeper changes: the Bank of France (and the nationalized banks in general) must not go on giving preferential medium-term credit at low interest rates for industry and housing; the Treasury should just take money from the market, now that one existed. The Rueff reform took a line in financial stabilization that has been familiar since 1923, when Dr Hjalmar Schacht took it in Germany; budget decreases, tax increases, a liberalization of foreign trade and a devaluation of 15.45 per cent.

…

Vietnam had to be paid for, but so also did the expense of Johnson’s vast public spending programme. Nixon, though supported, electorally, by opponents or at least critics of Johnson’s spending, carried on with and for that matter increased it: when a new chairman of the Federal Reserve System was introduced in July 1970, Nixon said he wanted ‘low interest rates and more money . . . I have very strong views and . . . hope that he will independently conclude that my views are the right ones.’ Whether he did or did not, he allowed Nixon to continue the Johnson programmes and to expand them. The result was a rising budget deficit and a rising national debt.

Higher: A Historic Race to the Sky and the Making of a City
by Neal Bascomb
Published 2 Jan 2003

“All you had to do was to buy and wait till the next morning and just pick up the paper and see how much you made, in print.” Short of an early stall and a few dips, the stock market rose steadily through 1927. Then it began to climb the sharp peaks of a mountain largely of its own making. Coolidge unburdened the rich of their onerous taxes. Mellon maintained low interest rates, and speculators bought stocks on margin, putting only ten to twenty percent of the price down and borrowing the difference. President of National City Bank, Charles Mitchell, ran a 350-strong sales force to drum up securities investments. To motivate his men, he brought them up to the top of a skyscraper and said, “Look down there . . .

Poor Economics: A Radical Rethinking of the Way to Fight Global Poverty
by Abhijit Banerjee and Esther Duflo
Published 25 Apr 2011

The microfinance model, as we saw, is simply not well designed to put large sums of money in the hands of people who might fail. This is not an accident, nor is this due to some shortcoming in the microcredit vision. It is the necessary by-product of the rules that have allowed microcredit to lend to a large number of poor people at low interest rates. Moreover, microcredit may not even be an effective way to discover entrepreneurs who will then go on to set up large businesses. Microfinance gives its clients every incentive to play it safe, so it is not well suited to discover who has an appetite for risk taking. Of course, there are always counterexamples—every microfinance agency boasts on its Web site about corner shops turning into retail chains, but the instances are few and far between.

The new village green: living light, living local, living large
by Stephen Morris
Published 1 Sep 2007

These levels of personal debt are virtually enslaving Americans, forcing many of us to work harder and harder, for longer hours, at often meaningless corporate jobs in order to pay off our obligations. And bankruptcy laws have recently been toughened to make it even more difficult to escape the impact of serious personal debt, often caused by huge medical bills as well as our own intemperance. 2. The Real Estate Bubble Thanks to low interest rates, Americans have been on a real estate binge, buying any property at any imaginable price in the belief that real estate will appreciate forever. Interest-only loans, variable interest loans, balloon payments, and low- or nodown payment arrangements have become the norm in the usually conservative world of home loans.

The Road to Ruin: The Global Elites' Secret Plan for the Next Financial Crisis
by James Rickards
Published 15 Nov 2016

It warned that markets were “euphoric” and said, “Time and again … seemingly strong balance sheets have turned out to mask unsuspected vulnerabilities.” The BIS report was followed on September 20, 2014, by another warning from the G20 finance ministers meeting in Cairns, Queensland. Their communiqué said, “We are mindful of the potential for a buildup of excessive risk in financial markets, particularly in an environment of low interest rates and low asset price volatility.” Just a few days later, a powerfully connected think tank in Geneva, Switzerland, the International Center for Monetary and Banking Studies (ICMB), issued its annual “Geneva Report” on the world economy. After years of being reassured by policymakers that the world was deleveraging, ICMB offered this shocking synopsis: “Contrary to widely held beliefs, six years on from the beginning of the financial crisis … the global economy is not yet on a deleveraging path.

The Clash of the Cultures
by John C. Bogle
Published 30 Jun 2012

A corporate bond index fund would be useful to investors who require higher income without assuming undue risk. An investor who transferred, say, half of his bond holdings in the total bond index portfolio into an investment-grade corporate bond portfolio would have a 35 percent position in U.S. government securities. As low interest rates continue for the foreseeable future, and spreads between corporates and Treasurys remain at current levels, it can only be a matter of time until a total corporate bond index fund is made available to investors. 1987: Extended Market Portfolio. As good as it was, an index fund modeled on the S&P 500 Index was in some sense not quite good enough.

The Industries of the Future
by Alec Ross
Published 2 Feb 2016

Square now has a program, Square Capital, that goes beyond facilitating transactions and gives its users access to capital so that they can grow as their demand rises. Jack explains, “Now they can actually open up a register, the thing that runs their business, and they can hit a button and they can get an instant loan for $10,000. And then they pay back that loan—with a very, very low interest rate—by swiping their customers’ cards.” In other words, the loan is easy to take out and almost automatic to pay back, through small payments tied to each sale. Jack says, “The reason we can do this is because we know their business. We see all their cash transactions. We see their card transactions.

The Boy Who Could Change the World: The Writings of Aaron Swartz
by Aaron Swartz and Lawrence Lessig
Published 5 Jan 2016

The right solution wasn’t for the Fed to raise interest rates until even punch-drunk venture capitalists could realize all this investment in fiber wouldn’t be profitable. The right solution was to take their money away. Give it to the poor, who will spend it on something useful, like food and clothing. So those are Keynes’ prescriptions for a successful economy: low interest rates, government investment, and redistribution to the poor. And, for a time—from around the 1940s to the 1970s—that’s kind of what we did. The results were magical: the economy grew strongly, inequality fell away, everyone had jobs. But, starting in the 1970s, the rich staged a counterattack. They didn’t like watching inequality—and their wealth—melt away.

Postcapitalism: A Guide to Our Future
by Paul Mason
Published 29 Jul 2015

And in August 1971, Richard Nixon delivered one, unilaterally breaking the commitment to exchange dollars for gold, and thereby destroying Bretton Woods. Nixon’s reasons for doing so are well documented.27 As America’s competitors caught up in productivity terms, capital flowed out of the US into Europe, while its trade balance declined. By the late 1960s, with every country engaged in expansionary policies – with high state spending and low interest rates – America had become the big loser from Bretton Woods. It needed to pay for the Vietnam War and the welfare reforms of the late 1960s, but could not. It needed to devalue but could not, because to make that happen, other countries had to raise their own currencies against the dollar, and they refused.

Pound Foolish: Exposing the Dark Side of the Personal Finance Industry
by Helaine Olen
Published 27 Dec 2012

Now there were mortgages offered to buyers with no money down, variable interest rates, interest-only payments that would balloon with time, and so-called “no-doc” loans which allowed buyers to state their income while offering little or no proof of it. These changes, when combined with the low-interest-rate environment and dismal personal finances of the 2000s, caused the next transformation in the home ownership market. We had been trained for the previous half-century to think of homeownership as a risk-free way of growing a nest egg, so it was not a large leap to take it to the next level, as the housing bubble gained steam.

