Steven ZeniosLow-interest rates may seem beneficial; however, the benefits are usually short-lived as the long-term damaging effects take a toll on the economy. What are the negative effects?
Increased Risk Investments
Many must meet income targets or returns, this becomes difficult with low-interest rates thus leading to risk investing. Groups such as banks, pension funds, retirees, insurance companies, charitable foundations, and educational groups all have targets that must be met via returns on fixed-income investments or money loans. If these targets are not met it leads to a cut in spending or a raise in fees.
Artificial Asset Valuations
Low-interest rates paired with easy lending make it appealing for people to acquire assets. One example is housing, as people rush to take advantage of the rates and lending the result is an artificially high housing market, inflating the lending portfolios of banks with overpriced assets. Other areas affected are the car and boat industry as people are enticed to buy with credit.
Rises for Commodities
Low-interest rates usually go hand in hand with monetary policy, that is, in turn, factored into commodity prices, from everything to grain and beef to electricity and oil. The prices of commodities rise creating a higher cost of living affecting everyone in general, not just those looking to buy assets such as houses and cars.
Reduction in Spending
For those who rely on income via bond interests, a decrease in income will be experienced. For example, a retiree who relies on this type of income will be likely to cut back on spending in response to this decrease. If the majority of those who are retired take the same approach the economy as a whole will experience less income via spending resulting in a negative weakening effect.
Decrease in Saving
With savings account returning so little and the overall price of living rising it becomes impractical for individuals to save. This is especially true as incomes tend not to keep up with the price of assets however due to low-interest rates people are enticed to spend money beyond their means resulting in further disincentive to save.
Once you look past the initial gratification of lower interest rates it is clear that negative long-term effects reach everyone via the economy. Whether you are looking to obtain assets, live off bond interest or just pay for commodities changes in pricing reaches everyone.
