The menace of low rates of interest

Here is the text:

The Reserve Bank of Australia recently lowered its economic growth estimate for the upcoming calendar year to 2 per cent to 3 per cent from an August forecast of 2.5 per cent to 3.5 per cent.

It has cut interest rates eight times over the past two years in an attempt to boost spending to help ease the country’s transition to a less mining-dependent economy as a long resources boom cools.

As they tell it, the fall in growth rates is in spite of the fall in interest rates. As I tell it, the fall in growth rates is because of the fall in interest rates.

Low interest rates are not a good thing as I explain to my classes. Pull them down at the height of a panic but the rest of the time they should be kept relatively tight to ensure our savings are directed to their most productive users. You can’t get a recovery based on lowering rates. It’s from the same Keynesian stable that believes that economies are made to grow from the demand side.

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