How the City Really Works: The Definitive Guide to Money and Investing in London's Square Mile
by Alexander Davidson
Published 1 Apr 2008

The forward or futures price is a function of the underlying spot price and the prevailing interest rate in the money markets plus insurance and storage. The forward premium will usually be quoted as a percentage of the underlying price. Gold is nearly always in a contango, meaning at a premium over the nearby price, because of the ready availability of above-ground stocks, which can be borrowed at low interest rates. A backwardation may happen during a price squeeze, but is extremely rare. Silver Silver is a more practical metal than gold but is similarly a store of value. The metal has been used as money for longer than gold, and in more countries. It is used in, among other areas, technology, photography and electronics, as well as in jewellery and silverware, and industrial demand is rising.

Conscious Capitalism, With a New Preface by the Authors: Liberating the Heroic Spirit of Business
by John Mackey , Rajendra Sisodia and Bill George
Published 7 Jan 2014

The economic meltdown in 2008 resulted in unprecedented governmental bailouts of those in the financial sector deemed “too big to fail.” Not only did hundreds of billions of tax-payer dollars go to bail out profligate Wall Street banks and government-sponsored enterprises such as Fannie Mae and Freddie Mac, but the Federal Reserve has maintained artificially low interest rates for several years now that enable these same financial institutions to make very high and virtually risk-free profits on the interest rate spreads—a prime example of crony capitalism run amok.1 Treating Investors Responsibly and Consciously Having been entrusted with the capital of investors, businesses have an ethical and fiduciary responsibility to make money for them.

Rise of the Robots: Technology and the Threat of a Jobless Future
by Martin Ford
Published 4 May 2015

The Chinese central bank has also recently announced plans to relax regulations that hold down the interest rate paid on savings accounts. This might turn out to be a dual-edged sword, on the one hand raising the income going to households but on the other further increasing the incentive to save. Allowing deposit rates to rise could also threaten the solvency of many Chinese banks, which now profit from artificially low interest rates.35 Some factors behind the Chinese propensity to save may be very hard to address. Economists Shang-Jin Wei and Xiaobo Zhang have proposed that the high saving rate may be attributable to the sex imbalance resulting from China’s one-child policy. Because women are scarce, the marriage market is very competitive, and men often have to accumulate substantial wealth or own a home in order to attract a potential spouse.36 It is also quite possible that a strong desire to save is simply an integral aspect of Chinese culture.

The Future of Money
by Bernard Lietaer
Published 28 Apr 2013

There are two ways by which a member can obtain WIR: either by selling goods or services to someone else in the circle, or by obtaining a WIR credit from the co-ordinating centre. In other words, the WIR is a hybrid of mutual credit (whenever trading occurs by selling goods directly) and fiat currency (whenever a loan is made from the centre). Such credit has a very low interest rate (1.75% per annum). In practice, these credits are often guaranteed by real estate or another asset. As is true with all currencies, trust remains the key. The WIR credits are automatically removed from circulation whenever a member reimburses a loan to the centre. The value of the WIR is pegged to the Swiss franc (i.e., 1 WIR = 1 Swiss franc), but all payments have to be made in WIR.

Tower of Basel: The Shadowy History of the Secret Bank That Runs the World
by Adam Lebor
Published 28 May 2013

This results in an outflow of hot money, chasing better returns around the world, which causes asset bubbles in the destination economies and distorts exchange rates, making currencies such as the Malaysian ringgit and the Korean won more expensive and thus affecting exports from those countries. “The disagreements on this were more pronounced,” said a former central banker, who wished to remain anonymous, of the governors’ meetings in late 2012. “Most of the developing countries were saying, ‘We don’t see that low interest rates are adding to your economic growth and at the same time it causes us problems because of the capital inflows. Our exchange rates go up and we are having real estate bubbles.’” The central bankers remain polite. “Everyone is very careful because you cannot tell other countries what to do. But the developing countries are saying, look, this is what these policies are doing to us.

Flying Blind: The 737 MAX Tragedy and the Fall of Boeing
by Peter Robison
Published 29 Nov 2021

“It was easier for the program leaders to drive their wishes into the design teams. They just didn’t have people that understood that you need to say ‘no.’ ” The industry was in the midst of the greatest order boom of the jet age, as the combination of millions of wealthier new travelers in Asia and cheap money in the form of low interest rates prompted airlines to order planes at a frantic pace. From 2010 to 2020, carriers took delivery of single-aisle jets worth $442.2 billion—36 percent of all such planes manufactured in the previous half century, according to Richard Aboulafia, the Teal Group consultant. At a meeting in 2012, Reed, the FAA engineer who had so reluctantly joined the Boeing Aviation Safety Oversight Office, questioned Boeing managers about the plan to leave the cockpit of the new MAX largely unchanged.

Cryptoassets: The Innovative Investor's Guide to Bitcoin and Beyond: The Innovative Investor's Guide to Bitcoin and Beyond
by Chris Burniske and Jack Tatar
Published 19 Oct 2017

Figure 7.7 Bitcoin’s performance compared to the FANG stocks since its November 2013 peak Data sourced from Bloomberg and CoinDesk At that same peak in price, innovative investors who chose bitcoin over a nonequity holding—such as bonds, real estate, gold, or oil—would have been the most at peace with their decision (Figure 7.8). The performance of commodities like gold and oil have been far from stellar since November 2013, and in the period up to January 2017, bitcoin actually outperformed oil. The low interest rate environment meant bonds conserved investors’ capital but didn’t grow it much. In this group, U.S. real estate was the only investment that appreciated on par with the equity markets. Figure 7.8 Bitcoin’s performance compared to non-equity assets since its November 2013 peak Data sourced from Bloomberg and CoinDesk At this point, we have provided insight into some of bitcoin’s best and worst returns in its relatively short life.

The Permanent Portfolio
by Craig Rowland and J. M. Lawson
Published 27 Aug 2012

Most importantly, it is unique to each country. Kangaroos versus Eagles In 2011, the United States was still recovering from the problems caused by the real estate crash that started several years earlier. The result was that the central bank in the United States decided to adopt a very low interest rate policy (sometimes called “ZIRP”—Zero Interest Rate Policy) and had interest rates set very low at 0.25 percent. The official rate of inflation, however, was reported to be 2.96 percent. In real return terms, putting cash in your local bank account in 2011 would have earned perhaps 0.50 percent a year in interest, but with inflation at 2.96 percent a year, you would have seen a negative return after inflation.

Broke: How to Survive the Middle Class Crisis
by David Boyle
Published 15 Jan 2014

Especially when policy and economic circumstances have combined to provide an extraordinary shift in resources backwards from the next generation to their baby-boomer parents, the phenomenon outlined by the higher education minister David Willetts in his much-debated book The Pinch. Willetts showed how the baby-boom generation benefited from free higher education, low house prices and inflation to eat away at their debts. And now when the debts are almost paid off, they benefit from low income taxes and low interest rates. ‘The boomers, roughly those born between 1945 and 1965, have done and continue to do some great things but now the bills are coming in,’ he wrote, ‘and it is the younger generation who will pay them.’[20] The middle classes — those that dare to look ahead — see their children being flung into a proletarian struggle to maintain any kind of roof over their heads.

Billion Dollar Whale: The Man Who Fooled Wall Street, Hollywood, and the World
by Tom Wright and Bradley Hope
Published 17 Sep 2018

Banks would fight a rearguard action in Congress: The rule was watered down, permitting certain investments, and took years to come into effect. But Wall Street banks had to stop acting like hedge funds, which make proprietary investments using money from rich individuals, and look after their clients’ interests, whether a small home owner or a multinational corporation. These new restrictions, coupled with an anemic U.S. economy, low interest rates, and a weak stock market, led Blankfein to double down on his push into emerging markets. China continued to grow at double-digit rates, and the economies of Brazil, Russia—even small Malaysia—were humming along. In a speech later in 2010, as Goldman licked its wounds from the damage the crisis had done to its reputation, Blankfein said the biggest opportunity for the bank was to be “Goldman Sachs in more places.”

