# The Long Term Effects of Low Interest rates? **URL:** \ **Category:** Great Debates\ **Created:** [January 16, 2010, 9:16am UTC](https://boards.straightdope.com/t/the-long-term-effects-of-low-interest-rates/525185 "2010-01-16T09:16:59Z")\ **Posts on this page:** 12\ **Page:** 1
**Author:** ![ralph124c](https://avatars.discourse-cdn.com/v4/letter/r/8797f3/32.png) [@ralph124c](https://boards.straightdope.com/u/ralph124c)\ **Post date:** [January 16, 2010, 9:16am UTC](https://boards.straightdope.com/t/the-long-term-effects-of-low-interest-rates/525185/1 "2010-01-16T09:16:59Z")
I just check a bank account statement-I am receiving only 0.75% on a savings account. This is so low, it doesn’t even cover inflation. I am sure that a lot of people like me are torn between more risky investments (with a chance of a loss), versus such a paltry yield. Moreover, we are allowing the big banks to make enormous profits by doing nothing (that would benefit our economy)-they just pay you and me nothing, and invest the money in foreign bonds. These very low rates mean that retirees are having trouble-they depend upon investments to fund their living expenses, now that they are no longer in the labor force. many now have to spend their assests. So, will these extremely low interest rates cause massive problems for us? As I said, keeping rates low is supposed to stimulate business activity-but I don’t see that happening. ---
**Author:** ![Hellestal](https://avatars.discourse-cdn.com/v4/letter/h/3ab097/32.png) [@Hellestal](https://boards.straightdope.com/u/Hellestal)\ **Post date:** [January 16, 2010, 10:05am UTC](https://boards.straightdope.com/t/the-long-term-effects-of-low-interest-rates/525185/2 "2010-01-16T10:05:11Z")
> [@ralph124c](#): > > I just check a bank account statement-I am receiving only 0.75% on a savings account. This is so low, it doesn’t even cover inflation. I am sure that a lot of people like me are torn between more risky investments (with a chance of a loss), versus such a paltry yield. > Moreover, we are allowing the big banks to make enormous profits by doing nothing (that would benefit our economy)-they just pay you and me nothing, and invest the money in foreign bonds. > These very low rates mean that retirees are having trouble-they depend upon investments to fund their living expenses, now that they are no longer in the labor force. many now have to spend their assests. > So, will these extremely low interest rates cause massive problems for us? > As I said, keeping rates low is supposed to stimulate business activity-but I don’t see that happening. Well, this is the one trillion dollar question. But you asked it kind of the wrong way round. Lower interest rates do help stimulate business activity. It’s not obvious right now because you’re using the wrong baseline of comparison. You’re looking at the crappy economy and thinking, damn, those very low rates don’t seem to be helping, do they? But that’s not how you should be thinking. You should be thinking about what would happen if those interest rates were higher than 0% (with this, I’m referring to the rate for short-term government debt). And the answer is simple: the economy would be _even worse_ than it is right now. That we are at 0% and it still sucks does not mean that 0% is not having any effect. It just means that the economy is in such a sorry state that even when rates have gone as low as they can reliably go, things are fairly dismal. Eventually, rates will have to come back up. The question is, when? If we do it too soon, if the Fed jacks up rates too quickly, then you will see first-hand how tighter monetary policy can send the economy back into a dive. Unfortunately, this is the kind of topic that’s hard to discuss for a lay audience on a message board, as even the professionals in charge of this stuff are in mostly uncharted territory. Bernanke has overseen an unprecedented expansion of the US monetary base–with some people urging that he do even more–and he must always keep in mind his strategy to safely unwind all that cash he’s pumped into the system without risking a spike in inflation. It’s a real pickle, no mistake. ---
**Author:** ![Rysto](https://avatars.discourse-cdn.com/v4/letter/r/ecccb3/32.png) [@Rysto](https://boards.straightdope.com/u/Rysto)\ **Post date:** [January 16, 2010, 1:00pm UTC](https://boards.straightdope.com/t/the-long-term-effects-of-low-interest-rates/525185/3 "2010-01-16T13:00:32Z")
> [@ralph124c](#): > > I just check a bank account statement-I am receiving only 0.75% on a savings account. This is so low, it doesn’t even cover inflation. Isn’t inflation basically zero right now? I know that it is here in Canada. ---
**Author:** ![amarone](https://avatars.discourse-cdn.com/v4/letter/a/e0b2c6/32.png) [@amarone](https://boards.straightdope.com/u/amarone)\ **Post date:** [January 16, 2010, 4:20pm UTC](https://boards.straightdope.com/t/the-long-term-effects-of-low-interest-rates/525185/4 "2010-01-16T16:20:37Z")
> [@Rysto](#): > > Isn’t inflation basically zero right now? I know that it is here in Canada. The latest CPI figures, released yesterday, show annual inflation currently at 2.7% That is a little misleading as the monthly inflation was only 0.1% The annual figure reflects dropping December 2008 from the figures, and the CPI fell significantly in that month. ---
