The way I understand it (and I've never taken an econ class so take this with a grain of salt). Assuming low interest rates are automatically inflationary is simplifying the broth.
After a credit crisis, government-supported banks are borrowing at close to government rates and at the same time being forced to lend at rates lower than they would otherwise demand for the risk of default. The result is that they demand higher credit standards of their borrowers. Since most companies after a credit-crisis have cash flow constraints (slowdown in the economy results in decreasing revenues), businesses, especially smaller ones are shunned. Bigger companies, restricted by less credit oblige by halting the growth in or cutting the nominal wages of workers. Price deflation typically follows wage deflation. Furthermore, as wages drop, so does the tendency for consumers to spend. With rising credit standards, consumers tend to focus more on debt consolidation and avoiding defaults. I would recommend checking credit card defaults rates over the last 5 years, you will be surprised by the decline from 2008. This has also resulted in a concurrent rise in stock prices of MA, V, AXP, all of whom are enjoying low default rates.
Credit crises are deflationary, because they increase demand for default-free government paper, which raises its value relative to goods and services (really, just deflation). So despite the huge increase in government obligations during these periods, you generally don't see inflationary pressures in the early years because that supply is eagerly absorbed. In our current case, the extended European crisis has prolonged this demand, US-backed treasuries continue to be in very high demand today. This has pushed and kept short-term interest rates to to near zero, while not causing in an equivalent rise in inflation. |