King Icahn: The Biography of a Renegade Capitalist
by Mark Stevens
Published 31 May 1993

What was scheduled for a brief session so excited Dan River’s president that the Kelso people stayed through the weekend, working out a proposal for creating an ESOP that would purchase Dan River’s shares, thus keeping the company out of Icahn’s grasp. The ESOP proved attractive to Dan River’s management from a debt management standpoint. At the time, $96 million of Dan River’s $130 million debt carried a relatively low interest rate of 8 percent. Before Kelso came along, a management-led buyout was being considered as a means of blocking Icahn. But this option necessitated new borrowings in violation of the existing loan covenants, meaning management would have to refinance the 8 percent loan at about 14 percent. Because this would have had a burdensome impact on Dan River’s debt load, there was strong motivation to keep the current financing in place.

The Accidental Investment Banker: Inside the Decade That Transformed Wall Street
by Jonathan A. Knee
Published 31 Jul 2006

Frequent issuers often demanded and received commitments from underwriters to “buy” an entire issue, something that never happened in an IPO where an offering simply prices where the market clears.5 For a debt security, the counterpart to a share price is the interest rate. Just as an issuer looking for the lowest cost of capital hopes for the highest share price in an IPO, he or she prays for a low interest rate on their junk bonds. “Buying” an issue involves an underwriter putting a backstop on the possible interest rate payable by the issuer: the bank will guarantee to absorb whatever portion of the offering the market will not accept at the specified rate. In the worst-case scenario, if it was badly mispriced, an underwriter could end up literally owning an entire supposedly “public” offering.

Number Go Up: Inside Crypto's Wild Rise and Staggering Fall
by Zeke Faux
Published 11 Sep 2023

It seemed to me that he had been wondering how Madoff got away with it for so long, and had come up with his own answer. It wasn’t that hard. No one noticed. They are all dumb. Devasini was fascinated with finance. In a December 2011 post titled “The Shell Game,” he explained how Italian banks could avail themselves of billions of dollars of low-interest-rate funding. They could use it to gamble on anything, or to buy higher-yielding government bonds to make risk-free profits. When I grow up, I don’t want to be an astronaut or a football player. When I grow up I want to be a bank! Yesterday Italian banks got the European Central Bank to lend them 116 billion… They will be able to use that money to do what they want… Take, take all this money, buy scratch cards, tickets of the Italian lottery, or just play them in the slot machines in your neighborhood.

The Glass Half-Empty: Debunking the Myth of Progress in the Twenty-First Century
by Rodrigo Aguilera
Published 10 Mar 2020

Figure 5.3: The decline in US private investment (and savings) Notes: Net investment by the private sector (that is, investment minus depreciation) has been on a slightly declining trend since the 1960s but dropped sharply during the 2008–2009 global financial crisis and has recovered only about half of its previous levels. This despite historically low interest rate levels. Net savings have also shown a declining trend although their post-crisis pickup mostly has to do with deleveraging (paying back debt) following the massive accumulation of debt before the crash. Source: Bureau of Economic Analysis, National Income and Product Accounts. This suggests that modern capitalism is turning into a system of wealth accumulation rather than socially efficient production.

The Four Pillars of Investing: Lessons for Building a Winning Portfolio
by William J. Bernstein
Published 26 Apr 2002

The result was a gross trade imbalance that rapidly depleted the British Treasury of gold. The traditional solution for trade imbalance is to get your trading partners to reduce their interest rates; because low rates make investing in your partners unattractive, money flows out of those countries back to yours, solving the problem. Unfortunately, low interest rates in the U.S. also made it easier to borrow money. In 1927, the U.S. was in the middle of an economic boom, and the last thing it needed was easier credit brought about by the lowered American interest rates sought by the British. Most American financial authorities realized that this was an awful idea.

The Blue Sweater: Bridging the Gap Between Rich and Poor in an Interconnected World
by Jacqueline Novogratz
Published 15 Feb 2009

In those early days, we spent a lot of time in Kigali’s markets talking and listening to the women, this time to understand better why they would want to borrow money. Most were interested in expanding their tiny businesses. “I pay too much to the moneylender,” a tomato vendor told Liliane. “I could borrow at a low interest rate; I could sell more and take more money home to my family.” Another wanted to borrow enough to buy a goat with the hope that the animal would reproduce and she could earn even more money. Some of the women had outsized dreams. One of our first potential borrowers wanted to start a bookstore, explaining that she’d had the idea because there were too few books in Rwanda.

The Great Surge: The Ascent of the Developing World
by Steven Radelet
Published 10 Nov 2015

Economic growth has rebounded much less quickly than many expected, and output remains far below its potential. Japan is in its second decade of slow growth, with a GDP today far lower than anyone would have predicted twenty years ago. Global investment and aggregate demand have remained tepid despite low interest rates. Summers does not argue that secular stagnation in the advanced economies is inevitable but that it could become the reality if policy makers do not take steps to heighten demand such as increasing public investment in infrastructure and changing regulations to spur private investment in alternative energy sources.2 Northwestern University economist Robert Gordon sees other forces working to slow long-term growth in the United States.

Hard Times: The Divisive Toll of the Economic Slump
by Tom Clark and Anthony Heath
Published 23 Jun 2014

Our research on social scarring, however, suggests that there could be an enduring cost to letting things drift, which will not show up on any public finance spreadsheet in Washington or Whitehall. But, make no mistake, frailer communities and worse mental health will cost the public purse in the end. Because deep recessions do such damage, it is important to be grateful for one great mercy: the prevailing policy of easy money in both Britain and America. Record low interest rates and liberal use of the printing presses represent one crucial break with the early 1930s, and have allowed both countries to avoid the trap of debt deflation and the wholesale destruction of jobs that has historically come with it. We have not dwelt on this point because the reflationists have mostly carried the day; it is, however, important to register, since undue panic about inflation, or pressure from savers fed up with low returns, could yet force a premature policy shift.

Digital Gold: Bitcoin and the Inside Story of the Misfits and Millionaires Trying to Reinvent Money
by Nathaniel Popper
Published 18 May 2015

BITCOIN HAD THE good fortune of hitting hard times at a moment when there was a renewed willingness to rethink the foundations of the existing financial system. On one side of the spectrum, the 2012 presidential campaign of Ron Paul was gaining steam in the fall of 2011, thanks in no small part to his discussion of the Federal Reserve and monetary policy. He argued that the central bank had encouraged the real estate bubble with low interest rates, and had done more damage by printing money after the crisis hit. Around the time that Erik was selling the Free State Project on Bitcoin, Paul likened the Fed’s money printing to a drug addiction. He warned that if it wasn’t reined in, the central bank would do itself in. “The Federal Reserve will close themselves down eventually when they destroy money,” Paul said on the campaign trail.

