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by saalweachter
3926 days ago
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The interest rate / inflation is largely low because the central banks are trying to keep it low / not trying to raise it. The return from consumer savings accounts being near inflation / a near-zero real rate of return is because of the savings glut. The two are related but not the same thing. |
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The interest rate is supposed to be the price of money. There's going to be a bid/ask spread on that because of the cost of accepting money and bundling it together, along with the cost of keeping up with the book-keeping and various other things that are costs for loans. So the rate you get paid in interest should always be less than the rate that you pay in interest. This I understand.
But if the interest rate is low, then the interest rate is low. The interest rate is determined by the aggregate supply and demand for money. If there is a lot of supply, relative to demand, then the interest rate is low. If there is a lot of demand relative to supply, then the rate is high. And given that people have a nearly infinite desire for money today versus in the future, the rate is really determined by the supply.
The Fed is in control of the supply by creating or destroying money as needed. That means that they fully and truly do set the rate, because they can do literally whatever is needed to move the needle.
The idea that everyone's individual actions to save is somehow what created the tremendous amount of expansion in the money supply (and thus the very low interest rate) is utter nonsense. The Fed created a lot of extra money which expanded the supply of loans, thus pushing down the rate.