Economics: Are Super-Low Interest Rates Really So Bad?

(Drivebycuriosity) - There is a lot ado about the record-low interest rates. The pundits complain that extremely low interest rates are bad for the economy & the stock market. Are they?

I assume that low interest rates support the economy. Investors have to pay less for their loans, which encourages them to take more loans and to use the money to invest more. If you expect that a certain investment creates an annual return of say 5%, then it does make no sense to take a loan when the interest rate is 5% or higher. But if the interest rate is below 5% then you can hope to make a profit by taking loans and investing the money. The lower the interest rate the higher is the expected profit (return of the investment minus the cost of the loan).

Lower interest rates have more advantages. They are making building & buying houses more reasonable and consumer credits get more attractive. Low interest rates reduce the risks of going bankrupt because the debtors need to pay less. Low interest rates also benefit the taxpayers because the government needs to spend less for her debts.

Low interest rates are also good for the stock market. Bonds & stocks are competing with each other. Do you want to invest in stocks or in bonds? The answer depends on the relative risks and returns. If the return of low-risk bonds, the interest rate, is as high as the return of risky stocks, the expected gains & dividends, it does make no sense to buy stocks. If the return of bonds is much lower than the return of stocks, then investing into stocks gets more attractive. In this case the higher stock returns compensate for the higher risks.

Some claim that low interest rates punish savers. Really? It makes more sense to save money by owning stocks than owning bonds. Stocks are investments in companies, so the stock market participates in economic growth, bonds don`t.  Since 1928 the US stock market (S&P 500) created an average annual return of about 10% p.a! (dividends reinvested nyu.edu/ investopedia).

The pundits also claim that the current inverse yield curve -   long term interest interest rates are below short term rates - are predicting a coming recession. i doubt that. Nobody can read the future, no crowd, no market. The inverse yield curve mirrors just the current pessimism. Bond investors are a shy & risk avers crowd, otherwise they would invest in riskier assets like stocks. The current inversion shows that the bond buyers got more a bit more risk avers. 

Today´s hyper-low interest rates are a response to the damaging trade war but they also are a remedy.