Commuter City: How the Railways Shaped London
by David Wragg
Published 14 Apr 2010

During the nineteenth century, inflation varied but was low by the standards of post-Second World War Britain, and interest rates were low as well. A dividend of 3 per cent was worthwhile when the Post Office paid 2½ per cent. Indeed, one reason why the country could afford to build the railways was the low interest rates charged or expected, and, of course, the low price of agricultural land, plus cheap labour, much of it imported from famine-stricken Ireland. Building and operating a railway was far less capital intensive than today. The railways were a shock to the national financial system. Their immediate predecessor, the canals, had a total share capital between them of £20 million, but in the first stage of the railway age, between 1820 and 1844, the railways required more than £40 million, and in another six years, in 1850, their total share capital amounted to £187 million.

Doughnut Economics: Seven Ways to Think Like a 21st-Century Economist
by Kate Raworth
Published 22 Mar 2017

Since then, however, leading economists in the OECD and in major financial institutions have been choosing their words carefully when discussing future growth prospects. In early 2016, Mark Carney, governor of the Bank of England, warned that the global economy risked being trapped in a ‘low growth, low inflation, low interest rate equilibrium’.21 The Bank for International Settlements – effectively the central banks’ central bank – concurred, noting that ‘the global economy seems unable to return to sustainable and balanced growth … the road ahead is quite narrow’.22 The IMF meanwhile advised that, ‘our projections continue to be progressively less optimistic over time … policymakers should not ignore the need to prepare for possible adverse outcomes’.23 The OECD itself agreed that the world was in a ‘low-growth trap’ with growth ‘flat’ in high-income countries.24 And the influential US economist Larry Summers declared that we have entered ‘the age of secular stagnation’.25 It sounds suspiciously as if some economies might be approaching the top of their S curves.

The Evolution of Everything: How New Ideas Emerge
by Matt Ridley

By the time they became insolvent that year (shortly after Paul Krugman had said they were not in trouble, worries about them were overblown and they had no sub-prime loans), Fannie and Freddie were holding more than two-thirds of all sub-prime loans, or $2 trillion worth. Nearly three-quarters of new loans passed through their hands that year. I have dwelt on the story of Fannie, Freddie and the Clinton and Bush administrations to drive home the point that while the surplus savings to create the housing bubble came from China, and the low interest rates to encourage borrowing came from the Fed, the incentive to lend irresponsibly to sub-prime borrowers came from a combination of governments and pressure groups, far more than it came from alleged deregulation or from a new outbreak of ‘greed’. And this was the biggest reason for the collapse of so many banks and the insurance giant AIG.

An Extraordinary Time: The End of the Postwar Boom and the Return of the Ordinary Economy
by Marc Levinson
Published 31 Jul 2016

Thatcher’s key economic advisers, Keith Joseph and Alan Walters, subscribed to the ideas of monetarist economists such as Milton Friedman, for whom the path to lower unemployment and higher incomes ran through the money supply. Reagan’s advisers were a more eclectic group: they encompassed monetarists; traditional small-government Republicans, who favored a balanced budget and low interest rates; and adherents of a new doctrine called “supply-side economics,” who contended that lower marginal income-tax rates would create powerful incentives for work and entrepreneurship. The monetarists regarded the supply-siders as snake-oil salesmen. The traditionalists mocked the monetarists’ obsession with the money supply, and they distrusted the supply-siders’ eagerness to lower marginal rates even if that would leave the government in the red.

Treasure Islands: Uncovering the Damage of Offshore Banking and Tax Havens
by Nicholas Shaxson
Published 11 Apr 2011

It is a relationship described years later by James Carville, Bill Clinton’s adviser, who famously articulated the borrower’s sense of helplessness when he said that if reincarnated he wanted to come back as the bond market because then “you can intimidate everybody.” The interests of industrial capitalists and financial capitalists often conflict too. Financiers, for instance, tend to like high interest rates, from which they can derive considerable income, while industrialists want low interest rates, to curb their costs. And the financiers then, as today, firmly had the upper hand. As is well known, the Great Depression that erupted in 1929 was the culmination of a long period of deregulation and economic freedom for Wall Street and a great bull market built on an orgy of debt, along with mind-bending rises in economic inequality.

Common Stocks and Uncommon Profits and Other Writings
by Philip A. Fisher
Published 13 Apr 2015

In the United States this decline amounted to 29 per cent and in Canada to 35 per cent. This means that in the United States the annual rate of monetary depreciation during the period was 3.4 per cent, and in Canada it was 4.2 per cent. In contrast, the yield offered by United States Government bonds bought at the beginning of the period, which admittedly was one of rather low interest rates, was only 2.19 per cent. This means that the holder of this type of high-grade, fixed-income security actually received negative interest (or loss) of better than 1 per cent per annum if the real value of his money is considered. Suppose, however, that instead of acquiring bonds at the rather low rates that prevailed at the beginning of this period, the investor could have bought them at the rather high interest rates that prevailed ten years later.

Them and Us: How Immigrants and Locals Can Thrive Together
by Philippe Legrain
Published 14 Oct 2020

Yet often-poorer migrants, who tend to make do with much less space than locals, are scarcely the main cause of inflated property prices in cities such as London, New York, Sydney and Auckland. Moreover, newcomers tend to live in private rented accommodation, whereas a majority of locals are homeowners.52 Shrinking household sizes, a greater availability of credit at low interest rates and government subsidies and tax breaks for home ownership are bigger factors in boosting demand for housing. In any case, higher housing demand would not be a problem if the property market worked well: increased demand would lead to increased supply. The real problem is dysfunctional planning laws that choke off the supply of new housing in cities, driving up prices.53 Britain also bans building on (often ugly) ‘green belts’ around towns.

Anatomy of the Bear: Lessons From Wall Street's Four Great Bottoms
by Russell Napier
Published 18 Jan 2016

This was increasingly turned over to producing food rather than feed as US horse numbers dwindled. On US farms alone there were five million fewer horses in 1929 than in 1921. To electrification, we can add the impact of mass production of the automobile on growing corporate profits, low inflation and low interest rates. That combination alone would have been sufficient for a bull market in equities, but the technological developments also produced a surge in demand. The increasing number of households with electricity meant a bigger market for domestic electrical appliances. The dollar value of sales of electrical household appliances, even during this period of quiescent prices, increased 189% from 1921 to 1929.

Chokepoint Capitalism
by Rebecca Giblin and Cory Doctorow
Published 26 Sep 2022

The biggest challenge to worker cooperatives is raising the capital they need to start up.4 In a satisfying irony, Stocksy was financed by the proceeds of its founders’ earlier sale to Getty. But other creator co-ops will need to find the money elsewhere—an increasingly difficult task given how thoroughly they have been shaken down over the last years and decades. This hurdle is not insurmountable. We write this during a time of historically low interest rates, and with economies in desperate need of stimulus. The US government has been pouring cash into corporations, much of which has then been funneled directly to investors and executives via share buybacks, resulting in very little actual stimulus. Instead, some of that capital could be loaned or granted to creator groups with a strong vision for alternative distribution models.

Gusher of Lies: The Dangerous Delusions of Energy Independence
by Robert Bryce
Published 16 Mar 2011

My initial projections were that the system would pay for itself after about 13 years. However, after 2 years of operation, it’s clear that recovering my original $7,445 investment will take more than 19 years, or about half again as long as I originally projected. And that payback assumes no cost of capital. If I had borrowed that $7,445, even at a low interest rate, the loan payments would have been nearly double the monthly savings in electricity costs.3 On a cash return basis, the panels are yielding the equivalent of about 5.1 percent per year, tax-free. That’s not terrible. But I could have done better from a financial standpoint by purchasing stock in an energy company like Exxon Mobil.

