Why are interest rates so low in countries like USA, UK?

I think it has something to do with our unique economic theory on how to avoid bankruptcy through low interest overnight interbank loans. Or something like that. Calling @zenvelo…

The theory behind it is quite simple. Low interest rates means that money is cheap to borrow. Things like buying a home or opening a business is cheap It spurs economic growth and benefits everyone. Raising interest rates makes money much more expensive to borrow and home sales and startups become much more expensive which slows economic growth. Unfortunately in a large economy there are many moving parts and even though interest rates are low, which should spark more growth, other factors are making it difficult to get that low interest rate loan. The recession has spraked a lot of regulation that continues to make banks reluctant to loan money. So that even though loans are cheap, they are hard to get. The result is low economic growth and little or no interest on your savings. Money needs to be cheap and easy to get to spur economic growth. We only have half of that equation.

Raising interest rates is inherently inflationary. And, there is still a lack of demand for borrowing, so there is little to drive rates up.

And really, with interest rates so low, there is an incentive for people to spend rather than save, which also boosts the economy.

But you have many alternatives to sticking money in a bank. And, when the stock market is riskiest, so are CDs, which are not insured.

Find a stable stock that pays a good dividend, and invest for the dividend payment not for growth in stock price.

@jaxk – i agree with your analyis / explanation. China is also growing world economy i suppose. But it is having it around 6%. How does it work in that case then?

@imrainmaker – A couple of ways. First China is moving from a third world economy and that makes growth easier. If you are making 10 cents a day as a farmer and move to a manufacturing job at 20 cents a day, you’ve doubled you economy. The second way is through currency manipulation. China is the biggest offender in that regard.

China isn’t growing right now, exports are down by 20%. That is one reason oil prices have cratered, because the Chinese demand for energy is way down.

And China has had to devaluate the yuan. Years of holding it fixed worked when world demand was high; now they need to make their goods attractive.

Interest rates are raised in times of higher inflation to decrease the money supply and put the brakes on the economy. Low interest rates make money cheaper and fuel the economy, and are done in times of economic stagnation or deflation.

@zenvelo – China’s growth rate is down a little but certainly not flat. Same with the Trade Imbalance. Regardless of what anyone thinks of Trump personally, he’s right on this one.

It would help, first of all, to understand what money is. Not many people seem to, unfortunately.

Look around you right now and see how little money matters in your life, physically. You don’t eat it. You don’t wear it. Your house isn’t made of it. You don’t burn it for heat or consume it directly as any other kind of energy source or fuel. You don’t walk on it; the streets aren’t paved with it. It probably doesn’t even hang on your walls as art, and it’s certainly not growing on an ornamental tree in your garden. It has next to no value in and of itself. You can’t even stuff it into a mattress to help yourself sleep better.

Money is a medium of exchange. Yeah, we all know that, right? It’s something that we obtain to trade with others for the things that we want. And that’s how you use money to get your house, your food, your transportation and all of the other things and services that you want. You do or make something, and someone pays you for the time you put in or the thing you made, and so on and so forth. Cycle of life. Got that.

But most money never exists in the real world. I do not have the figures handy – anyone who wants them can probably look them up online – but the value of “all currency in the world”, that is, all of the coins and printed bank notes that we recognize as cash, is only a fraction of “all money”. Most money is simply bookkeeping entries in various ledgers. (And even the ledgers are now “virtual”, too.) Most of us are paid nowadays via direct deposit transfers from an employer to a bank, and that is very representative of most money transactions these days: balancing transfers from one account to another, which are never represented in actual currency, no cash or coins required. Aside from our salaries, credit card purchases (and payments), car payments, mortgage payments, rent and utility payments, stock investments, even more and more grocery transactions – including purchases made with EBT and checks – do not involve cash in any form. You don’t pay taxes in cash. You don’t invest for retirement or pay your Social Security “contributions” in cash. Likewise, you don’t receive government payments in cash, either.

So where does the money come from? It is literally created out of thin air – and confidence. I’m not going to describe the entire Federal Reserve process for money creation in the United States (which has parallels in other nations, too), but in simple terms, the Fed creates accounting transfers to its member banks – essentially, loans – which represent the creation of “first money”. Those banks then look for customers to borrow that money, to be repaid at interest so that the Fed member bank can pay back its “loan” and generate profit for itself. And so on to other banks and ultimately to businesses and individuals who borrow money with a promise and expectation to repay their lender over time.

