Video: The Cost-Benefit Trade-off of Low Interest Rates

What are the cost-benefit trade-off of low interest rates?

At the LearnLiberty.org, Duquesne Professor Antony Davies discusses this very critical issue.

Here is a summary from LearnLiberty.org,

The cost of borrowing money is at a record low. Low interest rates and cheap credit encourage people to spend more, and to save less. Is this good or bad?

Many argue that we need low interest rates to encourage spending. But low interest rates don’t actually encourage people to spend more money. Low interest rates simply encourage people to spend more money now, and less in the future. The opposite is true for high interest rates.

So what interest rate is best overall? Professor Davies says the best interest rate is the one that comes about naturally, without government intervention. Individuals know better than the Federal Reserve how and when to spend their money. Decisions on whether to consume more or save more is best left to individuals, not government officials.

Since interest rates are essentially about time preferences of people to hold money, notice that the policies to artificially suppress interest rates, such as zero bound rates or the US Federal Reserve's Zero Interest Rate Policy (ZIRP), have been designed to promote spending NOW at the expense of spending in the FUTURE.

The consequent distortion of people's time preferences, and its corollary, the enticement to get hocked into unsustainable debt, thus produces boom bust cycles.

Also this reflects on the PRIORITIES of political agents who almost always take on measures which addresses the short term with hardly any regards or concern over the longer term impact from their actions.

Nevertheless low interest rate policies are attained through credit expansion, which fundamentally represents the hallowed creed of interventionists and inflationists, who think they can wish away the law of scarcity in order to achieve a statist or socialist utopia.

As the great Ludwig von Mises wrote,

Credit expansion is the governments' foremost tool in their struggle against the market economy. In their hands it is the magic wand designed to conjure away the scarcity of capital goods, to lower the rate of interest or to abolish it altogether, to finance lavish government spending, to expropriate the capitalists, to contrive everlasting booms, and to make everybody prosperous.