Market Risk Analysis, Quantitative Methods in Finance
by Carol Alexander
Published 2 Jan 2007

An increase in the risk free interest rate should decrease the default probability (and therefore also the credit spread) because this increases the risk neutral drift in A ‘rule of thumb’ for the presence of multicollinearity is that the square of the correlation between any two explanatory variables is greater than the R2 of the regression. See Section I.4.4.10 below for further details. 17 172 Quantitative Methods in Finance the firm value process. Also low interest rates are associated with recession and frequent corporate defaults. • Equity prices. When the market value of the firm decreases, the probability of default will increase because hitting the default threshold becomes more likely. We cannot measure the firm value directly so we use the firm’s equity value as a proxy variable. • Equity volatility.

The Ascent of Money: A Financial History of the World
by Niall Ferguson
Published 13 Nov 2007

First, he was able to take advantage of the fact that no mainstream financial institution would extend credit to the Shettleston unemployed. Second, Law had to be rapacious and ruthless precisely because the members of his small clientele were in fact very likely to default on their loans. The fundamental difficulty with being a loan shark is that the business is too small-scale and risky to allow low interest rates. But the high rates make defaults so much more likely that only intimidation ensures that people keep paying. So how did moneylenders learn to overcome the fundamental conflict: if they were too generous, they made no money; if they were too hard-nosed, like Gerard Law, people eventually called in the police?

Machine, Platform, Crowd: Harnessing Our Digital Future
by Andrew McAfee and Erik Brynjolfsson
Published 26 Jun 2017

The company faced the daunting task of building a technology platform for quants comparable to the ones within the industry’s top companies. Such a platform had to be able to let investors upload their algorithms, then quickly test them under different market conditions—booms and recessions, periods of high and low interest rates, and so on. One way to do this is to “back-test” the algorithms with historical data. Fawcett and his colleagues worked to build a backtester as robust as those available within large institutional investors. The startup also had to let investors accurately assess the market impact of their trades—the fact that if they bought or sold a large amount of an asset, that action would itself change the asset’s price.

Unconventional Success: A Fundamental Approach to Personal Investment
by David F. Swensen
Published 8 Aug 2005

Ordinary income consists of dividends, interest, and short-term capital gains. The self-explanatory long-term capital gains distribution consists of tax-advantaged allocations of net realized appreciation on security holdings. In recent years, ordinary-income receipts generated modest tax burdens for investors in mutual funds. Low-dividend yields, low interest rates, and recurring operating expense deductions combined to dampen distributions to mutual-fund shareholders. Consider the experience of the two largest equity mutual funds for the decade ending December 31, 2003. As shown in Table 8.15, ordinary income distributions for Vanguard’s 500 Index Fund averaged 1.9 percent of assets over the past ten years, ranging from a high of 4.8 percent in 1994 to a low of 1.0 percent in 2000.

The Establishment: And How They Get Away With It
by Owen Jones
Published 3 Sep 2014

Take the CBI, a staunch advocate of the government’s cuts programme – as long as spending is increased in its own desired areas. The organization publicly pledges that it ‘fully supports the government’s deficit-reduction programme’ in order to ‘keep the confidence of the international markets’, and also because such deficit reduction secures ‘record low interest rates for both government and business’ for borrowing purposes. Following the government’s 2012 spending review, the CBI welcomed real-terms cuts to in-work and out-of-work benefits, which hit some of the poorest people in the country especially hard, and called for corporation tax to be slashed to 18 per cent (in 2010 it had been 28 per cent, and a government devoutly wedded to business was itself cutting it down to 20 per cent).

Bank 3.0: Why Banking Is No Longer Somewhere You Go but Something You Do
by Brett King
Published 26 Dec 2012

Utility and service are the new differentiators As the four phases of disruption occur, the old differentiators of banks evaporate. In the past, retail financial institutions held that Product, Rate and Location/Network were the mechanisms by which they competed. But in a transparent, open world where information flows freely—products are just a commodity. In a low-interest-rate environment, a 25-basis-point differential is hardly something to write home about. And if I never visit your branch except once or twice a year, it’s hardly going to be the linchpin in my choosing your bank over a competitor. It’s far more likely that your mobile capability, your internet banking support, and the ease of use in onboarding and day-to-day problem resolution will drive my decision to commit to your bank.

The Economics Anti-Textbook: A Critical Thinker's Guide to Microeconomics
by Rod Hill and Anthony Myatt
Published 15 Mar 2010

The telling point is that during the ‘Cambridge capital controversies’ it was shown that there may be no unique equilibrium solution. Because of the mutual dependence between the value of capital and the interest rate, it can be shown that one method of production – call it technique A – can be cheaper at both high and low interest rates, while another method – call it technique B – is cheaper at intermediate rates of interest. This is known as the ‘reswitching result’, and it implies that the demand for capital can have a backward-bending segment, implying the possibility of multiple equilibria, as shown in Figure 8.6. 181 8  |  Marginal productivity theory on a combination of increasing returns to scale and imperfect competition. ­

Hedgehogging
by Barton Biggs
Published 3 Jan 2005

He has invested his clients’ money in high-quality consumer growth stocks that have world-class franchises and that don’t have to reinvent themselves every five years the way tech stocks do. His criteria require that they ccc_biggs_ch06_63-79.qxd 70 11/29/05 11:11 AM Page 70 HEDGEHOGGING also generate free cash flow so they can buy back their stock and raise the dividend. He argues that in a slow-growth, low-inflation, low-interest-rate world, stocks with these characteristics will have great scarcity value and will sell at very high P/Es, just as they did in the late 1950s and early 1960s. This has always been his investment style. Buy and hold great growth stocks. “My favorite holding period is forever,” he says with a wry smile.The only difficulty is that companies with these characteristics are hard to find and usually are very expensive.

Financial Freedom: A Proven Path to All the Money You Will Ever Need
by Grant Sabatier
Published 5 Feb 2019

If you are carrying debt that is accruing at a high rate of 15 to 20 percent (or higher), then your debt is accruing at a faster rate than your investments are likely growing. Typically credit cards (especially store-specific credit cards as opposed to bank-issued credit cards) carry the highest interest rates, while student loans and mortgages tend to carry relatively low interest rates. Just look at the interest rates you wrote down in the chart a few pages ago to figure out where you stand. Pay down the highest-interest-rate debt first, not the biggest or smallest balance. Some personal finance gurus also suggest that you pay down all your debt before you start saving money, but this is often a terrible idea because while you’re waiting to pay down your debt, you are missing out on any returns you could get if you had money in the stock market.

The Missing Billionaires: A Guide to Better Financial Decisions
by Victor Haghani and James White
Published 27 Aug 2023

The formula has two noteworthy aspects: (1) for any positive coupon and positive finite price, the perpetuity cannot have a negative yield, and (2) price approaches infinity as the yield of the perpetuity approaches zero. Exhibit 21.1 illustrates the relationship between the price and yield of a perpetuity and annuities with tenors of 100 and 1,000 years. Notice how extremely convex these curves become at very low interest rates. This kind of convexity is generally an attractive characteristic for buyers of such investments and a terrifying one for short sellers. It wasn't until the late 1970s that economists started to directly embed uncertainty and randomness into interest rate models, thereby taking account of the convexity central to the perpetuity paradox we'll discuss.1 To avoid having to deal directly with infinity—clearly a price that no one would be willing or able to pay—we'll consider a 1,000‐year annuity paying $1 per year, rather than a true perpetuity.

