My column, “The time has come for interest rates to rise,” has prompted almost 50 comments and much disagreement.
I began with a complaint that today’s rates are unfair to savers. I said my bank had a 1-year, $1,000 bank CD with a rate of 0.03 percent. Several readers seemed to think I had put my money there and was complaining about it. No, I was complaining only. But I do think near-zero rates are unfair to savers. I know, it’s “the market price,” but it’s a market in which the Federal Reserve is dumping in massive supply of funds at a price of essentially zero. If the Fed reined in money creation, interest rates might rise at least as high as the rate of inflation, where they should be as a matter of fairness to savers.
After all, in our 401(k) culture we are constantly exhorted to Save! Save! Save! These exhortations are correct. You really do need to save. Well, then, let’s have some incentive to save. (And don’t forget the elderly, who did save, and now get the stick.)
Several critics argued from a Keynesian point of view that the current money creation is preventing the economy from falling into depression (“torvald uhlman” said this) and that there ought to be more money creation and inflation rather than less. “2Pi” even asserted that interest rates are too high, and theoretically should be negative. My answer is that cheap money is the policy the Fed has been following for five years, and if it were the right policy it should have worked by now. The Keynesian answer is that the Fed didn’t follow it rambunctiously enough, that it should print more money and really step on the gas. It’s a believer’s answer, and I am not one. Printing money is financial first aid, but it piles up debt, threatens inflation and undermines confidence. Right now the economy needs long-term investment, and long-term investors want stability and sustainability. Not this.
I quoted a pension manager, and “Yurij” laments the demise of most defined-benefit pension plans in the private sector. I lament them, too. He argues that low interest rates have little to do with their demise, and that it was “politically-motivated Reaganite anti-union fervor.” There has been some of that, I’ll admit, but corporate leaders are a good deal more interested in money than in ideology. To pin the demise of the defined-benefit plan on ideology is to miss economic truths. Pension plans turned out to be a lot more expensive than employers thought. Low interest rates are part of that. A bunch of pension plans were dumped on the federal government (the Pension Benefit Guaranty Corp.) when companies went broke.
“Guinnessfan” comes back at “Yurij” with: “What do you think is going to happen to long term bond prices when interest rates start to rise again?” Bonds will fall. If you have a 3-percent bond and rates on new bonds jump to 6 percent, the market value of your old bond will go down.
And that will happen, I think.
Thanks to “torvald uhlman,” “2Pi,” “Yurij,” “ Guinnessfan” and all the others for commenting.