Sunday, September 23, 2012

Danger of low interest rates

Governments around the world have reduce interest rate to almost nil, in their attempt to stimulate the economy and create jobs. It does not seem to work. In spite of low interest rate for more than a year in America and Europe, unemployment remained at a high level.

The low interest rate has caused asset bubbles to form in the property and stock markets around the world. It has also damaged the earnings of retirees who gets almost nothing for their savings. The harm that is posed by low interest rate is quite serious and is not being recognized. The longer it continues, the worse will be the bubble and other damages.

In the near future, people will abandon cash and buy gold and other commodities. This is already happening and may become a flood. This may lead to high inflation, as money is being abandoned. We may have to study the hyper inflation in Germany in the 1930s to understand how this situation will play out. Read this article.

Governments can combat inflation by increasing the interest rate. This happened in the 1980s under President Reagan. Paul Vocker was the head of the US Fed. Read this article.

Will we have high inflation to be followed by high interest rate?  We have to watch the events closely!


Tan Kin Lian said...

My prediction is that the US Fed will recognize that quantitative easing and low interest rate will not work. High inflation and high interest rate will also be damaging.

They will have to adopt the remaining option - protectionism and high taxation, i.e. they need to collect more money to balance the budget.

I expect a more protectionist world in the future era. And I personally think that this is good for the world, although not good for open economies like Singapore - unless we integrate into Asean!

Unknown said...

Alan Greespan's mistake all over again, but this time at much bigger scale.

Alan Greespan's low interest rate exercise and indiscriminate loan giving lead to collapse of housing bubble and subprime loans.

The beauty of US money printing is it does not affect US much, in fact the money printing can help to inflate their debts away. In other words, countries who bought US trasuries are helping them to pay the debt.

yujuan said...

Still lamenting, should accumulate more gold and silver assets, every country, including the Euro zone to Japan, is copying the US to crank up the Printing machine to print out useless paper notes to address economic problems.
Maybe should increase silver holdings in UOB silver savings accounts. It's the next best thing to gold as silver has many industrial uses.
Traditionally, both metals lie low during the summer months, and wake up from end August, start moving aggressively in Sept, then move down in Oct, then start continue upwards from end Oct, picking up speed thru' the winter months, and correct downwards in early spring, and keep quiet again in Summer.
Would this trend continue the same pattern this time.
Well, so far so good.
Still keep a wary eye on both stocks and metals in the dreaded month of October. Because QE 3, brave souls may pile into gold immediately.
Runaway inflation is such a scary animal.

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