Collision Course: Carlos Ghosn and the Culture Wars That Upended an Auto Empire
by Hans Gremeil and William Sposato
Published 15 Dec 2021

Foreign visitors used to the headlines about Japan’s economic malaise were shocked when they came to a Tokyo that looked as neat and modern as ever. As more than one American executive commented when visiting Japan during this period, If this is a recession, then I want one as well. The declines were real, however, and came despite record low interest rates and lavish government spending that tried to bring back the glory days of high growth. Instead, they gave Japan the distinction of having the largest government debt burden in the world. Sony’s Ohga was not alone in warning that Japan could be entering a deflationary trap, in which lower prices and continued economic contraction spiral downward together.

Microtrends: The Small Forces Behind Tomorrow's Big Changes
by Mark Penn and E. Kinney Zalesne
Published 5 Sep 2007

To his surprise, he’s ticked off a bunch of very ordinary people, who then send him 5 million pieces of complaint mail. People are passionate about their homes, including their second homes. There is a lot of potential in organizing second-home buyers—they have product needs like bill-paying, revolving credit, and insurance—and they have political needs like low interest rates and high home appreciation. On a societal level, the second-home buyer trend also represents a rejection of the 1990s philosophy of putting your savings into the stock market instead of your home. Now, it goes into your homes. This shift will make Americans less liquid, Social Security more dependent again on real estate values, and perhaps promote more savings.

China into Africa: trade, aid, and influence
by Robert I. Rotberg
Published 15 Nov 2008

The Development Assistance Committee (DAC) of the Organization for Economic Cooperation and Development (OECD) has defined ODA as grants or loans that are intended primarily to foster development in the recipient country, and that have at least a 25 percent grant element.31 Interviews in China confirm that the OECD-DAC guidelines have been closely studied by the Ministry of Commerce and the China Eximbank, and it is highly likely that the Chinese now use these same guidelines in their 09-7561-4 ch9.qxd 9/16/08 4:19 PM Page 209 China’s Foreign Aid in Africa: What Do We Know? 209 own calculations of foreign aid. For example, the China Eximbank reduced its already low interest rate on concessional loans in part to make them conform to international standards. The DAC also tracks official outflows in a second category, which it calls “other official flows.” These are moneys that come from governments but do not qualify as aid. It is worth focusing on this definition more closely because many of the flows that have made the headlines are in this category.

The Invisible Hands: Top Hedge Fund Traders on Bubbles, Crashes, and Real Money
by Steven Drobny
Published 18 Mar 2010

An example where alpha may result from policy change going forward is central banks moving away from inflation targeting, whereby they perhaps target inflation and credit growth. That would generate volatility and change how risk premia are valued. Another source of alpha from policy makers is when there is some kind of regime in place that is at odds with valuation, whether it is a managed exchange rate regime or artificially low interest rates. These regimes tend to work until the world changes. During structural breaks and regime shifts, financial markets tend to lag the real economy, generating opportunities for macro investors. What personality traits or characteristics are required for success in real macro? That is a very interesting question, and something I think about often here in my own business.

Selfie: How We Became So Self-Obsessed and What It's Doing to Us
by Will Storr
Published 14 Jun 2017

This wave of deregulation brought into being the highly unstable derivatives market that was made up, in the words of superstar investor Warren Buffett, of ‘financial weapons of mass destruction’. From a starting position of almost nothing, those weapons of mass destruction quickly became a $531tn industry. Whilst all this was happening, the low interest rates that were another of Greenspan’s preoccupations enabled millions of cash-strapped people to take on irresponsible levels of mortgage debt. In 2004 he was hailing the ‘resilience’ of the financial system; in April 2005, he voiced his approval of the new and thriving ‘subprime mortgage market’.

America's Bank: The Epic Struggle to Create the Federal Reserve
by Roger Lowenstein
Published 19 Oct 2015

Wall Street tried to replace British loans with domestic credit, but American banks, having grown so quickly, had reached a point of exhaustion. Toward the end of the year, the stock market broke. Preparing for the worst, National City tightened its lending. Vanderlip protested, but Stillman smelled a recession, possibly a nasty one. “I have felt for some time,” he wrote early in 1907, “that the next panic and low interest rates following would straighten out a good many things that have of late years crept into banking.” Stillman’s bank had emerged from the Panic of 1893 in a stronger position relative to competitors; he expected that prudence would pay off again. “What impresses me as most important,” he informed his chastened subordinate, “is to go into next Autumn ridiculously strong and liquid.”

No One Would Listen: A True Financial Thriller
by Harry Markopolos
Published 1 Mar 2010

Finally, Madoff calls ridiculous the conjecture that the firm at times provides subsidies generated by its market making activities to smooth out the returns of the funds in a symbiotic relationship related to its use of the capital as a debt or equity substitute. He agrees that the firm could easily borrow the money itself at a fairly low interest rate if it were needed, and would therefore have no reason to share its profits. “Why would we do that?” Still, when the many expert skeptics were asked by MARHedge to respond to the explanations about the funds, the strategy and the consistently low volatility returns, most continued to express bewilderment and indicated they were still grappling to understand how such results have been achieved for so long.

The End of Work
by Jeremy Rifkin
Published 28 Dec 1994

While lower interest rates will encourage some additional home construction and increased automobile sales, the effect is likely to be dampened by the increased unemployment and loss of purchasing power resulting from a slash in government spending. As to the prospect that lower interest rates will encourage business investment, a number of economists believe that "job-creating investment is influenced more by market demand and profit prospects than by interest rates."76 Low interest rates become increasingly irrelevant if there are insufficient customers to buy the products. A few economists continue to argue against the conventional wisdom, warning that further reductions in government spending are likely to throw the economy into even greater turmoil, from which it may not recover.

Empire: How Britain Made the Modern World
by Niall Ferguson
Published 1 Jan 2002

It was part of a full-scale financial revolution that made Amsterdam the most sophisticated and dynamic of European cities. Ever since they had thrown off Spanish rule in 1579, the Dutch had been at the cutting edge of European capitalism. They had created a system of public debt that allowed their government to borrow from its citizens at low interest rates. They had founded something like a modern central bank. Their money was sound. Their tax system – based on the excise tax – was simple and efficient. The Dutch East India Company represented a milestone in corporate organization too. By the time it was wound up in 1796 it had paid on average an annual return of 18 per cent on the original capital subscribed, an impressive performance over such a long period.

The Tyranny of Experts: Economists, Dictators, and the Forgotten Rights of the Poor
by William Easterly
Published 4 Mar 2014

Another sign that regional growth is an important part of the action is that regions move together from one decade to the next. For example, Latin American nations in the 1980s collectively had a famous “lost decade.” A regional credit bubble had burst: global banks had given the region a supply of easy credit at low interest rates in the 1970s, then interest rates went up and credit was cut off in the 1980s. A sensible principle for attribution for national growth performance is that a nation does not get special recognition if its performance is just at the average. It would be foolish for a nation to claim credit for growth that is the same as the average for its region.

Sacred Economics: Money, Gift, and Society in the Age of Transition
by Charles Eisenstein
Published 11 Jul 2011

That was because the banks did not increase lending, which puts money in the hands of people and businesses who would spend it. Instead, all of the new money sat as excess bank reserves or sloshed into equities markets; hence the rise in stock prices from March to August 2009.13 It is no wonder, given the lack of creditworthy borrowers and economic growth, that low interest rates have done little to spur lending. Even if the Fed bought every treasury bond on the market, increasing the monetary base tenfold, inflation still might not result. To have inflation, the money must be in the hands of people who will spend it. Is money that no one spends still money? Is money a miser buries in a hole and forgets still money?

