General idea
We have already seen in one of our blogs what the functions of monetary policy are and how we can apply expansionary or restrictive policy.
It is clear that in order to stimulate an economy we should apply expansionary policy, but problems can arise when lowering interest rates, as we will see below.
Interest rates
When interest rates fall, we could reach a disproportionate demand for credit and overinvestment in certain types of assets, and this is what happened in the great crisis of 2008. But why is this drop in interest rates really a bad thing? If we really pay less this way… don’t we?
– Debtors are refinanced. All those who have a loan already given by the bank, and find themselves in a difficult situation to pay back the interest, are granted a refinancing, extending even further the rope.
It is something like the public debt, and in order to alleviate this debt, what does our government do? Issue more debt. Well, the same thing happened in the famous 2008 crisis at the individual level. They don’t charge us interest so… why not ask for more?
– Another problem with low interest rates is that even if there are families trying to save, there can be a zombified economy.
This zombified economy, or more commonly called zombification, are companies that should be bankrupt, and due to the possibility of being able to borrow at low interest rates, they reinvest this capital in their economic activity, in most cases useless, slowing down the development of the economy.
Because of this, potential start-ups may find it difficult to integrate into the market and achieve price equalisation.
– As a last big problem which we all know is, by offering lower interest rates, increasing the country’s public spending in a disproportionate way, in order to increase the GDP.
We can then answer the question by saying that it is NOT a bad thing to lower interest rates if there really is control by the central banks.
There is a popular saying “Pray to God for saints, but not for so many”, indicating that abundance can sometimes be detrimental, and rightly so.
Conclusion:
The application of lower interest rates does indeed create growth in the economy. However, if we grant loans to the entire population, whatever their situation, together with the lack of responsibility on the part of public institutions, taking advantage of the situation to continue creating a bubble in all possible assets on the market, this bubble will burst and we will experience, as we have seen, a crisis that will be very difficult to alleviate.
