Five Mysteries Surrounding Low and Negative Interest Rates

Abstract

The authors explore the consequences of zero and negative interest rates for the economy, the capital markets, and incentives facing producers and consumers. They characterize the current regime as monetary Keynesianism—using central bank policy to pursue traditionally Keynesian goals of economic stimulus. They argue that monetary stimulus during and after the Great Recession did not spark massive inflation because the nature of the money supply has changed; the increased money supply did not stimulate the economy very much because borrowers are satiated and cannot be induced by low interest rates to borrow more. Moreover, low interest rates mean that savers need to redouble their savings efforts, instead of spending. The authors conclude by recommending that investors wait for better conditions, which will come eventually. In the meantime, the authors recommend that investors ignore stories of impending Armageddon, discount the mythology of central bankers as the new masters of the universe, and be suspicious of new solutions that purport to perform financial alchemy in a low-growth world.