Chasing the Scream: The First and Last Days of the War on Drugs
by Johann Hari
Published 20 Jan 2015

Almost always, when the year is up, the employer keeps the former addict on in his garage or bakery or shop, because she has turned out to be a good worker. The last time João moved with his family, he hired a moving company that was established with the help of his department. Ten recovering addicts came together to form a cooperative, and the state lent them the money to buy a truck at a very low interest rate. His wife had been nervous, but the guys did a perfect job, João says with pride. Of course, he adds, in that cooperative of ten, “some of them will relapse,” but now “the others are protectors. They will help to deal with that problem. They will insist: go to your doctor, go now, as soon as possible, try to stop again, then you can work with us again.

Sapiens: A Brief History of Humankind
by Yuval Noah Harari
Published 1 Jan 2011

The way in which the Mississippi Company used its political clout to manipulate share prices and fuel the buying frenzy caused the public to lose faith in the French banking system and in the financial wisdom of the French king. Louis XV found it more and more difficult to raise credit. This became one of the chief reasons that the overseas French Empire fell into British hands. While the British could borrow money easily and at low interest rates, France had difficulties securing loans, and had to pay high interest on them. In order to finance his growing debts, the king of France borrowed more and more money at higher and higher interest rates. Eventually, in the 1780s, Louis XVI, who had ascended to the throne on his grandfather’s death, realised that half his annual budget was tied to servicing the interest on his loans, and that he was heading towards bankruptcy.

The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street
by Justin Fox
Published 29 May 2009

The lack of any inflation threat, and high demand from overseas for fixed-income securities, kept rates on long-term debt down as well. Rates on both adjustable and fixed-rate mortgages hit historic lows. These were the fundamental reasons for an above-trend increase in house prices, but eventually those rising house prices became a self-fulfilling prophecy. They rose so fast along the coasts that, even with low interest rates, fewer and fewer people could afford homes under traditional underwriting standards. Lenders desperate to keep volumes from dropping began to push exotic loans that allowed borrowers to pay nothing but interest, or started them out with superlow teaser rates, or otherwise got large sums of money into the hands of people who previously never could have borrowed that much.

The Trade Lifecycle: Behind the Scenes of the Trading Process (The Wiley Finance Series)
by Robert P. Baker
Published 4 Oct 2015

Regulators started reducing this flexibility because:      Banks have been too aggressive in using their own models to reduce weightings. Banks are using general cleaning up of data and other housekeeping to show risk-weighting optimisation. Models are too complex and opaque. Recent low interest rates have enabled borrowers to avoid default and therefore reduce default estimates. Each bank has been left too much to their own devices. Steps taken to compensate: 1. 2. 3. 4. Benchmarks for risk parameters and setting constraints on model inputs. Forcing stressing scenarios to adopt higher base values.

A Man for All Markets
by Edward O. Thorp
Published 15 Nov 2016

I visualized opening accounts as planting acorns in the hope of getting a crop of oak trees. Only these were strange acorns. They could lie dormant for months or years, perhaps forever; but once in a while, at random, a mighty tree of money would explode out of the ground. Was this “farm” worth operating? Our hundreds of accounts took capital away from other investments. Paid low interest rates on our passbooks and certificates of deposit (CDs), we sacrificed an expected 10 to 15 percent differential to maintain our accounts. We also had expenses and the so-called opportunity cost. Fortunately, Judy McCoy in my office managed the project competently and efficiently. The harvest from our crop of S&L accounts sometimes netted a million dollars in a year.

The Contrarian: Peter Thiel and Silicon Valley's Pursuit of Power
by Max Chafkin
Published 14 Sep 2021

“The man who broke the Bank of England” would later anticipate (and also be blamed for) crashes in Southeast Asia, but he took big losses by shorting tech stocks during the late 1990s and buying biotech stocks just as the market was peaking. Thiel’s pessimism had led to tension with Moritz at PayPal; now it was his secret weapon. Clarium’s investment thesis held that the tech bubble collapse should have led to a depression, which had only been thwarted by low interest rates and high levels of borrowing by American consumers. Meanwhile, oil prices were bound to rise, driven by growing demand from the developing world and instability in the Middle East, which would further damage America’s long-term economic prospects. Soros had bet against England and Asia; Thiel would bet against the United States.

Mastering Private Equity
by Zeisberger, Claudia,Prahl, Michael,White, Bowen , Michael Prahl and Bowen White
Published 15 Jun 2017

But if estimates from the United States are correct (12–17% of all companies over $100 million in value are in PE hands), a large group of senior executives currently occupy ringside seats, not just as observers but working side by side with their investors to learn the tools of the trade. LPs—A Tsunami of Capital? The rapid growth of capital flowing into the PE industry will likely continue. The historically low interest rate environment of the last decade has influenced investor behavior and put significant pressure on portfolio managers to search for means of enhancing returns. Institutional investors understand that ignoring the investable universe of non-listed companies and maintaining a strategy focused exclusively on public market equity is a luxury that few can afford.

Taming the Sun: Innovations to Harness Solar Energy and Power the Planet
by Varun Sivaram
Published 2 Mar 2018

Putting all this data together, often through partnerships among financiers, solar providers, and telecom firms, can yield highly accurate predictions of whether an off-grid customer will reliably make lease payments for an SHS. Using these inferred credit scores, issuers of off-grid solar securities might achieve high ratings and low interest rates one day, attracting much more capital to the sector. If these novel financing strategies work, they could fund widespread deployment of off-grid systems, which in turn could unlock economic opportunities beyond just solar. Most providers offer customers a lease-to-own option, under which they pay off an SHS over a period of time (often around three years) and subsequently own it.

Narrative Economics: How Stories Go Viral and Drive Major Economic Events
by Robert J. Shiller
Published 14 Oct 2019

Reaching for these higher yields was risky for banks, because if interest rates suddenly increased, they might have to pay more to keep depositors than they earn from the longer-maturity investments, which could cause the banks serious trouble. Ultimately, the banks decided to take the risk, but how did they form their expectations of future interest rates? No expert has a proven record of forecasting interest rates years into the future. No one can tell a banker how long to wait out a period of low interest rates or guarantee that the low rates will go on forever. All that bankers have are fading memories of narratives of other historical periods when interest rates rose dramatically, leading droves of depositors to run to their banks and withdraw their money. Those stories seem less relevant when interest rates have been low for ten years, but there is no way to quantify how much less relevant.

The Lonely Century: How Isolation Imperils Our Future
by Noreena Hertz
Published 13 May 2020

Training more people to care for the elderly or the young would also make sense, at least in the short to medium term, provided the government commits to raising pay in the care sector. Of course, to do all this the state will need to add to its coffers. Given the scale of the challenge, governments won’t be able to borrow or print money indefinitely without causing significant long-term economic damage, however low interest rates are currently.13 This means that the very richest strata of society will inevitably need to pay a higher rate of tax. That is only fair. But it’s not just wealthy individuals who should face this additional tax burden. Multi-national corporations that continue to register their profits in low or no-tax jurisdictions should also face tough legislation that forces them to pay their dues to the countries in which they sell their products.

