Tuesday, October 4, 2011

Interest rates so low, Obama must hate old people who want to live on retirement savings!

I feel sorry right now for all of my baby boomer aged friends. I am sure they believed they might be able to retire or take it a bit easy and live at least partially on income from savings. At 1% interest I don't see how any of them could have even close to enough money to make this a reality.

Low interest rates are only good for wealthy people with a lot of debt, and governments. Wealthy people can gets loans at the low rates and tend to invest in ways that will pay a greater dividend then the artificially low rates, so they like it. Governments, like low interest rates because they can borrow more for less and it makes it easier to balance their budgets, but to me this is a negative, it encourages both wealthy investors and governments to borrow in excess and place bets on the future with that money, the wealthy tend to be successful at this and they wind up even richer, the government tends to be really shitty at this and they wind up bringing down countries in this manner. Farmers seem to like low interest rates as well. The reasons here are two fold, one reason is that most farmers live most of the year on borrowed money, borrowing to plant and pay living expenses until harvest and paying off the debt after harvest. The second reason is that commodities tend to perform well compared to interest rates under conditions like we have today, especially when food price increases are outpacing interest rates.

Low interest rates aren't good for old people or poor people. They are not good for middle class people with low debt, or high savings, they aren't good for companies that hold cash or are trying to accumulate capital to invest in new equipment instead of borrowing for new equipment, etc. Poor people do not tend to have levels of debt, since they earn so little it is hard for them to obtain credit, if they do have any debt it is typically in the form of a credit card and the interest they pay on that is very high even when other rates are low, so they don't tend to benefit. Old people are hit the hardest by low interest rates, they tend to seek out stable investments like treasury binds and bank CD's and when these pay an interest rate that is lower than the rate of inflation they are losing money every year. Low interest rates seem to be a mixed bag for middle class young people, on one hand they may benefit if they are buying a house or other large purchase, on the other hand they lose when they save money. Overall I think it is a negative for nearly everyone.

In a free market, which we do not have, interest rates are determined like everything else, by supply and demand. When savings rates are high and there is a lot of money saved looking for people to borrow it, interest rates fall. When lots of consumption is going on very little savings is happening, interest rates increase since there is very little savings available for lending out. This natural back and forth is a beautiful thing, unfortunately it has been distorted beyond all recognition by the federal reserve and the government and people are truly suffering under these policies.

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