We are taught that lowering interest rates is done to stimulate the economy. Unfortunately, this is counter to how things actually work.
In this video I discuss how interest rates affect capital flow. This is why monetary policy is more propaganda than anything else.
▶️ 3Speak
While I do agree that the interest rates are lowered when the economy is bad, and a lot of people are scared of borrowing because of that. I do think that for others, this can be very helpful. If they have a stable job and need to buy a car or a house, this is perfect time to do so. And this might be the target of the lower interest rates. Give an opening for the upper/middle class to buy things.
If lowering interest rate doesn't affect the economy or stimulate the economy, how then could the economy be stimulated?
I thought that when the interest rate is lowered most investments will come in thereby stimulating the economy.
Summary:
The video is part of the Money 101 series and is titled "Why Interest Rates Don't Stimulate the Economy." Task discusses how interest rates, historically used for capital flow and bank solvency, are ineffective in stimulating lending during economic downturns. He explains that during tough economic times, banks are hesitant to lend, and businesses and individuals are reluctant to borrow due to lack of confidence. Task emphasizes that economic outlook and confidence play a crucial role in financial decisions, rather than interest rates. He criticizes the common belief that lowering interest rates can easily stimulate the economy and provides examples of how interest rates are not the sole factor influencing economic activity. Task also mentions the impact of negative interest rates and discusses how high interest rates may not solve economic issues if confidence is lacking.
Detailed Article:
The video delves into the complexities of interest rates and their impact on the economy. Task starts by providing background information on the Federal Reserve's structure with 12 regional banks, originally established to set interest rates. He explains that interest rates were primarily used for capital flow and maintaining bank solvency, rather than stimulating the economy. Task highlights how banks, businesses, and individuals react during economic downturns, illustrating that in such times, banks are less inclined to lend, and businesses and individuals refrain from borrowing due to uncertainty and lack of confidence in the future.
Task emphasizes that confidence in the economy plays a significant role in financial decisions, more so than interest rates. He argues that the common belief that lowering interest rates can stimulate the economy is flawed, as it overlooks the importance of economic outlook and confidence. Task uses examples to demonstrate that even with low interest rates, if businesses and individuals lack confidence, they will not engage in borrowing.
Furthermore, Task critiques the idea of negative interest rates and challenges the notion that high interest rates alone are responsible for economic challenges. He points out that economic issues are more complex and intertwined with factors like supply problems, affordability issues, and global economic conditions. Task discusses how high interest rates may not be effective in solving economic problems if confidence is low, citing examples from the automobile and housing markets to support his arguments.
In conclusion, Task emphasizes that the Federal Reserve's policies and the common narrative around interest rates are oversimplified and fail to consider the broader economic context and the role of confidence. He challenges the idea that interest rates alone can drive economic growth and highlights the intricacies involved in economic decision-making during challenging times.
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