Each of those “first money” transactions creates money that never existed before. And that creation happens with some unpredictable regularity. But manufacturing money in that way is not what makes everyone rich – or we could all be rich as simply as that.

The fact is that we are awash in money. There is more money in the world than anyone knows what to do with, which is reflected in the low interest rates charged to credit-worthy borrowers. “Not enough money” isn’t much of a problem. The problem is that more and more of those loans made down the money lending chain get tied up into bad investments: houses that owners can’t pay for; businesses with no hope of turning a profit; roads and bridges to nowhere; inventory that no one will ever buy, and so forth. You can name your own list of wasteful spending and bad investments, because they’re all around. Foreclosures on these bad investments leaves banks and others holding property in which much money has been invested – but which aren’t worth that much money any more, and for which the loans will never be repaid. So that money, in effect, “dies” … but because of the nature of the system, someone has to account for that money, sometime.

Of course, a lot of the money in these accounts exists as accounting transfers from taxpayers to the government, between and among various government entities and back to government clients: Medicare and Medicaid recipients and their doctors, Social Security payments to retired and certain disabled people, government employees, including the Armed Forces, all government vendors, and some “held in reserve” in various accounts for future pension, salary and capital goods payments.

Those examples of waste – and the uncertainty of the government to meet its own future obligations – add up to undermine the other part of what money is: confidence. Aside from the accounting entries, which an elementary school child could do (even with Common Core arithmetic), the other part of “what makes money” that I mentioned earlier is the confidence that people have that it has some intrinsic worth. There is an idea, that is, which people maintain that “money is a store of value” that can be traded for other things that we value. That confidence is vital to maintaining a value of money. When people realize, for example, that there is simply no way in the world for the United States – for one example – to repay its commitments to Social Security recipients, to Medicare service providers, to Defense contractors, and so on, then confidence drops. That can happen very quickly.

Loans in our culture are made on the basis that money will be repaid with money of “similar” value, plus a small-medium-or-large interest charge to represent risk of default on the loan plus a profit for the lender. We expect that the government will always be solvent and meet its own obligations; that’s fundamental to the entire banking and monetary system. But we recognize that things are always changing, and a long term loan that won’t be paid back for many years is going to be paid back with dollars whose value is diminished by “some” inflation. So interest rates rise in accordance with lenders’ anticipation of future interest, and a lot of that depends, as noted, on confidence in the future economy and the value of future money. (@zenvelo had this exactly backwards. Interest rates do not cause inflation – at all – they merely reflect lenders’ anticipations of its corrosive effect on the value of their future payment streams.)

When enough people start to realize that the loans that they’ve made (or taken) can’t be repaid, then confidence in the whole monetary system starts to evaporate. At that point, money becomes a lot more valuable to those who have it, and harder to get for both of the reasons that @Jaxk mentioned: interest rates rise to reflect the uncertainty, and lending rules and qualifications for borrowers become very tight. (Alternatively, the other thing that creates a similar lack of confidence is when the government issuing the money in the first place does that without regard to the dilution effect of the new money on the existing stock. To illustrate this, imagine that you’re playing Monopoly and you have, let’s say, $1000 in Monopoly money. If the players all agree to raid the bank for, say, $1,000,000 in Monopoly money, then who cares that the Railroads cost $200 to buy, or that Boardwalk with a hotel on it costs $2000? The money has very little value at that point – in the game, anyway.) When the value of bank lenders’ current dollars are perceived to be worth far more today than they will be in some future “tomorrow”, then their demands for additional interest increase as well. At that time – and only at that time – will the banks pay their depositors a higher rate of interest, too.

@CWOTUS I’ll believe you – zzzzzzzzz

@zenvelo In the U.S., certificates of deposit are issued by banks, thrift institutions, and credit unions, and they’re insured.

@Love_my_doggie I stand corrected. They used to not be, especially with larger CDs.

Seems like the original question is asking about the low rates for a savings account, rather than the rates for loans and mortgages and credit cards and so on, no?

