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  • Interest rates should be set to inflation.

    It is important to understand the impact of interest rates on how people act. When interest rates are high, people invest money by putting it in the bank and buying bonds. When interest rates are low, there is little point in investing, so people are more likely to borrow and spend.

    Some argue that interest rates should be high because this increases investment and ultimately spending and production. Others argue that lower interest rates will increase spending since borrowing will increase.

    Let's imagine a scenario in which interest rates are high. People with a lot of capital invest in promising businesses. The businesses use the investment on hiring better employees, new technologies, and generally capital. This in turn allows them to increase product quality, lower prices, and gain market share. In competitive markets, profits and prices fall for all businesses. In monopolistic markets, profits rise for the successful businesses and worse businesses die. Similarly, in the labor market for monopolistic businesses, skilled workers are hired for good wages while others are unemployed. In competitive markets, whether one is employed depends on whether they want to work at the current market wage level. In general, investors get very rich very quickly.

    Now let's see what happens with low interest rates. Those with lots of capital will still invest, but they will be perhaps more willing to spend. Borrowing increases, which leads to new businesses. Markets become more competitive. Unemployment falls from real wage increases. On the other hand, inflation increases too, slowing down the increase in real wages and reducing peoples' real savings. People aren't willing to save/invest anymore and lose hope for the future/retirement.

    The best way to reconcile the unemployment in scenario 1 with the lack of savings in scenario 2 is to set interest rates to inflation. This makes sense from a fairness standpoint: those with capital aren't able to increase their purchasing power from doing no work, while their savings aren't wiped away by inflation either. From an economic standpoint, this seems sound too: people will be willing to spend and borrow, increasing market competition and employment levels, but are still able to save/invest for the future. Any rise in inflation can be countered by a rise in interest rates which will bring inflation back down to equal interest rates.

  • Keep rates low.

    Low interest rates keep the cost of speculation down. This allows investors to accept greater risk.

    Lower interest rates also discourages people from holding cash, because of inflation fears, this forces unknowledgeable money into markets, creating opportunities for experts. Additional money in markets increases price levels and profits for the financial sector. On balance, lower interest rates should be maintained.

  • Low interest rates are great for corporations.

    Low interest rates benefit corporations. High interest rates encourage consumer savings which in turn provide businesses with private capital to fund their businesses.
    The current interest rate environment benefits to 1%ers while leaving the 99%ers scrounging for riskier asset classes. The FED artificially creates bubbles with these horrible policies and should raise rates to deflate the bubbles ala tom brady.


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