Are Low Interest Rates Good?

Are low interest rates good for the economy? Many argue we need low rates to increase spending, since these rates make borrowing money cheap. Prof. Davies explains, however, that lower rates don't mean more spending; they mean more spending now rather than in the future. The choice for every individual is to spend more now (borrow), or spend more in the future (save).

So what interest rate is best overall? Prof. Davies says the best rate is the market rate—the rate we get when the Federal Reserve doesn't meddle in financial markets. Individuals know better than the government how and when to spend their money, and should be left alone to make their own decisions.

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[Squiremjr]

Every Learn Liberty video summed up: "The government needs to pull their dick out of the economy and let the free market sort itself out"

[trygvb]

We don't need to increase spending. Our country has a spending problem and that's why there is so much private and public debt. Based off of that logic, it would be acceptable to claim that everyone should take out $1,000 of their savings account and go spend it, and that would cause economic growth. Hopefully I don't have to explain to you why that wouldn't work because it's really just common sense.

[trygvb]

M2 was 34.8 billion in 1920. In 1929, it was 46.6 billion. A general stock market rise is one of the effects of a boom, as we saw in the 2000s. Yes it fits the ABCT because businesses are expanding rapidly (even though they shouldn't be). And there was a real estate bubble. If you look at any of the data from the 1920s, you will see that. Type in "lessons from the Great Depression real estate boom and bust" on google. It's the one from ClevelandFed.

[RogueCapital]

I should have stated more clearly: the money supply in 1920 was at roughly the same level as 1929. it hit a low in 1922 so if you data-mine from that low, sure, you can find a large increase.

are you saying that it's absurd to deny that there was a real estate bubble or a general stock market bubble? (I think neither is absurd, but the former is not well-established by data, and the latter doesn't fit the ABCT story- that would just be an allocation of capital since it's not sector-specific).

[trygvb]

6* years later lol typo

[trygvb]

The money supply was NOT essentially flat. M2 was at 33.72 billion in 1922. By 1928 (only 7 years later) it was up to 46.42 billion. That's a 38% increase. And to deny that there was a bubble is absolutely absurd.

[RogueCapital]

there is a reason that you don't hear much about a pre-depression housing boom: it's indefensible that such a bubble, if it existed, could have caused the crash of 1929. you're right that the government prolonged the depression with atrocious regulatory & fiscal policies, but the major intensification of the depression happened when the money supply contracted by 1/3 in 1930-31 (even as gold inflows should have created new money). the money supply had been essentially flat over the prior decade.

[trygvb]

Well I pointed out that there was malinvestment in development of housing, especially in Florida. I haven't looked into the particular malinvestments made in the 1920s, but I would presume that they were at least somewhat similar to the boom in the 2000s. The ABCT could be falsified if there was a "bust" without over expansion of credit, but this over-expansion if credit was the cause of the Great Depression. It probably would have recovered in a couple years too if it weren't for gov actions.

[RogueCapital]

so in your view, the ABCT misallocation-of-capital view of a bust can never be falsified, because the very existence of a the bust proves that there was a misallocation of capital (we just have to look harder?). it's the exact same circular reasoning used to "prove" the existence of god with religious texts, and that is why people see austrian econ as more of a cult or religion than economic science. there is no strong evidence to suggest that real estate was particularly bubbly pre-1929.

[trygvb]

fluctuations in inflation*

[trygvb]

and in response to interest rates, real interest rates are determined by the value society places on buying these in the present rather than the future. And yes inflation is a part of this, but there wouldn't be any significant fluctuations in interest rates if it weren't for central banks manipulating it. A reduction in the real low interest rate indicates that more people are saving, therefore in the future, they will have more money to spend on things such as housing.

[trygvb]

I did my best to explain it in less than 500 characters. And the misallocation of capital occured in the 1920s, the depression was where those misallocation of capital were liquidated. The misallocation of capital during the 1920s was in real estate, but I'm not sure about where else; I'm presuming in other capital investments. Where the misallocation was doesn't really matter because we know there was misallocation because of the crisis.