That is the question
that Ben Bernanke, former US Fed Chairman, tackled in his blog at Brookings.
Here are the papers:
Why are interest rates so low? March 30, 2015
Why are interest rates so low, Part 2: Secular
stagnation, March 31, 2015
Why are interest rates so low, Part 4: Term
premiums, April 13, 2015.
To summarize his points,
the following are among his concluding statements and charts or table
presented.
Part 1: The
state of the economy, not the Fed, is the ultimate determinant of the
sustainable level of real returns. This helps explain why real interest rates
are low throughout the industrialized world, not just in the United States.
Part 2: Does the
U.S. economy face secular stagnation? I am skeptical, and the sources of my
skepticism go beyond the fact that the U.S. economy looks to be well on the way
to full employment today. First… at real interest rates persistently as low as
minus 2 percent it’s hard to imagine that there would be a permanent dearth of
profitable investment projects.
Part 3: the
global savings glut hypothesis remains a useful perspective for understanding
recent developments, particularly the low level of global interest rates.
Overall, I see the savings glut interpretation of current events as providing a
bit more reason for optimism than the stagnationist perspective.
Part 4: Overall,
the behavior of term premiums helps explain the generally low level of
longer-term interest rates in recent years... in turn reflects a number of
factors, including: minimal investor concern about inflation; relatively low
uncertainty about the likely future course of interest rates... a strong global
demand for safe, liquid assets (for use as international reserves, for example,
and to satisfy regulatory requirements); and quantitative easing programs by
central banks.
Mr.
Bernanke is right on at least two
points: (1) that it is the real economy, not the Fed or central banks, that
drive real returns to capital, and (2) credit glut, represented by high current
account surplus by many industrialized and emerging economies, not stagnation,
is a better explanation for low world interest rates.
Prevailing
interest rates are simply the equilibrium points of (global, regional,
national) credit supply and demand. Many if not all governments around the
world have been too irresponsible and wasteful, living beyond their means,
financing their over-spending with endless borrowings.
With
such high demand for credit to finance endless wastes and irresponsibility,
interest rates should rise. But this did not happen because the increase in
credit supply is much larger than the increase in credit demand. Modern
capitalism has become more efficient, it can bail out ALL irresponsible
governments combined. Even if the US (federal government alone) will borrow $1
trillion a year to finance its over-spending, global interest rates still
refuse to rise.
Central
planners in the monetary sector can produce various explanations like tinkering
with overall money and quasi-money supply, engineer the reserve requirements,
etc. as drivers of global and national interest rates. While these are valid
explanations, there is one major factor
that they may fail to mention -- that productivity in the private sector keeps
rising due to more innovation and competition. So that even if individuals and
corporations are over-taxed and over-bureaucratized, there are still huge
social surplus. So a flat or declining productivity and usefulness of many in
the public sector can still be endured by the private sector, savings and
credit can remain high, and so interest rates can remain low.
Many
if not all governments of developed economies need to reform and reduce their
expensive welfare system instead of printing more money, which only delays belt
tightening in the future.
Low
world oil prices also significantly contributed to low global inflation. The
cost of airlines, shipping lines, bus lines, trucks, taxi and ordinary
motorists have significantly declined. Again it is a result of capitalist
competition -- shale oil vs. petroleum, OPEC vs non-OPEC producers. Competition
among motor companies result in new
models of cars, buses, trucks, airplanes that are more fuel efficient, they can
run or fly the same distance at lower oil consumption.
Central
governments and central banks tend to specialize in creating inflationary
pressures in the economy. What could be cheaper goods and services become
expensive because of the various taxes, fees, fines, mandatory contributions,
that are passed on by the sellers and manufacturers to the consumers. Then the
inflationary pressures of endless borrowings and printing of currency.
The
private sector in a competitive environment on the other hand, specialize in
deflationary pressure. What used to be a $200 mobile phone last year becomes
$150 this year because of harsh mobile phone competition. Productivity keeps
rising, companies and workers produce more for the same if not lesser,
resources and inputs.
Overall,
the latter bails out the former, and the former continues their wicked and
wasteful ways while bragging that they are "fighting poverty and
inflation."
This
situation can continue for as long as productivity growth in the private sector
is higher than wastefulness growth in the public sector. If the latter catches
up with the former, then that is the
inflection point and interest rates will start rising.
