The price of low interest rates? Weaker economic recoveries

Forbes once again giving space to what can only be described as the arithmetical truth.

He [Hayek] wrote that one of the signs of excessive money creation is that the market interest rate is forced below what he calls ‘the natural rate of interest’.

The Fed wants the interest rate to go lower, but investors resist it, and over time it takes more and more heavy piles of newly printed money to push the rates down (ed. this is due to the diminishing marginal efficiency of debt). This is why QE1 and QE2 barely had an effect. Dropping 600 billion dollars into the 7-10 year bond market (which amounts to about only $1.6 trillion dollars in total value) only brought about 15-40 basis points in lower interest rates. Why? Because a zero target on Fed Funds had already stretched the elasticity of the bond rates nearly to the limit.



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