So, there are a couple of indications that interest rates are on the upswing. The situation is reviewed here, in Canada’s National Post.
Do we (“we”, meaning central bankers, facetiously) want continued low rates (near zero bound, as my friend Frances Coppola from across the pond would say) or rising rates?
Pick your poison. The article quotes a number of people saying that rising rates would be “liquidationist” and 1937 all over again, meaning that in 1937 the Federal Reserve made matters worse in the midst of the Great Depression by “tightening” monetary policy, meaning in turn “raising rates”.
So much misinformation there. As me and others have pointed out, we’re in uncharted territory. The idea that there is any comparison to 1937, or for that matter 1967, is fatuous.
We have astronomical debt levels, both public and private, unlike anything ever seen before in modern times. Yet as others can tell you as well, this is not accounted for in many economists’ models of what is supposed to happen and why. In fact, a big part of “easing” has been the central bank buying up huge amounts of government bonds directly – not in the “open market”, as is implied by the name of the committee that effectuates the purchases for the Fed. So the mammoth purchases serve to keep rates low, and now the Fed is saying this particular feature of “policy” has run its course, they’re going to slow down government bond buying and presumably that will cause interest rates to rise, since anyone other than the Fed would be crazy to lend money to the federal government at effectively 0% interest.
Nevertheless, the low interest rate environment has been a bust. Maybe a rising interest rate environment will be an improvement – you do potentially get that “rush to borrow” effect when people think it will be more expensive to borrow later.
But there’s this other problem: borrowers are tapped out. They were tapped on in ’07 and they still are, and there’s no appetite for borrowing and it’s likely that the real problem is too few people/businesses are qualified to borrow whether they have an appetite for it or not.
So for me, it’s as I’ve been pointing out for quite some time: the existing debt is the problem. There’s too much of it. And more of it is no solution, whether the borrower is the federal government or anyone else. Interest rates can rise or fall but they don’t have any impact because they’re not the problem in the first place.
Again, this is a problem for the law, not for economics.