It has long been a truism of economics that high-interest rates were favored by wealthy capitalist lenders against poor borrowers, with such a view lying behind the populist demands of the late 19th century. We are used to applauding Keynes’s forecast of the “euthanasia of the rentiers.” But now that such a situation is upon us of increasingly likely very low-interest rates for a long time ahead, this euthanasia does not seem so much like something poorer people should be all that happy about.
Increasingly it looks like the largest effect of prolonged very low-interest rates is a booming stock and real estate market. The latter may help the middle class, but those gaining from the former are much more heavily concentrated among the wealthy, even though somehow Donald Trump thinks that nearly every American is totally focused on their 401ks and that really is what matters in the economy. After all, we all know that it was the potential negative impact on the stock market that had Trump worrying about public “panic” back in early February when he told Woodward that he was not going to publicize how serious the coronavirus is. Ironically he would probably be in much better electoral shape now if he had done so back then, with the economy probably doing better than it is, although I have no idea what the stock market would be doing. But Trump still has not figured all that out.
Anyway, it is not just that the poor do not seem to get much of the obvious gains from asset price appreciation that seems to be the main effect of lower interest rates. It is also that the future viability of pensions, both public and private may become endangered, although this is not an immediate worry. But in today’s WaPo Allan Sloan reiterated a case he has made previously, citing several new studies on this, warning that low-interest rates on bonds will make it harder for pension funds to pay out what they have promised to payout, with this affecting Social Security as well, although the greater damage and danger seems to be for state and local pension funds, as well as private pension funds, with insurance companies and others facing problems down the road some years if interest rates really do stay so low.
A particular point on this that Sloan notes is that there is a huge difference in the share of wealth that pensions constitute for different parts of the income distribution. For the 20-80 percentiles, it is the largest portion, even exceeding homes. For the top 1%, it is less than 2% of their wealth, essentially nothing. So damage to the value and viability is potentially a serious hit for the middle and poorer classes, whereas it is a big nothing for the super wealthy.
Thus we have this new irony of interest rates: lower ones hurt the poorer parts of the population while helping the wealthier parts of it. The rentiers that may end up getting euthanized may well be the middle and poorer classes in the longer run.
Should we start paying attention to low interest rates’ ability to facilitate the displacement of labor with automation? When one can borrow at virtually zero interest over long periods, taking a chance on automation to replace all your workers begins to look a winning bet.
“with this affecting Social Security as well”
The structure of SS does not depend on interest income. It did get up to 15 percent of total income at its peak, but (when and however Congress finally deals with SS) it will end up being 2 to 5 percent.
This is pretty much at odds with what Dean Baker has been saying about the importance of getting jobs for those who have been marginalized for years.
I agree that interest income is a small part of SS income, but it is a part. As for your claim that somehow this has something to do with getting marginalized workers jobs, well, maybe. Obviously one wants to be very careful about raising interest rates so that they do not clearly slow economic growth.
The only interest rate that is directly controlled by the Fed is the Fed funds rate on overnight inter-bank lending. In turn the Fed fund rate indirectly sets the bank lending prime rate which in turn changes interest rates that are pegged to the prime rate. The biggest care for the Fed should be preserving the term premium on US safe securities interest rates. Even if setting the Fed funds rate is pushing on a string, safe interest rate inversions can be pulling on a chain. Inversions sit at the crossroads between the Fed’s control over short term rates and the market’s control over longer term lending rates. If they are not on the same page then it behooves policy makers to determine why.
Globalization has had a bizarre effect on the link between interest rates and inflation, or more precisely core inflation and consumer price inflation which are the most important key inflation indicators watched by the Fed. Core inflation excludes energy and food, the important stuff with rising but often volatile prices. The consumer price index excludes shelter, a major consumer cost responds overly to the markets long term expectations of future fed funds rates. Globalization has cause a persistent deflationary pressure on the US economy via lower prices on goods combined with lower real wages that lessons demand for goods further lowering prices for goods. We are not spiraling deflation though thanks to persistent low interest rates giving us a raging FIRE sector.
Ironically there are many now that believe that low interest rates cause deflation because it is against their religion to accept that globalization does not produce better outcomes for all, but rather is a wasteful and short-sighted vision of arbitrage chasing financialization advocates.
I should probably be more consistent with editing between typing and posting.