**Author:** ![LSLGuy](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/lslguy/32/5813_2.png) [@LSLGuy](https://boards.straightdope.com/u/LSLGuy)\ **Post date:** [January 16, 2010, 4:23pm UTC](https://boards.straightdope.com/t/the-long-term-effects-of-low-interest-rates/525185/5 "2010-01-16T16:23:50Z")
> [@ralph124c](#): > > I just check a bank account statement-I am receiving only 0.75% on a savings account. This is so low, it doesn’t even cover inflation. … As a general rule, savings accounts barely cover inflation in the best of times. So retirees were burning principal, they just didn’t notice it. ---
**Author:** ![Defero](https://avatars.discourse-cdn.com/v4/letter/d/8797f3/32.png) [@Defero](https://boards.straightdope.com/u/Defero)\ **Post date:** [January 16, 2010, 7:13pm UTC](https://boards.straightdope.com/t/the-long-term-effects-of-low-interest-rates/525185/6 "2010-01-16T19:13:03Z")
Gold and silver sidesteps the long term effects of currency devaluation, these periods of low interest rates, as well as various other kinds of market malarkey and geopolitical mayhem. In 1913 US $0.05 bought you a little more (gold or goods) than US $27.50 does now. In other words, buried under your lawn, invested in nothing and exposed to no risk, it produced “interest” at about 3.23% over those 95 years (compounded monthly). Similarly, in 1965 silver was $1.29/ounce whereas it’s about $18.50/oz now, so the “interest rate” over those 45 years is about 6%. Again, you got that “interest” while the silver was tucked away “doing nothing” and exposed to no risk. So what is going on? How can these two facts be true: first that the longer-term purchasing power of gold is effectively invariant (from Ancient Rome to today) while second that it “bears interest” ever since the invention of FIAT currency? (Hint: systemic fraud.) So, buy gold and silver and sit on it. Not only will you do far better than having it in the bank, you will not be exposing it to risk. There is virtually no imaginable cataclysm that can decrease the value of gold or silver. Be it war, stock market crash, banking holiday, or runaway inflation/devaluation as in pre-WWII Wiemar Germany, if you have your holdings in metal, s’all better than good. The nastier and more screwed up your environment becomes the more your metal buying power skyrockets. One could phrase this well known (among the elites) effect as “metals carry a negative risk”. ---
**Author:** ![Mosier](https://avatars.discourse-cdn.com/v4/letter/m/7ea924/32.png) [@Mosier](https://boards.straightdope.com/u/Mosier)\ **Post date:** [January 17, 2010, 8:12am UTC](https://boards.straightdope.com/t/the-long-term-effects-of-low-interest-rates/525185/7 "2010-01-17T08:12:53Z")
> [@ralph124c](#): > > I just check a bank account statement-I am receiving only 0.75% on a savings account. This is so low, it doesn’t even cover inflation. Your 0.75% is infinitely higher than current inflation levels. If you multiply inflation by INFINITY it will be lower than 0.75% right now. ---
**Author:** ![amarone](https://avatars.discourse-cdn.com/v4/letter/a/e0b2c6/32.png) [@amarone](https://boards.straightdope.com/u/amarone)\ **Post date:** [January 17, 2010, 12:23pm UTC](https://boards.straightdope.com/t/the-long-term-effects-of-low-interest-rates/525185/8 "2010-01-17T12:23:45Z")
> [@Mosier](#): > > Your 0.75% is infinitely higher than current inflation levels. If you multiply inflation by INFINITY it will be lower than 0.75% right now. 2.7% x infinity \< 0.75% ? ---
**Author:** ![Honesty](https://avatars.discourse-cdn.com/v4/letter/h/f04885/32.png) [@Honesty](https://boards.straightdope.com/u/Honesty)\ **Post date:** [January 18, 2010, 12:17am UTC](https://boards.straightdope.com/t/the-long-term-effects-of-low-interest-rates/525185/9 "2010-01-18T00:17:38Z")
> [@Defero](#): > > So, buy gold and silver and sit on it. Not only will you do far better than having it in the bank, you will not be exposing it to risk. There is virtually no imaginable cataclysm that can decrease the value of gold or silver. Be it war, stock market crash, banking holiday, or runaway inflation/devaluation as in pre-WWII Wiemar Germany, if you have your holdings in metal, s’all better than good. The nastier and more screwed up your environment becomes the more your metal buying power skyrockets. One could phrase this well known (among the elites) effect as “metals carry a negative risk”. I am not an economist but it seems to me that if you purchase gold now, the price will retreat once the Fed jacks up the interest rate (which will probably occur this year). I think gold is heading for a mini-bubbe but who knows. ---
