Why the low-interest-rate trap is worrying: Mayers

After 68 months of interest rates at or near zero in North America and Europe, inflation is still benign. But how long can that last?

After a two-day meeting last week, the U.S. Federal Reserve maintained its no-rate-increase stance, but acknowledged that as inflation moves towards its 2 per cent target, there may be more pressure to raise them sooner. On Thursday, the Dow tumbled 300 points in part on the fears that this might come true. 

The low cost of borrowing has sent a flood of money into world stock markets, pumping up prices, helping pension plans recover, giving households a greater sense of wealth, and offering savers a way to keep their nest eggs from shrinking.

 Cheap-money policies encourage people to borrow and spend rather than save. It sends them into the stock market because there’s nowhere else to go. That eventually creates inflation and bubbles. When too much money chases the same thing, prices rise.

 David Stockman, U.S. President Ronald Reagan’s budget director, said in a recent blog post that by telegraphing their intentions to keep rates low, the world’s central banks are pursuing financial instability. That’s because they are removing the element of risk that keeps speculation in check. 

“Financial markets have become casinos in which speculative bubbles are guaranteed to build to dangerous extremes as the central-bank-driven financial inflation gathers force,” he wrote. “That’s where we are now. Again.”

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Before marrying, ask the money questions

Earlier this year, just in time for Valentine’s Day, the National Endowment for Financial Education released a survey that found that 13 percent of couples who have combined finances have deceived their partners by lying about such things as the amount of debt they owe or how much they earn.

DYI Comment:  Only 13 percent???  I suspect it to be much higher. Forty percent would not surprise me.


DYI