Submitted by Patrick Watson via MauldinEconomics.com,
Central bankers use low or negative interest rates so that it leads to more investment. For them interest rates are a consequence of the currently very low inflation rates. Patrick Watson argues in the exactly opposite way: Falling prices are a consequence of low interest rates and not the opposite:
We see two reasons why this can be true:
High, maybe excessive investment is happening in China (alas not in Europe). Cheap costs of investments lead to productivity gains, but also to fierce competition and consequently to lower prices. One example is electronics.
Michael Pettis argues in his book “The Great Rebalancing” that Chinese or Indians maintain the same total savings in order to finance future expenses like study fees. When interest rates falls then they obtain a lower return on the existing savings. Hence they must save “more quantities” to make up for this loss on return.Bear in mind that the Chinese save 35% or more of their income, which is far more than Americans or Europeans.
Patrick shows the three unintended consequences:
Negative interest rates are all the rage at central banks, a symptom of the deflation that is slowing spreading worldwide. The Bank of Japan, European Central Bank, and Swiss National Bank already peg rates below zero.
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