**Author:** ![suranyi](https://avatars.discourse-cdn.com/v4/letter/s/e36b37/32.png) [@suranyi](https://boards.straightdope.com/u/suranyi)\ **Post date:** [January 18, 2010, 1:13am UTC](https://boards.straightdope.com/t/the-long-term-effects-of-low-interest-rates/525185/10 "2010-01-18T01:13:38Z")
> [@Defero](#): > > Gold and silver sidesteps the long term effects of currency devaluation, these periods of low interest rates, as well as various other kinds of market malarkey and geopolitical mayhem. > > In 1913 US $0.05 bought you a little more (gold or goods) than US $27.50 does now. In other words, buried under your lawn, invested in nothing and exposed to no risk, it produced “interest” at about 3.23% over those 95 years (compounded monthly). Similarly, in 1965 silver was $1.29/ounce whereas it’s about $18.50/oz now, so the “interest rate” over those 45 years is about 6%. Again, you got that “interest” while the silver was tucked away “doing nothing” and exposed to no risk. > > So what is going on? How can these two facts be true: first that the longer-term purchasing power of gold is effectively invariant (from Ancient Rome to today) while second that it “bears interest” ever since the invention of FIAT currency? (Hint: systemic fraud.) > > So, buy gold and silver and sit on it. Not only will you do far better than having it in the bank, you will not be exposing it to risk. There is virtually no imaginable cataclysm that can decrease the value of gold or silver. Be it war, stock market crash, banking holiday, or runaway inflation/devaluation as in pre-WWII Wiemar Germany, if you have your holdings in metal, s’all better than good. The nastier and more screwed up your environment becomes the more your metal buying power skyrockets. One could phrase this well known (among the elites) effect as “metals carry a negative risk”. On January 21, 1980, gold was $850 per ounce. On March 16, 2001, gold was less than $261 per ounce. If you consider the effect of inflation in those intervening 20 years, gold did even worse. So how can you say that “there is no imaginable catcaclysm that can decrease the value of gold or silver”? ---
**Author:** ![Kobal2](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/kobal2/32/20_2.png) [@Kobal2](https://boards.straightdope.com/u/Kobal2)\ **Post date:** [January 18, 2010, 2:49am UTC](https://boards.straightdope.com/t/the-long-term-effects-of-low-interest-rates/525185/11 "2010-01-18T02:49:42Z")
> [@suranyi](#): > > On January 21, 1980, gold was $850 per ounce. > > On March 16, 2001, gold was less than $261 per ounce. > > If you consider the effect of inflation in those intervening 20 years, gold did even worse. > > So how can you say that “there is no imaginable catcaclysm that can decrease the value of gold or silver”? Forget it, Jake, he’s a goldbug. One of those people who, for some reason nobody can quite fathom, adamantly believes that gold, among all the goods and products and concepts and materials, has intrinsic Value (capital not optional). In their heads, even before man crawled out of their caves to kill the last sabertooth tigers, gold had Value. When the bombs fall and the bedraggled remains of humanity emerge from smoking craters, irradiated, hopeless and alone, gold will still have Value, and still be worth more than fresh water. The kind of guy who believes that back in the day, money was not simply a common exchange medium, a tool to keep score, a mean to buy valuable things : money itself was valuable, because it was made out of gold. Now that money isn’t made out of gold anymore, and can’t even be exchanged pound-for-pound for a pouch of gold dust, it doesn’t have any worth anymore. Why, it’s just paper ! Madness ! Cats and dogs grinding their teeth together ! It’s an odd faith, but like all religious creeds, it defies explanation and laughs in the face of denial and proof to the contrary. ---
**Author:** ![Mosier](https://avatars.discourse-cdn.com/v4/letter/m/7ea924/32.png) [@Mosier](https://boards.straightdope.com/u/Mosier)\ **Post date:** [January 18, 2010, 7:59am UTC](https://boards.straightdope.com/t/the-long-term-effects-of-low-interest-rates/525185/12 "2010-01-18T07:59:16Z")
> [@amarone](#): > > 2.7% x infinity \< 0.75% ? [Deflation.](http://en.wikipedia.org/wiki/Deflation) > [@wiki](#): > > Year-on-year, consumer prices dropped for six months in a row to end-August 2009, largely due to a steep decline in energy prices. Consumer prices dropped 1 percent in October, 2008. This was the largest one-month fall in prices in the US since at least 1947. [More Deflation](http://www.guardian.co.uk/business/2009/apr/15/us-economy-deflation-recession) > [@](#): > > The US economy has begun to deflate for the first time in more than half a century as a slump in demand pushes energy and food costs lower. [Even More Deflation](http://economics101.suite101.com/article.cfm/understanding_investing_terms_3) > [@](#): > > The most common triggers of deflation are reduced credit availability and decreased spending. check and check. [More and More Deflation](http://www.marketoracle.co.uk/Article15608.html) > [@](#): > > Extreme measures of monetary stimulation via money printing are necessary to counteract the deflationary pressures set in motion by declining asset values against which massive amounts have been borrowed. [Deflation](http://www.inflationdata.com/inflation/Inflation_Rate/CurrentInflation.asp) 9 out of 12 months in 2009. December was -0.34%. There’s a pretty goddamned good chance your 0.75% return is going to beat “inflation” in 2010, and a not-too-unlikely chance that it will beat it by a multiple of more than infinity-plus one.