The answer to that, it seems to me, is because the banks prefer to cultivate the understanding that they get to charge substantial interest rates (e.g. 3.00 to 36.00 % or even more), but people with savings accounts should only get JACK SQUAT, e.g. 0.03 – 0.06 %. (example). The banks and credit cards like to keep people feeling like greatly inferior entities, with money flowing into the banks rather than the other direction, and charging 100 to 1000 times as much interest as they offer to mere humans, is a big part of that.

@Zaku. But that doesn’t explain why it used to be higher.

@janbb Maybe because the government hadn’t been quite so corrupted for quite so long?

My passbook savings account in 1960 paid an annual interest rate of 4%, compounded daily. That meant that I was making money on my principal and my interest, readjusted on a daily basis. When I moved to Sweden just over twenty years later, a banker friend there wouldn’t believe it. He still thinks it’s a childhood mis-remembrance on my part.

@Espiritus_Corvus That is what my savings account paid back in the 1960s too. But banks were much more regulated then, and there weren’t things like Certificates of Deposit. Back then, a bank couldn’t open offices in more than one state.

There seems to be some confusion on how banks work. Money deposited in a savings account is used by the bank to make loans. The interest rate for savings and loans are tied together in that the interest from the loans pays for the interest on savings as well as any defaukts and a profit. When interest rates go up the interest rates for both savings and loaning also go up.

One of the big problems we have right now is that we have $19 trillion in debt. If the inerest on that debt goes up by only a few percentage points we will go broke. All the spending we have done over the past 8 years was based on a very small interest rate. If we raise the savings rate, the interest on that debt will also rise. Damned if you do and damned if you don’t.

@Jaxk “The interest rate for savings and loans are tied together in that the interest from the loans pays for the interest on savings as well as any defaukts and a profit.”

- So are you saying if typical credit card APR’s went down from 12% to 8%, people might suffer a reduction in their savings account interest income from 0.06% to 0.04%?

@Zaku Mortgage rates do go down when savings interest rates go down. I have paid much higher in the past than recently.

@Zaku – First if you are only getting .06% on your savings, you should move your money somewhere else. Around 1% right now is fairly easy to find. Credit card interest rates are much more tied to risk and marketing schemes but generally as interest rates rise and fall credit card rates will as well. I would again say that if your paying 12% on your cards you either have lousy credit or you aren’t looking very hard. Generally the interest rates for everything are tied to the Fed rates. Not directly but indirectly. What the bank can borrow from the Fed will govern what you can get from the bank.

Ok… yes, right. It just seems like there has been an awful lot of explanation of all sorts of things, which doesn’t really relate to the question asked. The question was about why do savings accounts pay so little, and wouldn’t it be good if they had better rates. Seems to me the answer to the question has almost nothing to do with any other interest rates for anything other than savings accounts, because the rates are so far apart.

None of that really seems to me to have much at all to do with the real answer to the question, which is simply that the banks only offer a tiny rate because they can and don’t want to give higher rates, so they avoid being competitive with each other, because no banks want to have to pay anything like the rates they change other. So the best rates they give are maybe 1/10 what they take, and sometimes more like 1/100 or 1/1000 what they take. Basically no one offers much interest on savings. The banks know that paying compound interest with no risk is a horrible deal, so they offer as little as possible.

And as for the part of the question ”Government should encourage people to save more by increasing these rates so that more people will tend to save money.”, the government-set interest rates don’t really apply to bank savings rates, except very indirectly, and the banks don’t have in their statements of purpose, to do anything good for people except by accident or as an incentive for people to do business with them, so eventually they can charge them interest and fees.

Which is also why some good credit unions tend to offer better rates on their accounts. Their charters do have some purpose that has their members’ interests in mind.

@Zaku I do think the answer to lower interest rates on savings is related to government interest rates pretty directly. I don’t know whether they are related by regulation but when the Fed interest rate goes down, interest on savings bank accounts on savings goes down as do mortgage rates. As I and others have pointed out, years ago interest rates on savings accounts was higher and mortgage rates were higher. They are not unrelated and are part of Federal monetary policy. For economic growth, they want to encourage spending rather than saving. Why credit card companies are allowed to charge such high interest rates is another question.

If you don’t want to accept that, that’s your prerogative.

@janbb They may be related, but it seems like offering 1% or less APR (and often more like 0.1% or 0.04%) is so small that it’s all barely worth noticing. Some of those rates could be multiplied by 50 and still be jack squat.