Raising Interest Rates Could Cause ‘Wonderland Economy’ To Collapse

Bank of England chief economist Andy Haldane dug through thousands of years of historical data and found interest rates now sit at the lowest levels in some 3,000 years.

short and long term interest rates

Wonkblog economic affairs reporter Matt O’Brien places the historic state of interest rates in vivid perspective in a Washington Post op-ed:

This is the best time to borrow money in recorded history…Now, it is true that rates almost got all the way down to zero during the Great Depression, but they have gotten all the way down there today. Indeed, interest rates are all-but-zero in the United States, the United Kingdom, the euro zone and, for the past 16 years now, Japan. Those are economies that, in nominal terms, make up more than half of the global economy.”

O’Brien goes on to provide some in-depth analysis of what got us here, focusing on the basic economic principles relating to the supply and demand for money. He pinpoints an “aging economy” that requires less investment, and explains how and why the demand for money has dropped worldwide:

When people get scared, say, when a housing crash almost brings down the entire financial system, they don’t want to borrow money or lend money or do anything else with it. They just want to hoard money. The problem, though, is that if nobody is spending, then the economy will shrink — which will only make people want to put their money in super-safe places, like government bonds, rather than taking any kind of risk. Interest rates, in other words, will fall even more.”

O’Brien goes on, arguing the fact that we essentially have a “global crisis” exacerbates and magnifies the problem.

Of course, O’Brien and other mainstream economics reporters view these low interest rates as a good thing – something to take advantage of. We can borrow and that means we can consume. As O’Brien puts it, “It turns out Polonius was wrong. You should be a borrower right now.”

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Author: Travis Esquivel

Travis Esquivel is an engineer, passionate soccer player and full-time dad. He enjoys writing about innovation and technology from time to time.

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