What’s interest rates got to do with economic growth?

An idea appeared on the economics blogosphere at the end of last year which hopefully won’t re-appear. It’s the idea that interest rates on risk free or near risk free investments should be below the rate of economic growth. E.g. see here and here.

In a free market, the rate of interest is determined by the relationship between borrowers and savers. The rate of economic growth is an entirely separate matter: it’s determined by amongst other things the pace of technological improvement.

In a country populated by compulsive savers (and perhaps Japan is an example), the interest rate will tend to be low. In contrast, in a country populated by spendthrifts (and perhaps Anglo-Saxons are an example) the interest rate will tend to be high. But that “spendthrift/compulsive saver” matter has little to do with the pace of technological improvement.

As distinct from the above mentioned free market, there is the real world where there are various interferences in the interest rate: first and foremost there are central banks which deliberately try to influence interest rates. Also it can be argued that commercial banks interfere with interest rates in that they create money out of thin air and lend it out.

But given a genuine free market, I don’t see why the interest rate is necessarily above or below the rate of economic growth.

Hope that’s the last I hear on that subject.

 

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s