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Absolute Return Letter: The Real Burden Of Low Interest Rates

Absolute Return Letter: The Real Burden Of Low Interest Rates by Absolute Return Partners

“The situation is desperate but not serious.”

Old Viennese saying

The ceteris paribus enigma

One of the questions I am most often confronted with goes as follows:

Why is the extraordinarily and persistently low interest rate environment not great news? Why is it not a once-in-a-lifetime opportunity to get all the wheels spinning again? Put another way, why do I think very low interest rates for an extended period of time can actually do quite a lot of damage?

It is a tricky question to which there is no simple answer. Low interest rates, ceteris paribus, obviously boost overall economic activity, and those who are so critical of our central bankers for their relentless pursuit of easy money, should probably think again before they have another go. Imagine what economic activity would have been like, had rates not been kept extraordinarily low. The economy post 2008 is without precedent, and an economy without precedent requires a monetary policy that is also without precedent.

The sharp reader will now argue that I am contradicting myself. One moment I suggest that low interest rates for an extended period of time can do a lot of damage. The next I scold those who criticize our central bankers for keeping interest rates low. How come? The answer lies in the use of the term ‘ceteris paribus’. The point is, other things are not equal.

More often than not, the critics point at the ongoing paltry GDP growth rate to prove their point. My point is different. Low interest rates for an extended...


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