Zero interest rate

If the interest rate is close to zero – as a result of appropriate central bank policies, as in Japan around 2000 and in the course of the euro crisis in the EMU – then the savings rate will also fall to zero or even below. The supply of credit may dry up because investors no longer take their money to the bank but turn to higher-yielding investments, such as real estate in particular. But companies will not make new investments even at zero interest rates if the prospects for profit are poor. But arguably – arbitrageurs will borrow the cheap money domestically to invest it (at high) interest rates abroad, depressing the exchange rate of the currency in the low-interest country and making its imports more expensive, – companies will replace relatively expensive labor domestically – measured by the ratio of wages to marginal product of labor – with now cheap investments in machinery, which frees up jobs in the low-wage sectors and is socially undesirable, – investments with comparatively low returns – and thus, given global competition for scarce resources, with little promising use – are stimulated, which in turn is at the expense of innovations in the area of production and finished goods, ultimately thus inhibiting economic growth. – Because overall economic production is changing in favor of capital-intensive manufacturing – there is a substitution of capital for labor – jobs are being destroyed. – States addicted to the debt drug are encouraged to issue more government bonds in the face of low interest rates, instead of returning revenues and expenditures to equilibrium and strengthening competitiveness. – Therefore, zero interest rate policies do not bring benefits. – See presumption, central banking, bubble, speculative, carry trades, expropriation, cold, financial investment, fragmentation, leadership, verbal, crisis, central bank induced, liquidity trap, negative interest rate, low interest rate policy, Phillips theorem, bubble, speculative, real estate bubble, stealth policy, vault boom, redistribution, central bank-induced, interest rate allocation function, interest rate differential, interest rate, kept low, interest rate guarantee reserve, interest rate floor. – Cf. ECB Monthly Bulletin, October 2012, pp. 22 et seq. (impact of very low interest rates on money demand; overviews; references), Cf. Financial Stability Report 2012, pp. 42 et seq. (low interest rate policy encourages taking higher risks; insurance companies are particularly affected by low interest rate policy).

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University Professor Dr. Gerhard Merk, Dipl.rer.pol., Dipl.rer.oec.
Professor Dr. Eckehard Krah, Dipl.rer.pol.
E-mail address: info@ekrah.com
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https://www.jung-stilling-gesellschaft.de/merk/
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