DJ:
>>I'm somehow used to the idea separation of duties, with the central bank creating / controlling the creation of money, and financial (your private) sector getting paid to do the rest.<<
In my opinion the Fed gets the blame for many things that are truly out of its control. As far as interest rates go, the Fed primarily controls the cost to commercial banks of borrowing short term from the banks in the Federal Reserve Banking system (the discount rate). The Fed has virtually no control over long term interest rates which result from risk arbitrage in the bond market. Even in short term interest rates to a large extent the Fed follows, not leads, the bond market. So, interest rates primarily reflect the bond market's perception of the current and future prospects for inflation, and on prospective changes in the purchasing power of the dollar. If the perception is that the purchasing power of the dollar will be lower in the future, the bond market assesses a higher cost of borrowing. The reverse is also true, which is our current situation. Asset prices figure very little in all of this. So....low interest rates are primarily a result of the (private sector) bond market's perception of the high probability of low inflation. Oversimplified, as I'm sure someone will point out, but that's about how it works. The Fed has been more concerned about deflation than inflation lately, hence large (inflationary) increases in the money supply to offset structural deflation. This all works just fine until it doesn't, and it's my contention that everything will be hunky-dory until there is a secular breakdown in final demand (i.e. absence of buyers for .....{fill in the blank}). Call this a Ponzi scheme if you will, but as long as the global population is increasing all of human society is a giant Ponzi scheme. I'm OK with that.
>>Somewhere at the bottom of some spreadsheet in my head low interest rates mean to me no incentive to save<<
You're making the elementary mistake of looking at nominal interest rates, as almost everyone does. This is human nature. Folks want 6% more in their savings account at the end of the year. They ignore the fact that the purchasing power of those dollars went down 4%. What's important is the inflation-adjusted interest rate, which has been shown by people smarter than me to stay approximately constant over time.
>>mean low risks<<
Yes. there is a low risk right now that when you save a dollar that what you get back in a year will buy less than it buys today.
>>mean either some thermodynamic winter like Japan<<
Only when the low rates are the result of a secular failure in final demand.
>>or yet another round of carry-trade- or debt-based bubbles...<<
It is human nature to want to get rich quick. Low interest rates facilitate this propensity because even the average Joe can leverage themselves to a foolish extent. Hence in a period of time when it is easy to get rich slowly by buying value and sitting on cash and cash equivalents, many humans will throw it all away and then blame Uncle Al (or the bank who lent them the money, or the mortgage broker and the realtor who sold them the house, or the alignment of the planets, or the aliens who kidnapped them, or.....) The real problem ,of course, is the hole in their head where the thinking part should be (attribution: Mq). |