The World for Sale: Money, Power and the Traders Who Barter the Earth’s Resources
by Javier Blas and Jack Farchy
Published 25 Feb 2021

Dig a little deeper, and they would have found that Oilflow SPV 1 DAC was an Irish company whose address was a bland, four-storey building in central Dublin where some 200 other companies were also formally incorporated. 2 Its official purpose, according to a filing with the Irish authorities in 2016, was to ‘acquire, manage, hold, sell, dispose of, finance and trade in all forms of financial assets’. 3 Then, in early 2017, Oilflow SPV 1 DAC registered on the Cayman Islands Stock Exchange. It had raised $500 million in ‘secured amortising notes’, an investment akin to a bond, due to be repaid by 2022. 4 The most unusual element of Oilflow SPV 1 DAC was how good an investment it looked to be. In a world of ultra-low interest rates, the anonymous-sounding Irish company offered a surprisingly high yield. The notes promised to pay 12% annually over five years, more than six times the interest rate on US government debt at the time. Of course, the high yield reflected the fact that the investment product carried a significant risk.

McMafia: A Journey Through the Global Criminal Underworld
by Misha Glenny
Published 7 Apr 2008

“Most Russian banks at this time were not banks in any recognizable or meaningful sense,” explained Mark Medish, who under President Clinton worked at the U.S. Treasury as an expert on the Russian economy. “They did not take deposits or make credits; instead they made easy money by handling government transactions, borrowing state funds at low interest rates then buying high-yield, short-term government bonds, making super profits.” The move into banking brought Solntsevo and the top criminal syndicates still closer to the oligarchs. Together they set new exuberant standards in tastelessness as they celebrated their newfound status among the world’s superrich.

The death and life of great American cities
by Jane Jacobs
Published 1 Nov 1961

If he could not get such a loan, however, the ODS would itself lend the money—a backstop facility necessary because of the existence of concerted credit blacklisting of city localities by conventional lenders, and necessary only to the extent that loans from conventional sources, at reasonably low interest rates for guaranteed mortgages, were unobtainable for the program. Second, the ODS would guarantee to these builders (or to the owners to whom the buildings might subsequently be sold) a rent for the dwellings in the building sufficient to carry them economically. In return for making financing available, and for guaranteeing the building an assured rental income for all occupied apartments, the ODS would require that the owner (a) build his building in a designated neighborhood and sometimes in a designated spot there, and (b) in most cases, that he select his tenants from among applicants within a designated area or designated group of buildings.

An Empire of Wealth: Rise of American Economy Power 1607-2000
by John Steele Gordon
Published 12 Oct 2009

Instead American diplomacy largely pursued a quixotic foreign policy with such treaties as the Washington Naval Treaty, which limited the size and number of battleships and total naval tonnage, and the Kellogg-Briand Pact, which outlawed war as an instrument of national policy (both Germany and Japan signed it). Further, the United States was determined to maintain a high tariff to protect American producers and to have a favorable balance of trade. Meanwhile the Federal Reserve returned to a policy of low interest rates while European central banks maintained high ones to protect the value of their currencies. The result was a largely unnoticed (at the time) cycle. American investment banks aggressively pushed highly profitable loans and underwritings in Europe. Europe used the proceeds to finance imports from the United States, and Germany used them to fund reparations to the Allied Powers.

India's Long Road
by Vijay Joshi
Published 21 Feb 2017

Since the US could not devalue against China, it had to rely on highly expansionary monetary policies to maintain full employment, which fuelled a rise in liquidity and added to the downward pressure on interest rates that came from the placement of the mounting Chinese reserves in US treasuries. The result of ultra-​low interest rates was a ‘search for yield’ and a colossal credit bubble, whose eventual implosion triggered the GFC. The episode confirmed the point that large and growing imbalances are a recipe for disaster. I n di a a n d t h e W or l d Ec o n o m y [ 259 ] 260 In the aftermath of the GFC, there was extensive discussion of global imbalances and the adjustment problem in the G20 and elsewhere but in the end it went nowhere.

The Zero Marginal Cost Society: The Internet of Things, the Collaborative Commons, and the Eclipse of Capitalism
by Jeremy Rifkin
Published 31 Mar 2014

A growing number of the millions of consumers of electricity who are footing the bill for the feed-in tariffs are also beginning to reap the benefits. They are investing their own capital to install renewable energy harvesting technologies on site. While the up-front capital investment is significant, they are beginning to receive low-interest-rate green loans from banks and credit unions. The lenders are more than willing to lend money at reduced interest rates because the premium in selling green electricity back to the grid virtually ensures the loan will be honored. The shift from being a consumer to being a prosumer of energy marks a tipping point in the way power is generated and used.

The Best Business Writing 2013
by Dean Starkman
Published 1 Jan 2013

While they aren’t asking for sympathy, “at their level, in a different way but in the same way, the rug got pulled out,” said Sonnenfeldt, fifty-six. “For many people of wealth, they’ve had a crushing setback as well.” He described a feeling of “malaise” and a “paralysis that does not allow one to believe that generally things are going to get better,” listing geopolitical hot spots such as Iran and low interest rates that have been “artificially manipulated” by the Federal Reserve. Poly Prep The malaise is shared by Schiff, the New York–based marketing director for Euro Pacific Capital, where his brother is CEO. His family rents the lower duplex of a brownstone in Cobble Hill, where his two children share a room.

The Forgotten Man
by Amity Shlaes
Published 25 Jun 2007

The dollar was now like a sail flapping in the wind, and Roosevelt was sure he knew how to bring it in line. Over the course of the autumn, the results of the first big farm experiments were coming in, and they were mixed. Morgenthau, by the end of the year, was lending $1 million a day, a total of $100 million, at low interest rates. That was helping some farms. But neither the gold price experiment nor the AAA was having the hoped-for effect on prices. The government, as even Fisher had to admit to himself, had tried to address a macroeconomic problem, money, through a microeconomic format, tinkering with supply and demand for agricultural goods.

How Asia Works
by Joe Studwell
Published 1 Jul 2013

After three decades of dragging its heels, in 1980 Japan lifted capital controls and then, in 1985, bowed to US pressure over trade surpluses and allowed the yen to appreciate more quickly. The currency’s value against the dollar doubled in three years. Financial system deregulation, foreign capital inflows and a rapidly rising currency were bound to produce stresses. What made the transition worse was that the government pursued a loose, almost reckless low interest rate policy to compensate for the export-dampening effects of the appreciating currency. The result was an orgy of previously unthinkable consumer lending. In five years in the late 1980s, urban real estate prices quadrupled and stock prices tripled.14 It was as if the whole country decided to make up for three decades of developmental graft by going on a speculative binge.

Wealth and Poverty: A New Edition for the Twenty-First Century
by George Gilder
Published 30 Apr 1981

Posner does not blame the government. “First, were there no government regulation of the economy, there probably would still have been a depression.” As for whether the Federal Reserve Bank’s long siege of near zero interest rates might have inflated the housing bubble, Posner acknowledges that “low interest rates alone increase the demand for housing because housing is bought mainly with debt.” But he disparages the impact of Fed policy and points to an array of mostly private excesses: namely “aggressive marketing of mortgages, a widespread appetite for risk, a highly competitive, largely deregulated finance industry, and debt securitization.”1 Summing up the Posner dynamic of capitalist rationality was the famous helplessness of banker supreme Charles Prince, CEO of Citigroup, when he declared in 2007 that “as long as the music keeps playing,” he was driven to “get up and keep on dancing.”