Interest rates keep dropping. In my country in northern Europe we now have negative interest
rate - banks have to pay the central bank for lending it their money.
I have two questions:
Why are interest rates lower than any time ever before?
Are low interest rates dangerous? The low interest rates will make it easier to borrow money for
projects that would otherwise not have been possible. Irresponsible lending has proven
dangerous in the past.
Are the low interest rates a way that the central banks are \"artificially resuscitating\" a poor
economy which may finally lead to a crash?
Adding that we have never seen this situation before I ask if this situation with extremely low
interest rates is dangerous?
One aspect of the question is: Are these low interest rates expected to stay low or are they
considered an extreme value in a cyclic variation?
Solution
If by dangerous it is meant they add possible downwards volatility of assets, that could easily be
argued for as:
PV=D/(1+r)t
Where D denotes any future income. This is especially the case if the reason for the low rates is
very easy monetary policy, as such policy cannot be maintained and thus the rate is not
equilibrium rate and must rise, causing a crash in asset values when that happens.
Central banks determinate the interest rates in the short run, their policies are targeted to lower
rates, thus a low rate. The other reason is that of supply and demand. There is not much demand
for credit (no profitable ideas, no more room for consumer credit) and on the other hand the
supply of credit is significant due to central bank action. High supply and low demand equals a
low rate..
Interest rates keep dropping. In my country in northern Europe we no.pdf
1. Interest rates keep dropping. In my country in northern Europe we now have negative interest
rate - banks have to pay the central bank for lending it their money.
I have two questions:
Why are interest rates lower than any time ever before?
Are low interest rates dangerous? The low interest rates will make it easier to borrow money for
projects that would otherwise not have been possible. Irresponsible lending has proven
dangerous in the past.
Are the low interest rates a way that the central banks are "artificially resuscitating" a poor
economy which may finally lead to a crash?
Adding that we have never seen this situation before I ask if this situation with extremely low
interest rates is dangerous?
One aspect of the question is: Are these low interest rates expected to stay low or are they
considered an extreme value in a cyclic variation?
Solution
If by dangerous it is meant they add possible downwards volatility of assets, that could easily be
argued for as:
PV=D/(1+r)t
Where D denotes any future income. This is especially the case if the reason for the low rates is
very easy monetary policy, as such policy cannot be maintained and thus the rate is not
equilibrium rate and must rise, causing a crash in asset values when that happens.
Central banks determinate the interest rates in the short run, their policies are targeted to lower
rates, thus a low rate. The other reason is that of supply and demand. There is not much demand
for credit (no profitable ideas, no more room for consumer credit) and on the other hand the
supply of credit is significant due to central bank action. High supply and low demand equals a
low rate.
