Interest rates set the exchange rate between future cashflows (i.e. assets) and cash today. Lower interest rates mean higher asset values, higher interest rates mean lower asset values. Higher asset values generally disproportionately benefit those that own assets (wealthy people) over those that don't (average people).
Of course, this is just one way that interest rates affect the economy, and it's important to bear in mind that lower interest rates can also stimulate investment which help to create jobs for average people as well.
> it's important to bear in mind that lower interest rates can also stimulate investment which help to create jobs for average people as well.
Precisely! Yet the big problem in the Anglosphere is that most of that money has been invested in asset accumulation, namely housing, causing a massive housing crisis in these countries.
Generally speaking, the lower the prime interest rate, the lower the returns on "safer" investments like certificates of deposit, sometimes below the rate of inflation. As a bank, why would you borrow from local depositors when you could borrow from the central banking system and pay less in interest?
People like my parents, who are both 65, could just park their money at a local bank and have an FDIC-insured savings instrument that roughly tracks inflation and helps invest in the local economy. They don't have to worry about cokeheads in lower Manhattan making bets that endanger their retirements like they have numerous times.
If they do that with lower interest rates, they're more likely to lose money instead of preserving it or slightly increasing it. Which, of course, gives the cokeheads more money to gamble with.
The issue with this theory post-internet economy is: its only true if that money is spent chasing a limited amount of scarce goods and services. But the majority of the US economy today is spent on goods and services that are no longer scarce (more accurately, whose unit costs are so low that they might as well be unlimited). We are in a very different world than the one Volker presided over, and this is the core axiom as to why: The economists who correctly invented this central bank interest rate lever could never have foreseen a world so supply-unconstrained.
Another way to look at this: Low interest rates can induce demand and drive inflation. But they also control the rates when financing supply-side production; so they can also ramp up supply to meet increased demand.
1. Not all goods and services are like this, obviously. Real estate is the big one that low interest rates will continue to inflate. We need legislative-side solutions to this, ideally focused at the state and local levels.
2. None of this applies if you have an economy culturally resistant to consumerism, like Japan. Everything flips on its head and things get weird. But that's not the US.
Not necessarily. Sure, it that money is chasing fixed assets like housing but if that money was invested into production of things to consume its not necessarily inflation inducing is it? For example, if that money went into expanding the electricity grid and production of electric cars, the pool of goods to be consumed is expanding so there is less likelihood of inflation.
> if that money was invested into production of things to consume its not necessarily inflation inducing is it
People are paid salaries to work at these production facilities, which means they have more money to spend, and the competition drives people to be willing to spend more to get the outputs. Not all outputs will be scaled, those that aren't experience inflation, like food and housing today
Low interest rates make borrowing cheap, so companies flood money into real estate and stocks, inflating prices. This also drives up costs for regular people, fuels risky lending (remember subprime mortgages?), and when the bubble bursts... guess who gets hit the hardest when companies start scaling back and lenders come calling?
